Impact of Revenue Recognition Strategies on SIA Inc.

This report discusses the financial impact of wrong revenue recognition strategies on SIA Inc. and its stakeholders. It explores the complexity, error-proneness, materiality, and fraud risk associated with revenue recognition. It also analyzes the amendments made by SIA Inc. in its revenue recognition policy in accordance with IFRS 15. Furthermore, it examines the number of performance obligations and contract price in a given scenario, and the impact of misappropriation of revenue recognition strategies on the firm, managers, and owners/investors.

CORPORATE REPORTING

Contents
Introduction................................................................................................................................3
Question 1..................................................................................................................................4
Question 2..................................................................................................................................6
Question 3..................................................................................................................................8
Question 4................................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

Introduction
Recognition of accurate revenue is very essential for a business organization and this is the
reason that international accounting standard board has developed IFRS 15 to make sure that
business organizations are recognizing the revenue in accordance with rules and regulations.
Before the introduction of IFRS 15 in 2014, there were various accounting standards issued
for recognition of revenue in different situations. Selection of a particular accounting
standard for their business operations was becoming very difficult for organizations and this
is the reason that resulted in the introduction of IFRS 15 (Yeaton, 2015). Now all the business
organizations are required to follow this accounting standard with some exceptions provided
in guidelines of this standard. given scenario is based on revenue recognition strategies
adopted by the management of SIA Inc. SIA Inc. is a world in the business of marketing and
development of software for electronic payments and other E-Commerce activities. Three
main sources of revenue for this organization are software license fees, maintenance fees, and
other additional services. In the case of software license fees, different resolution strategies
were adopted by the organization for the paid upfront contract and monthly license fees
contract. License fees were collected by an organization for a period of up to 60 months.
This organization has given the contract of collecting monthly fees from customers to a
financial institution and they started to record all the revenue in advance as there was no
ambiguity in relation to the collection of revenue. They will receive a total amount of data
from Financial Institutions in exchange for a percentage of total revenue (Wagenhofer, 2014).
This created a lot of problems for the company as this recognition policy was not in
accordance with IFRS 15. This report will be focused on discussing the financial impact that
wrong recognition policy has on business organization and its stakeholders.

Question 1
According to the given excerpt, revenue recognition process can be very complex to manage,
prone to error, material to financial statements and top fraud risk.
Complex to manage
SIA has three major activities from which revenue is generated and the nature of all these
three activities are totally different from each other. The total period for collection of
software license fees varies from 12 months to 16 months which created a lot of problem for
the organization in the recording of revenue. On the other hand, management was also
providing maintenance fees to customers for which monthly fees were collected by the
organization (Ciesielski & Weirich, 2015). The third service of the organization was "other
additional services" in which revenue was collected when additional service was provided in
addition to the above 2 services.
On the basis of nature of these three activities, it can be said that the complexity of revenue
recognition process will increase as nature of each and every service provided by the
organization is totally different from each other. This is the reason that the process of revenue
recognition can be very complex for a business organization.
Prone to error
Level of complexity in the revenue recognition process will have a direct impact on the
probability of errors and omissions in the accounting process. As evident from the case study
provided in the given scenario, complexity in the revenue recognition process of SIA Inc.
resulted in different errors and omissions in recording revenue and profitability of the
company (Srivastava, 2014).
Material to financial statement
One of the most important financial particular provided in the financial statement is the
revenue generated by the organization. The materiality of financial statement will be affected
if the management of the company is not to use the appropriate method for recognition of
revenue (Rutledge, Karim & Kim, 2016). SIA Inc. has prepared a statement showing a
comparison of original and restated income statement data in the year 2017 which clearly
shows that management of the company has made various wrong judgment and errors in the

recording of revenue, operating income, net income and earnings per share. Wrong judgment
in the selection of revenue generation strategy can be considered the material as actual
profitability from business operations is significantly lower as compared to revenue
recognized by the company.
A top fraud risk
There is a high probability that the management of the company might alter its revenue
recognition policies and procedures in order to show a higher profit of the organization to its
investors. This is due to the fact that there are various decisions in the organization made on
the basis of revenue generated from business operations. For example management directors
in SIA Inc. had received a significant amount of Bonus and share payments on the basis of
revenue generated in the year 2014 and 2015 but actual profit was not accurate and search
payment we should not have been made two directors (Biondi et.al, 2014). This might be
unintentional in the given cases but directors of the company can take advantages of
loopholes in accounting standards to conduct fraud.

