Free Case Study On Revenue Recognition

The Software Company wishes to recognize revenue immediately after installation of the software and before the end of the three months warranty period. However, the software must run successfully during the three months period; otherwise, the contract would be revoked or the company would install different software.
The company should not recognize revenue after installation of the software. This is because at this stage revenue has not been earned. The software renders service to the medical goods industry. However, the medical goods industry gains economic benefits; this should be a guide for the software company to recognize revenue. Revenue recognition should only be recognized after the completion of the service (IAS 18). In this case, it is the completion of the warranty period. In such a situation, revenue can only be recognized when the company is sure the revenue will be earned and can be measured reliably. In addition, revenue should be recognized when costs incurred can be measured effectively (IAS 18). Moreover, the software company should only recognize the revenue at a financial period when it has been earned.
In the event that the company recognizes the revenue immediately after installation of the software, financial statements prepared would not be true and fair. They overestimate revenue and under estimate costs, as more cost may be incurred during the warranty period. Also, it is probable that the company recognizes revenue at a wrong period, yet not earned. Therefore, the financial statements prepared using this information would give misleading information to the users of financial statements.