Oracle System Corporation Case and Revenue Recognition
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Answer the following questions based on the Oracle System case file attached.
1. What assumptions underlie Oracle's recognition of revenue for license fees? Are these assumptions reasonable given the firm's business and operating policies?
2. Estimate Oracle's 1990 sales if revenue is recognized at delivery rather than when the contract is signed. Hint: use the estimate provided by the controller of the effect of recognizing revenue at delivery on days receivable.
3. If the firm's 1990 cost of sales to sales ratio and average tax rate are unaffected by a change to the more conservative revenue recognition method, what would be the affect of this accounting change on the company's 1990 net income?
4. Use the 1990 cost of sales to sales ratio and average tax rate to estimate the size of the opening retained earnings write-off required if Oracle decides to retroactively adopt the new revenue recognition method.
5. How would a change in revenue recognition affect the firm's lending contracts and management compensation?
6. How do you expect investors to respond if Oracle decides to recognize revenue at delivery rather than when the contract is signed?
7. Do you recommend that Oracle make the accounting change? Why?
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Solution Summary
This solution provides a detailed discussion of a series of questions based on a Oracle System case file
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Question 1
Assumptions in revenue recognition include recognition of revenue from licenses when contact with a customer is signed even before delivery of the products has occurred. Initial non refundable payments and development license fees are also recognized once a contract is signed while sub-license fees are recognized as revenue when amounts are received from original equipment manufacturers and value added re-licensors.
The assumptions are not reasonable since the company has an aggressive policy in recognizing revenue which has led to high account receivables balances. The company can recognize revenue that could be shipped with 12 months and this led to high amount of receivables. The business is involved in the sale of software and its accounting policy in revenue recognition is not in line with accounting ...
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