Question 2
In the year 2017 management of the company made amendments in the revenue recognition
policy of the organization and made them in accordance with IFRS 15. According to the new
policy, software license revenue was recognized only when cash was received by the
organization in case of contract where connectivity was not reasonably assured at inception.
A. Importance in the judgment of probable collection of accounts receivable
It is very essential for a business organization to consider the probability of collecting
account receivables wild deciding whether revenue should be recognized or not. This is due
to the fact that one of the most important factors that should be considered in revenue
recognition is the probability of collecting the amount from customers (IASB, 2015).
According to the principles of IFRS 15, revenue should never be recognized in a contract
with the customer if there is a probability that it might not be received by the organization.
Revenue should be recognized only in situations where management of the organization is
100% sure that they will receive the account receivables from the customer.
This principle was not followed by management of SIA Inc. which resulted in overstated
revenue and profitability in the year 2016 and 2018. This is the reason that management of
the company has to revised financial statements for the year 2016 and 2018 which disclose
the overstated profits in both the financial years under consideration (Tysiac, 2014).
B. Impact of correction on revenue and bad debts
Revenue- According to the comparison statement prepared by the organization in the new
2017, it can be said that overall revenue of the organization is overstated by 20% in the year
2016 and 1% in the year 2017. On the other hand, the overall net profit of the organization is
also overstated by high margins in both the financial years (Robinson, Henry, Pirie &
Broihahn, 2015).
Bad debts- The difference between originally recorded revenue and actual revised revenue
will be considered as bad debts in both the financial years.

Question 3
In the given scenario SIA is entering in contract with Anon for $230000 computer software
which will be used by the organization for an unlimited period of time. This contract does not
involve any kind of updates, therefore, there will be no additional services provided to the
customer by SIA (Baetge & Celik, 2014). The entire contract price of $245000 will be
collected by the organization at the time of installation.
A. Number of performance obligation and the contract price
Situation 1- Installation services do not modify the software
In case of installation services does not modify the software then only three performance
obligations will arise i.e. software license fees, customer support service, and installation.
Management of the organization is also providing customer support to ANON for the next
two financial years free of cost. As the management of the company is collecting amount less
than the normal market amount then it is essential to allocate contract price in proportion with
the actual market price charged by the organization (Tong, 2014). Total contract price in the
given contract would be 245000 as this is the amount that will be received by SIA Inc. from
Anon.
Total contract price= 245000
Contract price allocated to each performance obligation-
Software license fees= (200000/260000)*245000
= $188462
Customer support service= (40000/260000)*245000
= $37692
Installation service = (20000/260000)*245000
=$18846 (Pacter, 2014).
Situation 2- Installation involves customization of software

Contract price charged from three performance obligation will remain the same in this
situation also.
B. Revenue to be booked in year 1 and 2
It is provided in the given scenario that the whole contract price of $245000 will be received
at the time of installation. There will be a difference in the amount of revenue recognized in
year 1 and year 2 in the given scenario.
The amount of difference is will be due to the fact that installation process is expected to take
250 hours in total out of which 150 will be included in year 1 and remainder will be included
in year 2. In conclusion, it can be said that whole contract price will be recognized in the year
1 i.e. at the time payment is received by an organization other than the proportion of contract
price that is apportioned towards installation cost.
Installation cost to be recognised in year 1=
= 18846* (150/250)
= 11308
Installation cost to be recognised in year 2=
= 18846* (100/250)
= 7538
Therefore total contract price to be recognised in-
Year 1= $237462
Year 2= $7538 (Jones & Pagach, 2013)

