Background
Social Konnections Inc. (SKI), which was founded back in 2005, has experienced a steady growth leading to its IPO in 2010. Currently, the social networking platform, based by SKI, has over 500 million active users with a majority of these users visiting the site for purposes of social interaction, expressing themselves, and playing games. One of the key revenue sources for SKI has been in an advertisement, as it provides advertisers with a platform through which to capture the attention of the significant number of active users.
On the other hand, it is essential to take note of the fact that SKI also receives a significant amount of its revenue from third party applications that are involved in the sale of goods and services. However, it is essential to take note of the fact that the company is facing a critical challenge concerning its revenue recognition policy and guidelines. Based on this understanding, the following is a discussion on some of the recommendations that SKI may need to adopt as part of its revenue recognition approach to help in capitalizing on its financial positioning.
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Problem
From the case analysis, the main problem that SKI is facing revolves around the lack of proper timing and realization of its revenues attributed to non-effective revenue recognition practices and guidelines. The problem is creating a dilemma for the company, considering that it is affecting its ability to manage its revenue streams efficiently as part of enhancing its positioning as a leading social media platform. From that perspective, it is clear that the main problem that SKI may need to focus on is having to expose the significant revenue recognition concerns to help in the development of practical measures that would be of value towards improving its capacity to build on revenue recognition.
Relevant Guidelines
Accounting Standards Codification (ASC) 605, which is on Revenue Recognition, seeks to provide clear guidelines on how companies would be able to maximize on transaction-specific revenue recognition (Financial Accounting Standards Board, 2012). Additionally, ASC 605 also provides a clear understanding of specific matters associated with revenue generation as one of the critical determinants of the overall capacity for a company to identify some of the existing revenue challenges. Some of the essential issues that this code seeks to consider include the sale of products, as well as, loss on conversions, each of which is likely to impact revenue recognition significantly (Gujarathi, 2012). The code goes ahead to provide a transparent approach through which to justify the revenue recognition approached used to determine overall efficiency in promoting practical usage of revenue.
Application
The potential revenue recognition issues that SKI is facing revolve around the recognition of the revenues, timing contemplations, and the pressure that arises from the demand to make sales and other notable forecasts. From the recognition of revenues perspective, it is essential to take note of the fact that the amounts of taxes that SKI was able to obtain from advertisers depended solely on several views for each of the advertisements and clicks on the same. The issue arises from the fact that SKI is only able to recognize this as revenue in a period when an ad has been clicked or viewed. Consequently, this creates a revenue dilemma for the company, as it is not clear when it is expected to realize revenue, especially in cases where sales are incomplete. At its current position, SKI recognizes revenue before the delivery of the products or services, which creates a platform for concern on the viability.
Based on the information provided by Ms Drew, it is essential for SKI to engage in a discussion touching on some of the fraud risk factors that are likely to have a serious implication on the company's ability to meet its expected outcome. Some of the critical fraud risk factors that the company ought to consider include control environment and pressure risks. Ms Drew may come up with an approach through which to ensure that the team is engaged in a discussion touching on these risk factors. That will serve as a basis through which to improve on the company's overall capacity to ensure that it can limit the impacts of these risk factors on the possibility of fraud.
From the information, it is clear that the company may need to come up with a critical structure focused on its potential audit procedures that would be of great value towards evaluating the revenue recognition policies that have been put in place by the management. Some of the critical processes that would be of benefit include inspection, observation, reperformance, and recalculation procedures. Each of these procedures will analyze the recognition policies concerning their overall implications from the perspective of the impacts of the strategies to help in determining the appropriateness of the policies applied.
Conclusion
From the information touching on Social Konnections Inc. (SKI), it is clear that the company may need to adopt revenue recognition policies that would be based on the IFRS guidelines and ASC topic 605, which is Revenue Recognition. The accounting standard would serve as a guarantee that the company will be in a strategic position allowing it to maximize on the generalization of the revenue outcomes.
References
Financial Accounting Standards Board (FASB). (2012). Revenue Recognition: Products—Recognition. Accounting Standards Codification (ASC) Section 605-15-25.
Gujarathi, M. R. (2012). Super Electronics, Inc.: Financial reporting of sales incentives and vendor allowances using FASB Codification. Issues in Accounting Education Teaching Notes , 27 (2), 50-63.
