Discuss the Methods of Revenue Recognition Og Is Currently Using and Analyze Them Using Ifrs Criteria

OUTLINE:

Discuss the methods of revenue recognition OG is currently using and analyze them using IFRS criteria:

IFRS Criteria – Rendering of Services:

1. The amount of revenue can be measured reliably.
2. It is probable that the economic benefits associated with the transaction will flow to the entity.
3. The stage of completion of the transaction at the end of the reporting period can be measured reliably.
4. The costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

1. Subscription Revenue:

A: Yes, the amount of revenue can be measured reliably by OG.

B: Yes, it is probable that the economic benefits associated with the transaction will flow to OG.

C: Yes, the stage of completion of the transaction at the end of the reporting period can be measured reliably, as OG recognizes revenue pro-rata over the life of the contract.

D: Yes, the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

1: Performance is substantially complete, (over life of contract)

2: The amount is measurable, all costs are decided before the contract

3: Yes, collectability is reasonably assured

1. Professional Service Revenue:

A: No, the amount of revenue can not be measured reliably by OG.

B: No, it is not probable that the economic benefits associated with the transaction will flow to OG, collectability problem

C: Yes, the stage of completion of the transaction at the end of the reporting period can be measured reliably.

D: N, the costs incurred for the transaction and the costs to complete the transaction can’t always be measured reliably, with cost overages having to be billed several times. Additionally, in regards to these cost overages, there is a problem with the collectability of these receivables.

1: Performance is substantially complete, provide service along the life of the contract

2: The amount is not measurable, problem with overages

3: Collectability is not reasonably assured – problems collecting overage charges

Recommendation: recognize this revenue once they contract is finished, and they can charge a single final amount that will have a much higher likelihood of being collected.

OG’s method of recognizing revenue for their subscriptions over the contract’s life is reasonable and reliable. However, OG’s method of recognizing revenue for their Professional Service fees can be considered too aggressive. The costs related to these transactions are unpredictable, making OG have to bill clients at the end of the contract for cost overages. And secondly, there remains uncertainty about the collectability of these cost overages charged to some clients.  

(Remember to consider the related balance sheet and expense accounts in your analysis)

Prepare a brief analysis of OG’s profitability and discuss what you think are the implications for the future:

Positive gross profit in all 3 years (2016,2015,2014), with gross margins of (67%, 68%, and 70% respectively).

However, OG has operating losses in all three years.  The largest operating expense, which has grown substantially in the past 3 years is “Sales & Marketing”.  This may be a sign that OG’s commission structure does not work well, costing the company too much in commissions.

Currently Sales and Marketing is expensed at 210,000. How to explain the strong cash flow and revenue, but operating at a loss?

The Sales staff are paid on commission, but receive the full amount owed to them when the deal is closed. OfficeGopher expenses this commission over the first term of the subscription contract. Assets have more than doubled yes, AR and Cash both growing extremely fast.

OfficeGopher will not pay income tax for the current year, since it has recorded a net loss, but it actually has more cash on hand than it did at the start of the year. OfficeGopher definitely has enough cash on hand to keep paying bills, however its not earning profits for its shareholders.