Question 4
Misappropriation of revenue recognition strategies by the management of SIA has a
significant impact on-
(A) Firm
Yes, misappropriation of revenue recognition strategy by SIA had a significant impact on
overall business organization. There are various important decisions that are made by the
business organization on the basis of revenue generated by the organization. For example
management of the company will decide the budget allocated to each and every resource on
the basis of revenue expected to be generated in the future (Carraher & Van Auken, 2013).
Overestimated revenues will definitely result in excess of actual expenditure undertaken by
the organization. Overall profitability margin of business organization will decrease
significantly as management has not actually on the revenue on the basis of which overall
expenses are increased.
(B) Managers
Economic impact on managers and directors of the organization has been very positive for
the year 2017 and 2018. This is due to the fact that bonus and share payments made to this
managing directors are based on Revenue generated by the organization (Verbeke & Tung,
2013). Therefore it can be said that the total bonus payment made to directors is significantly
higher as compared to actual payment earned by them in accordance with the financial
position of the company. Bonus and share payments in the future will decrease significantly
as corrections will be done by the management and bonus paid in future years will decrease
to zero (Wahlen, Baginski & Bradshaw, 2014).
(C) Owners and investors
Wrong revenue recognition strategy of the organization definitely have a significant negative
impact on investors and owners of SIA Inc. The overall wealth of these investors and owners
is inflated during the period of 2014-2017 where revenue generated was overstated. A wealth
of these investors has decreased significantly after rectifications are made by management in
previous financial statements in accordance with a new revenue recognition strategy (Kim,
Kraft & Ryan, 2013).

Conclusion
On an overall conclusion, it can be said that error in the selection of an appropriate revenue
recognition strategy can be very harmful for a business organization. The wrong selection of
any business policy can result in a wrong representation of financial profitability and position
of a business organization through its financial statements. The financial statements are used
by internal as well as external stakeholders to make important decisions with regard to their
interest in the business. This report has identified the manner in which SIA Inc. can make
changes in its revenue recognition strategies in accordance with IFRS. This report also
includes a brief example on how the management of the company should be recognized
revenue incoming financial years to make sure that the policies are in accordance with the
rules and regulations issued by International Accounting Standard Board.

References
Baetge, J., & Celik, A. (2014). Umsatzerlöse nach IFRS 15–ein inkonsistenter
Ansatz. Zeitschrift für internationale Rechnungslegung (IRZ), 10, 365-367.
Biondi, Y., Tsujiyama, E., Glover, J., Jenkins, N. T., Jorgensen, B., Lacey, J., & Macve, R.
(2014). ‘Old hens make the best soup’: accounting for the earning process and the
IASB/FASB attempts to reform revenue recognition accounting standards. Accounting
in Europe, 11(1), 13-33.
Carraher, S., & Van Auken, H. (2013). The use of financial statements for decision making
by small firms. Journal of Small Business & Entrepreneurship, 26(3), 323-336.
Ciesielski, J. T., & Weirich, T. R. (2015). Revenue Recognition: How It Will Impact Three
Key Sectors. Journal of Corporate Accounting & Finance, 26(3), 31-39.
IASB, F. (2015). Revenue from Contracts with Customers. Exposure Draft.
Jones, J. P., & Pagach, D. (2013). The next step for revenue recognition. The CPA
Journal, 83(10), 30.
Kim, S., Kraft, P., & Ryan, S. G. (2013). Financial statement comparability and credit
risk. Review of Accounting Studies, 18(3), 783-823.
Pacter, P. (2014). IFRS as global standards: A pocket guide. London: IFRS Foundation.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Rutledge, R. W., Karim, K. E., & Kim, T. (2016). The FASB's and IASB's New Revenue
Recognition Standard: What Will Be the Effects on Earnings Quality, Deferred Taxes,
Management Compensation, and on Industry‐Specific Reporting?. Journal of
Corporate Accounting & Finance, 27(6), 43-48.
Srivastava, A. (2014). Selling-price estimates in revenue recognition and the usefulness of
financial statements. Review of Accounting Studies, 19(2), 661-697.

Tong, T. L. (2014). A Review of IFRS 15 Revenue from Contracts with
Customers. Çevrimiçi) http://www. masb. org/my/images/2014-09-15% 20Review%
20of%-20IFRS, 20.
Tysiac, K. (2014). Revenue recognition: No time to wait. Journal of Accountancy, 218(1), 40.
Verbeke, A., & Tung, V. (2013). The future of stakeholder management theory: A temporal
perspective. Journal of Business Ethics, 112(3), 529-543.
Wagenhofer, A. (2014). The role of revenue recognition in performance
reporting. Accounting and Business Research, 44(4), 349-379.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial
statement analysis and valuation. Nelson Education.
Yeaton, K. (2015). A new world of revenue recognition: revenue from contracts with
customers. The CPA Journal, 85(7), 50.