Revenue Recognition (Topic 606) at Salesforce.com, Inc.

25 Pages Posted: 30 Sep 2019

See all articles by Mark E. Haskins

Mark E. Haskins

University of Virginia - Darden School of Business

Luann J. Lynch

University of Virginia - Darden School of Business

Abstract

This case uses an array of carefully selected and excerpted revenue recognition related information contained in Salesforce.com's January 31, 2019, 10-K. Maria, the fictional protagonist, is seeking to understand those disclosures as part of her preparation for an upcoming job interview with the company. As such, she is relying on those disclosures to provide insights as to the company's main product/service lines, the events that signal when and how much revenue the company has earned (i.e., the essence of its business model), along with the related official generally accepted accounting principles (GAAP) criteria pertinent to the valuing and timing of recorded revenues.

Excerpt

UVA-C-2428

Sept. 20, 2019

Revenue Recognition (Topic 606) at Salesforce.com, Inc.

After her previous review of the revenue recognition information provided by General Dynamics and Ford Motor Company (Ford) in their recent 10-K reports, Maria had become intrigued by the Financial Accounting Standards Board's (FASB's) latest revenue recognition and disclosure requirements. In part, she had concluded that the rule changes had had a material effect on reported earnings for some companies and not so much for others. Moreover, she had seen that the new rules had resulted in some companies reporting more revenue earlier than under the superseded rules, while for others, they ended up reporting less. In short, the comprehensive revenue recognition rules now in place set the stage for companies to provide some standard, informative insights in that regard.

Prior to the FASB's issuance of its comprehensive new revenue recognition guidance and its follow-on official addendums and interpretations (all currently published as Accounting Standard Codification [ASC] 606 and often referred to simply as Topic 606), companies had to consider a myriad of revenue recognition rules, from various sources, with potentially contradictory and/or ambiguous requirements. Moreover, Maria had learned that many, if not most, of the known financial reporting frauds or misstatements in the recent past had pertained to companies' misreporting revenues. In general, those guilty companies had “pushed the envelope” in finding rationales for recording more revenues sooner than what they should have done. Topic 606 was largely intended to clarify what companies could do in reporting revenues for fiscal years beginning in 2018. One knowledgeable pundit summed up the arrival of Topic 606 onto the contemporary financial reporting scene in a particularly poignant way, stating, “The new accounting rules are considered by many to be the biggest change to accounting standards in the last 100 years. Noncompliance is a huge risk. Revenue recognition errors are the biggest reason for earnings restatements. Earnings restatements can lead to firings, fines, and even jail time.”

. . .

Keywords: accounting, GAAP, revenue recognition, disclosures

Suggested Citation

Haskins, Mark E. and Lynch, Luann J., Revenue Recognition (Topic 606) at Salesforce.com, Inc.. Darden Case No. UVA-C-2428. Available at SSRN: https://ssrn.com/abstract=3460755

Mark E. Haskins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924 -4826 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/haskins.htm

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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