Case study - Revenue recognition

[Moon]

ABC Company is a parent company (Located outside Pakistan) of the XYZ Pakistan. Parent company assigns specific coursework to the branch in Pakistan. Branche through a number of professional staff hired on fixed salary basis carry out the assignment and, subsequent to completion, the product is send to the parent company. The parent company reimburses the monthly expenses of the branch on the basis of a statement prepared and sends to it by the branch. The question is when and how the branch should recognize the revenue from the rendering of services keeping in mind that the branch is not authorized to carry out independent operations.

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Be careful! Words speak....

[XBRL]

There are certain questions

1. Can the stage of completion of product and cost to complete the order be measured?
2. Are the orders from parent company renewed after sending specific products or paki company works on number of products side by side i.e at a given date are there several products under process or one by one?
3. What are the terms of parent company accepting the product to be true. i.e. is there any provision that product will not be accepted.
4. It appears that branch can not sale the product independently therefore the reimbursement of expenses obviously covers the servicing fee i.e revenue of branch. If the reimbursement is made monthly, revenue should be recognised monthly unless otherwise there are some spefic terms and condition.


As per the accounting standard 18 para 20 revenue be recognised when amount and stage of completion and associated cost can be measured reliably at balance sheet date also it is probable that economic benefits related to MAKING OF PRODUCT will flow to enterprise (branch)

I hope if not clear i have tried to broaden up the vision...