Revenue Recognition and Lucent Technologies, Inc Essay

Revenue Recognition and lambent Technologies, Inc - Essay ExampleIn the case of Lucent Technologies, Inc. (Lucent), the recognition policies proved to be unfortunate in light of the SEC action against them.Generally, one of the most reliable methods for tax revenue recognition is the critical effect basis. When a critical event takes place within the operating cycle, such as a final sale, there are few questions regarding the recognition of the revenue. This to a greater extent conservative method is justified because the price of the product is then known with certainty the exchange has been finalized by delivery of goods, leading to an objective knowledge of the be incurred which allows the revenue from the transaction to be accurately recorded (Riahi-Belkaoui 45). This results in a faithful representation of the companys underlying financial condition because it is unbiased and verifiable. In term of relevance of the information, the company may take the position that, since investors use the data to make decisions regarding timely investments, they should be given information that presents the company in the scoop out possible light. This approach can result in more aggressive methods, like the ones used by Lucent, via a scheme of issuing credits to see revenue as soon as possible. ... Revenue should be recognized at the final sale. In the case of Lucent, the companys actions demonstrate the worst aspects of ignoring conservative revenue recognition. They chose to use any means necessary to present investors with a positive picture. Lucents management decided that it was more important to show higher levels of income than engage in a faithful representation of true financial condition. The problem for Lucent was that investors were relying on the overstated revenues as a basis for owning the companys shares, and when the true revenue total were revealed, the stock lost over five percent of its value. Managements decision to massage the numbers towar d the higher revenue representation was a poor one. This case demonstrates the down-side of tampering with information to meet sales goals so that investors will be please. It is far better to use a reliable methodology. Lucents aggressive revenue recognition policies at long last hurt the company because they were dishonest and biased. When a vendor has an ownership interest in a customer, it is easier to engage in these practices. By using the leverage of customer ownership, Lucent could claim the revenues it originally reported while knowing that renegotiated terms would result in subsequent credits against that revenue. The issue is one of control. Rising to the level of collusion, Lucent could over-ship to its partner/customers, show the gross revenue on its financials, and then control the final customer cost through credits. The failure to book the be credits, when management knew that such reporting would temporarily meet the sales targets but ultimately result in reduce d revenues, was