Generally Accepted Accounting Principles free essay sample

Is Eye Vision’s arrangement with Holland Hospital within the scope of ASC 985-605, Software: Revenue Recognition? In this case, the main content of the Eye Vision’s arrangement with Holland Hospital include embedded software medical equipment and an initial option to purchase a two-year separately priced maintenance agreement. In this case, becauseâ€Å"Eye Vision has never sold, nor does it offer to sell, the Clear View Laser without the embedded software because the software is necessary to perform the medical procedures for which the laser is intended†, and â€Å"Eye Vision has never sold, nor does it offer to sell, the Clear View Laser without the embedded software because the software is necessary to perform the medical procedures for which the laser is intended†. So the software components and non software components of tangible product could be consider function together to deliver the tangible product’s essential functionality, so according the FASB codification 985-605-15-4 and 985-605-15-4A, the equipment and the software are excluded from the Software: Revenue Recognition. , Accordingly, the initial option to purchase a two-year separately priced maintenance agreement on the Clear View would be nonsoftware deliverables excluded from the scope of Software: Revenue Recognition. The guidance in this Subtopic does not apply to the following transactions and activities: e. Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and nonsoftware components of the tangible product function together to deliver the tangible product’s essential functionality. ASC 985-605-15-4A a. If sales of the tangible product without the software elements are infrequent, a rebuttable presumption exists that software elements are essential to the functionality of the tangible product. 2. What are the deliverables in this arrangement? In this case, the main content of the Eye Vision’s arrangement with Holland Hospital include embedded software medical equipment and an initial option to purchase a two-year separately priced maintenance agreement which includes telephone support, repair or replacement of nonconforming parts, software updates, and bug fixes for the software. In this case, the deliverables are three parts. The first part is the Clear View Laser equipment and the second part is the software which is embedded in the Clear View Laser equipment, and the last part is the initial option maintenance. That’s because according the FASB codification 605-25-15-2 all deliverables which include products, services, or right to use assets, compared with this case, the Clear View Laser equipment is the product and embedded software is the right of use assets, both of these two deliverables could be delivered firstly, and the maintenance is the service could be delivered later. References from FASB codification ASC 605-25-15-2 Except as described in the following paragraph, the guidance in this Subtopic applies to: a. All deliverables (that is, products, services, or rights to use assets) within contractually binding arrangements (whether written, oral, or implied, and hereinafter referred to as arrangements) in all industries under which a vendor will perform multiple revenue-generating activities. 3. On the basis of the responses to Questions 1 and 2, what are the units of accounting in this arrangement? The contract between Eye Vision and Holland Hospital includes the Clear View Laser which with the embedded software and a two-year separately priced maintenance agreement. Eye Vision has never sold the Clear View Laser. [? leiz?   without the embedded software. The Eye Vision maintenance agreement is available only to purchasers of the Clear View Laser and has never been sold separately. There is not a general right of return for sales of the Clear View Laser. The delivered item is the Clear View Laser with the embedded software while the undelivered item is the two-year separately priced maintenance agreement. Based on ASC 605-25-25-5 of FASB, there are two conditions should be met if the delivered item or items shall be considered a separate unit of accounting. One is that the delivered item or items have value to the customer on a standalone basis. Another one is the consideration of the general right of return relative to the delivered item, if there is a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. Based on an evaluation of the circumstances, the first condition for separation is met for the Clear View Laser with the embedded software. That is, the Clear View Laser with the embedded software has value on a standalone basis because it is sold separately by Eye Vision Inc. The second condition is also met because there are no general rights of return in this arrangement. Therefore, the Clear View Laser with the embedded software and the two-year separately priced maintenance services should be accounted for as separate units of accounting. References from FASB codification ASC 605-25-25-5 In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: a. The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customers ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s). b. Subparagraph superseded by Accounting Standards Update No. 2009-13 c. If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. This diagram represents an overview of the provisions of this Subtopic with respect to determining the separate units of accounting in an arrangement and should, therefore, be reviewed in conjunction with the guidance in the entire Subtopic. 4. On the basis of the responses to Question 3, discuss the revenue recognition accounting literature that would be applied to each unit of accounting identified in this arrangement. There are two units of accounting on the basis of the responses to Question. The first one is the Clear View Laser with the embedded software; and the second one is the two-year separately priced maintenance services. Based on ASC 605-25-25-2 (c) of FASB, it points out that applicable revenue recognition criteria shall be considered separately for separate units of accounting. For the Clear View Laser with the embedded software, it applies ASC 605-10 of FASB, the overall revenue recognition. Based on ASC 605-10-25-1, the recognition of revenue and gains involves consideration of two factors. One is that the revenue and gains are realized or realizable. Revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. Revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. The other one is that revenue and gains are earned. Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. In this case, after the contract is signed, Eye Vision will receive $1 million for the Clear View Laser, which means revenue and gains are realizable because related assets received or held are readily convertible to known amounts of cash or claims to cash. Eye Vision can recognize revenue and gains of the Clear View Laser if the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. For the maintenance services, it applies ASC 605-20-25 of FASB, the revenue recognition of services. Based on ASC 605-20-25-3, Sellers of extended warranty or product maintenance contracts have an obligation to the buyer to perform services throughout the period of the contract and, therefore, revenue shall be recognized in income over the period in which the seller is obligated to perform. So the revenue from the two-year separately priced maintenance services should be deferred and recognized in income on a straight-line basis over the contract period. References from FASB codification ASC 605-25-25-2 The principles applicable to this Subtopic are as follows: c. Applicable revenue recognition criteria shall be considered separately for separate units of accounting. ASC 605-10-25-1 The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. , Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, states that revenue is not recognized until earned. That paragraph states that an entitys revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events that involve no earning process, and for recognizing gains, being earned is generally less significant than being realized or realizable. ASC 605-20-Currently Viewing: 605  Revenue Recognition 20  Services 25  Recognition General gt; Separately Priced Extended Warranty and Product Maintenance Contracts Currently Viewing: 605  Revenue Recognition 20  Services 25  Recognition General gt; Separately Priced Extended Warranty and Product Maintenance Contracts 25-3 Sellers of extended warranty or product maintenance contracts have an obligation to the buyer to perform services throughout the period of the contract and, therefore, revenue shall be recognized in income over the period in which the seller is obligated to perform. That is, revenue from separately priced extended warranty and product maintenance contracts shall be deferred and recognized in income on a straight-line basis over the contract period except in those circumstances in which sufficient historical evidence indicates that the costs of performing services under the contract are incurred on other than a straight-line basis. In those circumstances, revenue shall be recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract.