CE18-2
The installment-sales method of recognizing revenue is not generally acceptable. Revenue should generally be accounted for at the time a transaction is completed because they are not recognized until realized and earned (ASC 605-25-3). The installment sales method accounts for sales that may extend payment periods and involves recording revenues in a specific proportion based on the criteria of cash collections (Carmichael and Graham, 2012). Thus, for these sales in which collectibility uncertainty is present, recognizing the revenue at the point of sale would overstate income and is not generally acceptable. However, ASC 605-25-4 accommodate for unique cases when the seller has no reasonable basis to assume it will collect the sale price. Therefore, the installment sales method of recognizing revenue is generally only acceptable in cases where there is a greater chance of uncertainty over the future collections, such that there is no reasonable basis for estimating the degree of collectibility (Wahlen, Jones and Pagach, 2013).
CE18-4
The cost recovery method is used by the company to record sales, cost of goods and collections in the usual manner during the given period (Bragg, 2011). According to Wahlen, Bradshaw, Baginski and Stickney (2010), the cost recovery method is used when companies face considerable risk about cash collections. It is a method of income recognition to the point of cost recovery, after which it is an anti-conservative method of income recognition (Flood, 2012). It balances the cost of generating revenues with cash receipts until all such costs are recovered. The company cannot recognize revenue until it receives cash. Afterwards, it recognizes matching amounts of expenses in each period until complete cost recovery happens. Therefore, under the cost recovery method, equal amounts of revenue and expense are recognized as collections are made until all costs have been recovered, postponing any recognition of profit until that period (ASC,360-55-13).
CE20-1
- The accumulated benefit obligation is the present value of benefits recognized by the pension formula to employee service given before a specified date, and based service and compensation before that date (ASC, Master Glossary, 2010). It is a more conservative measure of the pension obligation, and firms are required to use this measure to establish the minimum pension liability. It is also referred to as an unfunded accumulated benefit obligation (Norton, Diamond and Pagach, 2006).
- The defined benefit postretirement plan is the plan, which depends on a postretirement benefit formula that determines the amount of benefit the employee will receive upon retirement (ASC, Master Glossary, 2010). The estimated cost of the postretirement plan benefits is calculated based on actuarial assumptions (Weil, Schipper and Francis, 2014).
- The actuarial present value is the value assigned by an actuary to the assets of the plan, which is used together with the actuarial cost method (ASC, Master Glossary, 2010). In this case, the actuarial cost method is a tool used to determine the amount and incidence of employer contributions (Greuning and Koen, 2001).
- The prior service cost is the present value at a given period of a pension plan’s retroactive benefit (Weil and Maher,2005). It is included in accumulated of other complete income related to the future years of employee service, which is no longer expected to be rendered, but be recognized in earnings as part of a reduction (ASC, Master Glossary, 2010).
CE20-2
It requires employers to make several main assumptions in the accounting for financial statement items related with a defined benefit pension plan (ASC, 960-20-25-3). These assumptions include the discount rate used to determine the present value of a company’s pension liability. The employer can raise or lower the present value of its pension liability by varying the discount rate it applied to those liabilities (Knapp, 2013). Thus, an employer can use its actuarial information to develop an appropriate estimate of the discount rate to use in a pension liability (Hull, 2012). Meanwhile, the employer should use the current information from FASB on the accrual basis for accounting of the discount rate. He or she should be aware of a financial statement item associated with the defined pension plan that will to account for appropriate discount rate.
References
American Accounting Association - FASB Accounting Standards Codification. (2013). Retrieved from http://aaahq.org/asclogin.cfm.
Bragg, S. M. (2011). Wiley GAAP 2012: Interpretation and application of generally accepted accounting principles. Hoboken, NJ: John Wiley & Sons.
Carmichael, D. R., & Graham, L. (2012). Accountants' Handbook, Financial Accounting and General Topics. Hoboken: John Wiley & Sons.
Flood, J. (2012). Wiley GAAP 2013: Interpretation and application of generally accepted accounting principles. New York: Wiley.
Greuning, H., Koen, M. (2001). International accounting standards: A practical guide. Washington, DC: World Bank.
Hull, J. (2012). Risk management and financial institutions. Hoboken, N.J: John Wiley & Sons.
Knapp, M. C. (2013). Contemporary auditing: Real issues and cases. Australia: South-Western Cengage Learning.
Norton, C. L., Diamond, M. A., & Pagach, D. P. (2006). Intermediate accounting: Financial reporting and analysis. Boston: Houghton Mifflin Co.
Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2013). Intermediate accounting: Reporting and analysis. Mason, OH: South-Western Cengage Learning.
Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western.
Weil, R. L., Schipper, K., & Francis, J. (2014). Financial accounting: An introduction to concepts, methods, and uses. Mason, OH: South-Western, Cengage Learning.
Weil, R. L., Maher, M. (2005). Handbook of cost management. Hoboken, N.J: Wiley.
