Coax Case Study

CoAx is a publically traded company that manufactures and sells coaxial and fiber-optical cable. The company has two transactions where they must determine the appropriate way to recognize revenue. In Transaction 1, CoAx entered an agreement to sell 1,000 feet of 18 American wire gage coaxial cable for $3 a foot to CableCo. The agreement requires CoAx to hold the cable in its warehouse until CableCo can transport the cable to its own warehouse. CoAx concluded that risk of ownership have passed to CableCo, there is a legitimate reason for CoAx to hold the cable in their warehouse for CableCo, and CoAx has no other obligations related to CableCo’s purchase. CoAx will recognize revenue before CableCo takes delivery of the cable. In the Transaction 2, CoAx entered an agreement to sell 1,500 feet of fiber-optical cable for $3 a foot to TeleCo. CoAx collected payment before the order shipped. The title will transfer when the delivery company, DeliveryAx, takes the product. CoAx recently became 100 percent owner of DeliveryAx. In both Transaction 1 and Transaction 2, it is questioned whether CoAx appropriately recognized revenue. In Transaction 1, the contract for the sale of the cable has been incorrectly classified by CoAx. The contract CoAx formed with CableCo should be regarded as a bill-and-hold arrangement. The contract allows CoAx, the entity, to bill CableCo, the customer, but still possess the product until it is transferred to CableCo in the future. This follows the definition of a bill-and-hold arrangement (ASC 606-10-55-81 and IFRS 15). Even though the contract matches the definition of a bill-and-hold arrangement, IFRS and GAAP requires that the contract meets all four of their criteria for such an arrangement. All the criteria are met by the contract: the reason for holding the cable is substantive, CoAx identified the product as belonging to CableCo by “virtually” separating the cable, the cable is ready for transfer to CableCo’s warehouse, and CoAx has ensured that the cable is not able to be used for other customers by marking it as sold in the inventory system (ASC 606-10-55-83 and IFRS 15). Realizing that the contract is a bill-and-hold arrangement causes the treatment or revenue recognition to be different. Since the contract is a bill-and-hold arrangement, the written agreement that states CoAx will hold the cable is part of the original contract. This makes CoAx holding the cable in their warehouse a performance obligation. The service of holding goods of the customer after the sale is called a custodial service. The custodial service performed by CoAx is not complete until the physical transfer of the cable to CableCo at the end of three months. Therefore, CoAx is not allowed by IFRS and GAAP to recognize revenue because all the performance obligations are not satisfied (ASC 606-10-05-4 and IFRS 15). Instead, CoAx should allocate a portion of the transaction price to the custodial service. That portion should then be allocated over the three-month period of holding the cable for CableCo (ASC 606-10-55-84 and IFRS 15). CoAx recognized revenue from Transaction 1 before the delivery date because …show more content…
We used the new revenue recognition standards to identify the performance obligation. In this case, CoAx’s performance obligations to CableCo are the production of 1,500 feet of fiber-optical cable for $3 a foot and delivery of the cable to the carrier. According to Deloitte’s Heads Up: Revenue Standard Finally Recognized: Boards Issue Guidance on Revenue from Contracts with Customers, “Under the ASU, a performance obligation is satisfied (and the related revenue recognized) when “control” of the underlying goods or services (the “assets”) related to the performance obligation is transferred to the customer.” CableCo is using freight on board shipping point so CableCo has control as soon as the cable was delivered to DeliveryAx. Even though DeliveryAx is 100 percent owned by CoAx, we determined that DeliveryAx is a separate entity. CoAx does not take into account the performance obligation of DeliveryAx because the delivery company is a separate entity from CoAx. DeliveryAx would record the revenue from delivering the cable on its financial statements. CoAx has satisfied its performance obligations when the order for 1,500 feet of fiber-optical cable is complete and transported to DeliveryAx. CoAx can then record the payment collected before the order shipped as revenue when DeliveryAx receives the