2 . What financial declaration adjustments can Lucent need to make to fix the earnings recognition problems announced in late 2000? Lucent recognized earnings when influential evidence of a exists, delivery has took place, the cost is set and determinable, and collection of the causing receivable, which includes receivables of customers to which Lucent has supplied customers auto financing, is possible.
For revenue generated coming from long-term associates, primarily these related to custom-made network solutions and network build-outs, Lucent generally uses the percentage of completion technique of accounting.
Following the incident that SEC required Lucent to restate the its economic results leading its share price to decline eight. 5% in 2000, Lucent now data the product sales revenue if the customers purchase the Timing of revenue reputation is a essential part in revenue recognition. According to US GAAP, revenue needs to be recognized in the next realized/realizable and earned (FASB, 1984, Afin de. 83).
Nevertheless , a number of software firms acknowledged revenue just before product delivery or service performance during the past, which possibly violated one or both of the conditions of the earnings recognition rule. In response, AICPA released Assertion of Placement (SOP) 91-1 in Dec. 1991, which usually stipulated that if collectability is potential, license income should be known upon delivery and service revenue should be recognized ratably over the services arrangement. Your research question just for this article is definitely: How income recognition timing affects attributes of reported revenue?
This problem is interesting because: 1) revenue identification timing is very important in financial revealing and regular setters possess devoted very much attention, 2) very limited scientific research reviewing revenue recognition timing have been conducted, 3) software earnings recognition is unique as transfer of legal rights is attained by license instead of on-the-spot sale for products. The primary hypotheses for this article and their intuitions will be: 1) Early on revenue recognition increases the timeliness of reported revenue.
It is intuition is usually: early revenue recognition better influences decisions by providing even more timely information. 2) Yet , it will bring about greater concern in reported revenue. Its intuition is definitely: changes is probably not foreseen during contract signing. 3) Time-series predictability of revenue is lower under early revenue identification. Its pure intuition is: early revenue recognition results in bigger estimation problem and therefore decreases the time-series predictability.
