Question

Indus International, Inc. (the Company), develops, markets, implements, and supports a proprietary line of Enterprise Asset Management (EAM) software and service solutions for capital-intensive industries (for example, the utilities and energy industry) worldwide.
The following was extracted from Forms 10-Q and 10-K filed by the company for Year 1.

Revenue Recognition
The Company provides its software to customers under contracts, which provide for both software license fees and system implementation services. Revenues from system implementation services, which generally are time and material-based, are recognized as direct contract costs are incurred.

The revenues from software license fees have been recognized as earned revenue in accordance with FASB ASC Section 985-605-25: Software—Revenue Recognition relating to software revenue recognition, when persuasive evidence of arrangement exists, delivery has occurred, the license fee is fixed and determinable, and collection is probable. Prior to Year 0, the Company began to report applicable new license fees on standard software products not requiring substantial modification or customization as earned revenue upon shipment to customers. Previously, because substantial modification and customization of software products was expected by customers, The Indus Group, Inc., had deferred the applicable license fees initially and recognized those fees as earned over the period of modification, customization and other installation services. Maintenance and support services are subject to separate contracts for which revenue is recognized ratably over the contract period. Unbilled accounts receivable represent amounts related to revenue which has been recorded either as deferred revenue or earned revenue but which has not been billed. Generally, unbilled amounts are billed within 60 to 90 days of the sale of product or performance of services. Deferred revenue represents primarily unearned maintenance and support fees and unearned license fees, for which future performance obligations remain.


Required:
1. Reported third quarter income includes more than $2 million in revenue from two contracts for which the CEO had “side letters” written to the customers giving each a right to cancel its contracts. Should this revenue have been recognized at that time? Cite appropriate authoritative literature in support of your answer.
2. On October 28, Year 1, Indus issued a press release announcing its third quarter Year 1 financial results. The company reported that it had met quarterly targets with revenues of $50.88 million and earnings of $3.52 million, or 10 cents per share on a diluted basis.
What would be the approximate effect on reported EPS of not including revenue from the two contracts referred to in requirement1?


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  • CreatedSeptember 10, 2014
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