Chapter 1
Recognition and Measurement
32
Case Study
CS-1 (
4
5
)
Pampersky Ltd. is a multinational, publicly traded security software developer with a July 31
year-end. Pampersky specializes in the development of antiviruses but also has a large market
share in the corporate security and business IT security solutions. Pampersky is a rapidly
growing company and launched its North American operations two years ago, with strong
revenue and net income figures reported in the first two years. Pampersky has hired your firm
to assist with its reporting and financial statements preparation this year. Greg, the corporate
accountant, has provided you with a list of issues, requesting assistance with the treatment of
the following transactions.
Required
a) Pampersky entered into a three-year contract with a major investment bank to re-haul
its existing security software. The contract was signed in 2014 with Pampersky scheduled
to receive $16 million in each of the three years the contract is performed. The 2014 cost
was $12 million, the 2015 cost was $10 million and the 2016 cost was $8 million. Greg
indicated that revenue was recognized equally over the three years of the contract and
asked you to help him recalculate the revenue to be recorded under the percentage-of-
completion method.
Year
Actual Costs
Incurred
Percentage of
Completion
Revenue
Recognized
2014
2015
2016
b) Pampersky’s antivirus software is extremely successful and is sold exclusively online.
The client pays on the spot, using PayPal or other electronic methods, and is allowed to
download one copy of the software, which is installed on the computer and activated
using a unique code. There is a 30-day money back return policy during which the client
can change his mind and return the product for a full refund. Based on the last two year’s
data, about 5% of the clients utilize the return policy and get their money back. This
amount is recorded as contra revenue on the financial statements. Greg indicated that the
company recognizes 100% of the revenue when the software is sold (i.e. when the client
confirms payment via PayPal). Greg asked you to confirm that the revenue recognition
practice is correct.
