Lighthouse Case

Lighthouse

Case Answer

According to FASB's Codification of Accounting Standards, a company should not recognize revenue until:

1. It has performed under the terms of the arrangement,

2. Unless it will indeed receive and retain payment in a form that has value to the company,

And revenue is realized when "the seller receives cash or assets from the customer that is convertible into cash," This must occur before revenue is recognized. When revenue is being earned in a multi-period contract, sometimes it is more meaningful to recognize revenue over time and prior to completion in proportion to the percentage of work completed.

In this case, we believe that it really depends on the company itself on how to recognize revenue under GAAP.

One way they can recognize the revenue from ship device and revenue is to record them together because both the service and device are related to each other, service can't happen without device not being installed.

The other way of recognizing revenue is to record device and service separately because as the case mentions that light house let the customers sign two contracts, one for the device and the other service, so each should be recorded separately.

Moreover, light house receive revenue from device as a one-time payment from the customers when they make the order and sign the contract and revenue should be recognized at that time when the payment received. As for the service, payments from customers are made on monthly basis and should be recorded on a monthly basis even if the customers paid the full amount of service when they signed the contract, which would be recorded as unearned revenue for the service, it will be as credit for the customers. Furthermore, as the case mentions that the amount paid for the device is non-refundable if the customer cancels the contract, so by recording them separately that would eliminate any confusion that would be created if they were recorded together.

We also consider this case in IFRS perspective, If the Lighthouse is a European company, it should follow the IFRS accounting standards to recognize the revenue. The IAS 18 (Revenue) provide the detail requirement for revenue recognition. Under IAS 18.9, it requires that "revenue should be measured at the fair value of the consideration received or receivable."

For recognizing the revenue from selling device, IAS 18.14 provides a guideline for recognizing sale of goods. There are five criterion that the company should to satisfy with.

Under IAS 18.14: "

* the seller has transferred to the buyer the significant risks and rewards of ownership

* the seller