Making Connections - Case 14-6 Essay

5302 Words Mar 9th, 2016 22 Pages
I. Making Connections Case #14-6
1. Succinct statement of the facts:
Social Konnections Inc (SKI) is a global internet company that runs a large social media networking web site. The major source of income for the company is from the advertisers who use the advertising space created by Social Konnection Inc. The amount an advertiser pays depends on the number of views or the number of clicks depending on the type of the contract. The company acquired Corporate Collaborations this entity manages private and public social media networks that earn its revenue providing corporate social network development and hosting services. The audit committee of the company has requested the company to hire a new audit firm with a better experience in
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FN1 If a transaction is within the scope of specific authoritative literature that provides revenue recognition guidance, that literature should be applied. However, in the absence of authoritative literature addressing a specific arrangement or a specific industry, the staff will consider the existing authoritative accounting standards as well as the broad revenue recognition criteria specified in the FASB's conceptual framework that contain basic guidelines for revenue recognition.
* FN1 The February 1999 AICPA publication "Audit Issues in Revenue Recognition" provides an overview of the authoritative accounting literature and auditing procedures for revenue recognition and identifies indicators of improper revenue recognition.
* Based on these guidelines, revenue should not be recognized until it is realized or realizable and earned. FN2 Concepts Statement 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraph 83(b) states that "an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues" [footnote reference omitted]. Paragraph 84(a) continues "the two conditions…

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