Financing Accounting – Case Study Example
Goliath Productions This case is about how Goliath Productions (Goliath) should account for its revenues under its contract with Giant Theatres, Inc.or Giant for the showing of five films. The contract between the two companies provides for a fixed fee plus a variable fee for each film showing. The contract also gives Giant the exclusive right to show the five films during the six-month contract period.
Under Generally Accepted Accounting Principles, there are certain criteria for recognizing revenues. One criterion is that the revenue is realizable, that is, there is an existing arrangement between the seller and the buyer, the seller can reasonably estimate the amount of its revenues, the seller already has a right to collect payment from its customer and the collection of the amount is reasonably certain. Another criterion is that the revenue is already earned, that is, the company has already delivered the goods bought by the buyer under their contract, has already transferred the risks and rewards of using the item sold, and no longer has any obligation to perform further services after delivery of the bought item.
In Goliath’s case, with the presence of an existing contract with Giant, a reasonably certain amount of revenue and the receipt of payments, Goliath may claim that it has already realized the revenues from the said contract. In addition, when Goliath delivered the five films to Giant for the latter’s film showing, Goliath has also earned the revenues under the contract. Thus, the two criteria has been substantially met. However, there is the matter of Goliath’s obligation to Giant that it will not allow other theatres to show the films during the contract period. This is a controllable condition on Goliath’s part and if Goliath is certain that it can meet this condition, then it can recognize the revenues from the said contract. This means that Goliath can recognize the fixed fee of $5,000,000 on a straight-line basis over the six month period and the variable fee of $500 for each film showing upon proof that the actual showing has taken place. However, if Goliath is not certain it can meet this condition (and in this case, it seems that Goliath did not meet it), then it should only recognize all the revenues from the said contract after the six-month period has lapsed because only then will Goliath be able to ascertain that it has already met all the necessary criteria for recognizing its revenues under this contract.
Siegel, Joel G. (2001, October 1). Accounting Changes for the Film Industry. The CPA Journal. 2-3. Retrieved February 28, 2009 from http://www.allbusiness.com/professional-scientific/accounting-tax/990382-1.html.