Early revenue recognition provides management with the opportunity to boost current earnings by hading product quality and underreporting the cost of returns, reducing the credibility of financial reports. There’s some analyst that question Oracles method of revenue recognition because of revenue recognition timing, quality of receivables and aggressive sales practice. These were all legitimate concerns. The company can recognize any revenue they believe will be shipped in the next 12 months, but at the end there were not shipped.
Oracle Recognized licensing and subleasing revenues on the date of contract instead delivery when certain conditions were met. Revenues also come from maintenance agreements. Maintenance fees are recorded as revenues when they sign the contract and the fees are receivables for Oracle. We can be see the number of revenues had Increasingly In 1990 comparing to 1989. The company justified the practice stating its contractual obligation had been substantially performed at the time of signing the agreement.
The problem with recognize revenues of products or services its that always exist a risk that purchasers will be dissatisfied with the quality of future work and demand additional work, and the fact that exist a risk that the cost or providing the future service will be more than anticipate. Revenues from services is generally recognized under the percentage of completion method. This method records revenue when the contract Is actually completed. Ender the us GAP are expected to use the percentage of completion method If estimates of the cost to complete and extend of progress to completion o long term contracts are reasonable. Revenue recognition rules illustrate issues for contracts where cash is received before the product delivery or provision of the service The problem with this accounting method is legitimate because the company obviously TLD consider delivery of Its products a substantial part of obligation, while the wording of FAST Concepts Statement no 5. Suggests differently.
The concerns grew further as many other software firms began recognizing revenues only after the delivery. The company assumes that the quality of receivables was great. Another concern because Oracles days receivable exceed 160 days which was significantly longer than competitor average of 62 days even after considering that oracle recognized revenues early. The achievement of sales is based on the aggressive sales practice. Like most companies, Oracle based employees incentives on sales, so sales manipulation had always been a concern.
I detected that the company has an over recognition of revenues, with a very important portion of its sales that are unrealizable. It recognizes contract revenues to be received within the ear with: High level of accounts receivables Longer collection period Higher default risk Overstated income statement Recognizes revenues when services are performed without evaluating these revenues could actually be realized 3. What accounting or communication changes would you recommend to Oracle’s Board of directors?
Under the rule, revenues can be recognized only: If the seller has provided all, or substantially all of the goods or services to be delivered to the costumer. The customer has paid cash or is expected to pay cash with reasonable certainty. I recommend Oracle to change its revenue recognition ethos in order to control accurately the financial operation of the company, creating better strategies to increase its profit as the following: Adjustment in accounts receivable by knowing cash collection is reasonably.
Speeding the collection period to manage the discrepancy between the realization of revenues and the actual receipt of payment Adjust to industry averages Modify the recognition of license fees so that the revenue would be recognized only when substantially al the company contractual obligations has been performed Wait until the FAST announce its position on software revenue recognition before making any changes
