Metropolitan Environmental Inc: A Case Study in Revenue Recognition Policy
The ownership of the incoming customer waste shipments lies on the Metropolitan Environmental Service Inc. It assumes the ownership of the waste once they have serviced the customer and hence has the waste as part of their inventory. According to Giancinto & Hansen, they take responsibility and liability when they hold the waste in their inventory facility on behalf of their customer.[1] Hence, physical possession of the waste is the determinant of ownership.
The risks and control of the disposal process lies on Metropolitan Service. This is because Metropolitan transports the waste to their facilities from the customer premises. The costs of transport are billed on the customer but the disposal process is totally on Metropolitan. They have their own disposal outlets and hence they do not rely on the third parties for their disposal process. However, in cases where it may deemed fit to transport the waste to another facility belonging to Metropolitan, the costs will be incurred Metropolitan[2]. Any occurrences when the waste is in the inventory will a risk to Metropolitan.
An agreement between Metropolitan and the customer takes effect when Metropolitan collects the waste from the premises of the customer. An agreement can also take effect when the customer has allowed employees from Metropolitan to work in the customer’s site. This indicates the metropolitan has started to service their customer and therefore the agreement between the customer and the metropolitan becomes binding[3]. This means that Metropolitan can bill the customer depending on the costs they have incurred in transport, labor and taxes.
Metropolitan completes their earning process when the disposal process is completed and the customer has been billed. This means that Metropolitan can receive their dues from the customer for the services rendered. This is important because Metropolitan will have determined the amount of taxes i.e. local and federal taxes and fees that are associated with handling of hazardous waste, which will also be billed on the customer[4].
Revenue recognition for the different scenarios
Scenario a)
According to U.S GAAP codification topic 600, revenue should be recognized when it is earned[5]. Therefore, in the first scenario, Metropolitan went to the customers premises and collected the waste material. In such a case, Metropolitan offered the service and hence the revenue was earned but not realized. From the International Accounting Standard 9 and US codification on revenue, such revenue should therefore be recognized when the service was offered because it the revenue was earned.[6] The customer will be billed for other costs that will be incurred such as transport. Therefore, revenue will be recognized on September 5th.
Scenario b)
In the second scenario, Metropolitan scheduled with the hospital to pick the waste material from their premises on the afternoon of March 31st. The service was offered as scheduled but it was completed past the working hours and hence did not get to Metropolitan premises on the same day. However, the service was offered on 31st March and hence the revenue was earned on that day. Therefore, in the financial statements, revenue should be recognized on 31st when the service was actually offered. The revenue recognized should be the invoice amount as at that date.
Scenario c)
In this scenario, the service being delivered by Metropolitan will take a longer duration of six months. According to the IAS 18, revenue can be recognized when a service is offered and the total cost can be measured reliably. In such a case therefore, revenue should be recognized for the different services such as labor, disposal and employee expenses on daily basis as the costs incurred can be estimated with certainty.[7] Therefore, once the service is offered and the costs are estimated reliably, then revenue should be recognized in the financial statements as they are earned and realized.
Scenario d)
In the fourth scenario, Metropolitan was offering services to a university for the disposal of hazardous chemicals. The chemicals were transported from the premises of the customer but could not be disposed off immediately. In addition, the transport and other costs could not be estimated immediately. Therefore, the revenue could be recognized on August 10th when the chemicals were destroyed. According to IAS 18, revenue from services rendered can only be recognized when the costs incurred for the transaction can be measured reliably.[8]
Scenario e)
In this scenario, Metropolitan offers its services to the people of the City of Chicago through collection of hazardous materials. The collection of the waste occurs on 2nd Saturday of each month but disposal will take place later[9]. Therefore, revenue should be recognized when all the services are offered and the costs incurred corresponds with the invoice amount.
Revenue recognition is a principle in accounting that is mostly based on two concepts i.e. accrual basis and cash basis.[10] Revenue is recognized on cash basis when the actual cash is received. The accrual basis is based on when the revenue is earned but the actual cash has not been received. Cash basis can be recognized on instilment especially where it is risky, there is a possibility of losing cash, and hence we recognize the cash received only. The accrual basis is the most common especially where it is based on the possibility of recovering the cost that has been incurred so that the expenses incurred can be estimated reliably.
Bibliography
Bragg, Steven M. (2010). Wiley Revenue Recognition: Rules and Scenarios. New York, NY: John Wiley and Sons.
Epstein, Barry J., Steven M. Bragg, & Ralph Nach. (2010). Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles 2011. New York, NY: John Wiley and Sons.
Giancinto, G & Hansen, K. Metropolitan Environmental Inc: A case study in revenue recognition policy.
Martin, Robert E. (2006). Managerial Cost Accounting Practices: Leadership and Internal Controls are Key to Successful Implementation. Los Angeles, CA: DIANE Publishing
Mulford, Charles W., & Eugene E. Comiskey. (2002). The financial numbers game: detecting creative accounting practices. New York, NY: John Wiley and Sons.
Needles, Belverd E., Marian Powers, & Susan V. Crosson. (2006). Principles of Accounting. Washington, DC: Cengage Learning.
Norton, Curtis L., Michael A. Diamond, & Donald P. Pagach. (2006). Intermediate accounting: financial reporting and analysis. Washington, DC: Cengage Learning.
Stickney, Clyde P., Roman L. Weil, & Katherine Schipper. (2009). Financial Accounting: An Introduction to Concepts, Methods and Uses. Washington, DC: Cengage Learning.
Stolowy, Hervé, & Michel Lebas. (2006). Financial accounting and reporting: a global perspective. Upper Saddle River, NJ: Cengage Learning EMEA.
[1] G Giancinto, & K Hansen. Metropolitan Environmental Inc: A case study in revenue recognition policy.
[2] Steven M. Bragg, 2010, Wiley Revenue Recognition: Rules and Scenarios. (New York, NY: John Wiley and Sons)
[3] Curtis L. Norton, Michael A. Diamond, & Donald P. Pagach., 2006, Intermediate accounting: financial reporting and analysis. (Washington, DC: Cengage Learning)
[4] Robert E. Martin, 2006, Managerial Cost Accounting Practices: Leadership and Internal Controls are Key to Successful Implementation. (Los Angeles, CA: DIANE Publishing)
[5] Belverd E. Needles, Marian Powers, & Susan V. Crosson. 2006, Principles of Accounting. Washington, DC: Cengage Learning
[6] Mulford, Charles W., & Eugene E. Comiskey. (2002). The financial numbers game: detecting creative accounting practices. New York, NY: John Wiley and Sons
[7] Norton, Curtis L., Michael A. Diamond, & Donald P. (2006). Pagach. Intermediate accounting: financial reporting and analysis. Washington, DC: Cengage Learning
[8] Needles, B. E., & Marian Powers. (2010). Principles of Financial Accounting. Washington, DC: Cengage Learning
[9] Stolowy, Hervé, & Michel Lebas. (2006). Financial accounting and reporting: a global perspective. Upper Saddle River, NJ: Cengage Learning EMEA
[10] Epstein, Barry J., Steven M. Bragg, & Ralph Nach. (2010). Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles 2011. New York, NY: John Wiley and Sons.
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