Accounting Revenue Recognition and Risk Assessment Study

School: York University - Course: ADMS 4590 - Subject: Accounting

To: Evelyn Aderman From: CPA RE: Accounting Issues and Treatments Revenue Recognition: Issue:How the $75,000 of revenue from online courses be recognized immediately or what is the proper revenue recognition treatments? Analysis: The transaction is measurable oMET - each course cost $150 and allows to be done at the student's own pace Collectability is assured oMET - payment is collected immediately upon registration and the fee is non- refundable Performance has been rendered oMET - students will have access to online courses upon registration and they will receive their course username and password oAll payments are non-refundable once a student accesses the online courses for the first time oAt the end of December 31, 5 students did not complete the course before the expiry date oNOT MET - performance has not been rendered since the Academy provides services up until the 90-day period or when the course is completed. oThe Academy has recognized the revenue upfront even though the courses have not been completed. Recommendation: Even though the revenue recognition criteria has not ALL been met, revenue can not be recognized immediately even though the students have accessed to the online courses after payment and registration However, revenue should be deferred since the online courses have not been completed by the student. It should be recognized once the course is finished/expired or when the student has completed the course Percentage of completion method should be used to recognize the amount of revenue The amount of revenue that should be recognized at the end of each month is: oOctober: 100*150 = $15,000 oNovember: 150*150 = $22,500 oDecember: 250*150 = $37,500 Completed courses: oOctober: 95*150*0.80 = $11,400 oNovember: 150*150*0.30 = $6,750

oDecember: 250*150*0.2 = $7,500 oTotal Revenue that should be recognized is $25,650 Risk Assessment: New accounting treatments regarding the costs from shifting traditional to online courses The Academy recognized an asset of $258,000 on the balance sheet for online courses and IT platform - increases RMM oThe platform would require additional or new accounting treatments regarding amortization or impairment oThe value of the courses as Michael believes is valuable asset Risk: New online courses, website may crash, and courses can not be completed oThis affects revenue where revenue is understated oMisstated the revenue Risk: Online courses required new accounting treatment oRevenue is affected Risk: Privacy lost and privacy of information oReview the system to see if it was tested properly (i.e. how far a student completed the course) oRevenue will come from the registration of students and will be affected Risk: audit approach oNew system results in the auditor to test the controls and have a good understanding of the new processes, walkthroughs of the new system Based on the risk described above, the overall financial statement risk will be set to high.