Accounting and Auditing Processes
March 4, 2000
Writing Assignment #1
Revenue Recognition Policies
The purpose of this paper is to compare the revenue recognition policies of two companies in the search, detection, navigation, guidance, and aeronautical systems industry. The two companies I have selected are Aerosonic Corporation, and Esco Electronics Company.
Esco Electronics Company is engaged in the design, manufacture, sale and support of engineered products. These products are used principally in filteration/fluid flow applications, electromagnetic compatibility (EMC) testing, and electric utility communications and control systems. The filtration/fluid flow and EMC testing products are supplied to a broad base of industrial and commercial customers worldwide. At the present time, electric utility communications systems are marketed primarily to customers in North America. The four primary industry segments of Esco are Filtration/Fluid Flow, Test, Communications, and other.
In order for Esco to conform with generally accepted accounting principles, management must make careful estimates in preparing the financial statements.
These estimates are for anticipated contract costs and revenues earned during the life of the contract. These amounts affect the reported amounts of assets and liabilities on the company's financial statements. Actual results could differ from these numbers.
Revenues are recognized on commercial sales when products are shipped or when services are performed. Revenue on production contracts are recorded when specific contract terms are fulfilled. These amounts are determined either by the units of production or delivery methods. Revenues from cost reimbursement contracts are recorded as costs are incurred, plus fees earned. Revenue under long-term contracts in which the previous two methods are inappropriate, the percentage-of-completion method is used. Revenue under engineering contracts are generally recognized as certain "milestones" are attained.
The percentage-of-completion method recognizes a portion of the estimated gross profit for each period based on progress to date.