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Oracle Systems Corporation Case

- Analysts questioned Oracle's method of revenue recognition in the 1990s due to concerns about revenue recognition timing, quality of receivables, and aggressive sales practices. These concerns were legitimate. - If Oracle recognized revenue at delivery rather than contract signing, estimated earnings would be lower by $55M, $149M, and $95M for fiscal years 1990, 1989, and 1988 respectively. - The board should change revenue recognition to recognize revenue only when goods/services are delivered and payment is reasonably certain. They should also adjust accounts receivable, speed up collection periods, and modify license fee recognition to wait until obligations are complete.

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Darinho Dos Santos
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811 views3 pages

Oracle Systems Corporation Case

- Analysts questioned Oracle's method of revenue recognition in the 1990s due to concerns about revenue recognition timing, quality of receivables, and aggressive sales practices. These concerns were legitimate. - If Oracle recognized revenue at delivery rather than contract signing, estimated earnings would be lower by $55M, $149M, and $95M for fiscal years 1990, 1989, and 1988 respectively. - The board should change revenue recognition to recognize revenue only when goods/services are delivered and payment is reasonably certain. They should also adjust accounts receivable, speed up collection periods, and modify license fee recognition to wait until obligations are complete.

Uploaded by

Darinho Dos Santos
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Daro Vzquez Montes

141471
Oracle System Corporation

1. What factors might have led analysts to questions Oracle Systems


method of revenue recognition in mid 1990? Are these legitimate
concerns?
To reflect the economic substance of a firm revenue performance exist two
criteria for revenue recognition. The first criteria it is that the earning process is
ssentiality complete, that is the firm provided all, or substantially all the goods
or services to be delivered to the customer. The second criteria its cash likely to
be received.
Early revenue recognition provides management with the opportunity to boost
current earnings by shading product quality and underreporting the cost of
returns, reducing the credibility of financial reports.
Theres some analyst that question Oracles method of revenue recognition
because of revenue recognition timing, quality of receivables and aggressive
sales practice. These were all legitimate concerns. The company can recognize
any revenue they believe will be shipped in the next 12 months, but at the end
there were not shipped.
Oracle Recognized licensing and sublicensing revenues on the date of
contract instead delivery when certain conditions were met. Revenues also
come from maintenance agreements. Maintenance fees are recorded as
revenues when they sign the contract and the fees are receivables for Oracle.
We can be see the number of revenues had increasaly in 1990 comparing to
1989. The company justified the practice stating its contractual obligation had
been substantially performed at the time of signing the agreement.
The problem with recognize revenues of products or services its that
always exist a risk that purchasers will be dissatisfied with the quality of future
work and demand additional work, and the fact that exist a risk that the cost or
providing the future service will be more than anticipade.
Revenues from services is generally recognized under the percentage of
completion method. This method records revenue when the contract Is actualy
completed. Under the Us GAAP are expected to use the percentage of
completation method if estimates of the cost to complete and extend of
progress to completation o long term contracts are reasonable. Revenue
recognition rules illustrate issues for conctracts where cash is received before
the product delivery or provision of the service
The problem with this accounting method is legitimate because the
company obviously didnt consider delivery of its products a substantial part of
obligation, while the wording of FASB Concepts Statement no 5. Suggests
differently. The concerns grew further as many other software firms began
recognizing revenues only after the delivery.

Daro Vzquez Montes


141471
The company assumes that the quality of receivables was great. Another
concern because Oracles days receivable exceed 160 days which was
significantly longer than competitor average of 62 days even after considering
that oracle recognized revenues early.
The achievement of sales is based on the aggressive sales practice. Like
most companies, Oracle based employees incentives on sales, so sales
manipulation had always been a concern. In 1990, Oracles aggressive sales
practice were legitimate because the company had potentially greater credit
risk in receivables, and aggressive sales likely had contributed to the
questionable quality of receivables. The company assumes that the investors
have known the revenue method used by the company and the shareholders
will support their operating ways but it was not that way, the company had lost
credibility with the investors and customers because its recent poor
performance and its controversial accounting policies.

2. Estimate the earnings impact for Oracle from recognizing revenue at


delivery, rather than when a contract is signed.
If Oracle recognized revenue at delivery rather than when a contracts is signed,
I estimate that the company would report decreased earnings of ($55,065),
$149,784, and $95,984 for fiscal years ended March 31 1990, 1989 and 1988
respectively, instead to reported $117,410.
I detected that the company has an over recognition of revenues, with a very
important portion of its sales that are unrealizable. It recognizes contract
revenues to be received within the year with:

High level of accounts receivables


Longer collection period
Higher default risk
Overstated income statement
Recognizes revenues when services are performed without evaluating
these revenues could actually be realized

3. What accounting or communication changes would you recommend to


Oracles Board of directors?
Under the rule, revenues can be recognized only:

If the seller has provided all, or substancially all of the goods or services
to be delivered to the costumer.
The customer has paid cash or is expected to pay cash with reasonable
certainty.

I recommend Oracle to change its revenue recognition methods in order to


control accurately the financial operation of the company, creating better
strategies to increase its profit as the following:

Daro Vzquez Montes


141471

Adjustment in accounts receivable by knowing cash collection is


reasonably.
Speeding the collection period to manage the discrepancy between the
realization of revenues and the actual receipt of payment
Adjust to industry averages
Modify the recognition of license fees so that the revenue would be
recognized only when substantially al the company contractual
obligations has been performed
Wait until the FASB announce its position on software revenue
recognition before making any changes

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