Staff Accounting Bulletin

SEC Staff Accounting Bulletin No. 101
Revenue Recognition

This assignment requires that you log onto the Securities and Exchange Commission’s web site ( Once you are on the web site, scroll down to the section labeled “Staff Interpretations” and then click on the link titled “Staff Accounting Bulletins.” Then, on the next screen you should scroll to Staff Accounting Bulletin (SAB) No. 101 and click on the file with the full version of SAB No. 101 dated December 3, 1999. If you cannot locate the document, click on the following link:

Read SAB No. 101 to answer these questions:

• According to the background description of the COSO fraud study, Fraudulent Financial Reporting: 1987-1997, An Analysis of U.S. Public Companies, how often is overstating revenues the cause of a financial statement fraud?
• Based on a more recent report issued by the Center on Audit Quality (see describe the central message resulting from that study.
• How does SAB No. 101 change existing accounting rules on revenue recognition?
• Your Financial Accounting course taught you that revenue is to be recognized when it is realized or realizable and earned. In the SEC staff’s view, what four things must occur for those conditions to be met?
• Read Question 1 under the heading “2. Persuasive Evidence of an Arrangement.” What primary reason does the SEC provide for why Company A cannot legitimately record the sale to Customer Beta in the first quarter?
• Assume your client shipped goods to a customer. The customer has the right to return the product and the buyer does not pay for the goods at that time but agrees to pay for the goods at a later specified date. Your client has agreed to excuse payment until the buyer resells the product to one of their customers. What is the SEC’s view as to whether your client can record the revenue at the time of shipment?
• Assume that a customer of your client ordered merchandise from your client. By year end, your client is ready to deliver the merchandise, but the customer is not yet ready to take delivery of it. So, your client has segregated that inventory in its warehouse to ensure that they don’t include it in physical inventory counts at year end, given that they have already recorded the sale in that year. What is the SEC’s view about whether the revenue recorded by the client should remain on the books?
• Describe the major components of footnote disclosure information that is required with respect to revenue recognition?
• The FASB recently issued a new pronouncement on revenue recognition. Log into the FASB website ( and review the highlights of the new standard. Briefly describe 3 differences in how GAAP for revenue recognition will change due to the new standard. Do you believe SAB No. 101 will be necessary after the FASB standard becomes effective? Why?

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