Reference no: EM13138835
One of your firm’s clients, Company A operates an electronic payment processing service on behalf of retailers who accept payment by credit card. One-time costs are incurred by Company A on inception of the franchise arrangement, in adding the retailer to its processing system.
Charges to retailers for the service comprise a set-up fee on inception of the arrangement of $360 followed by annual charges, payable in one single installment in advance, of $240 per annum. The first annual payment starts the year after inception of the arrangement.
The annual charges of $240 result in Company A making profits from the ongoing service.
Company A also has a foreign subsidiary that provides the same services in the foreign country where it operates. This subsidiary must prepare domestic financial statements using IFRS.
The partner in charge of the audit of Company A has asked you to perform some GAAP research.
Required: Write a memo to the partner in charge of the Company A audit, Matt Wilson, answering the following questions. You need to provide a written summarized answer that is supported by properly formatted references to the Codification or IAS/IFRS statements. Written summaries without supporting GAAP references will not receive full credit nor will GAAP references receive full credit without a summarized explanation. GAAP references may be copied and pasted into your solution.
1. How should Company A recognize revenue in respect to the set-up and subsequent annual fees for the U.S. parent? Be specific in your answer with respect to how much of the set-up charge, if any, should be recognized at set-up and how much should be deferred, if any, and how much annual revenue is recognized.
2. How should Company A’s foreign subsidiary recognize revenue in respect to the set-up and subsequent annual fees? Be specific again with your answer.
3. Would your answer change to parts 1 and 2 above if the initial fee was $1,200 and subsequent fees were $50 per annum (which results in the ongoing service being uneconomic and loss making)? Be specific about any changes. Restate, if necessary, the amount recognized at various points in time and provide any additional GAAP references necessary.
4. Explain whether adopting IFRS in the U.S. would materially change how Company A would account for these contracts; and, if so, how the recognition changes would affect revenue recognition timing.
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