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TransShare Case Study 

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Trans-Share Inc. is a company that operates and markets fractional interest aircraft program. As the company prepares for its first public offering, it would like to carry out an evaluation on its current revenue recognition principles to ensure that its prospectus indicate the most relevant financial status of the company to the public. At the same time, the company is planning to employ new and more effective revenue recognition accounting principles. Revenue recognition principles are guidelines that establish when revenues are supposed to be recorded. The principles require recognition of revenues on accrual basis which implies recording of revenues when they are earned and not when they are necessarily received (Jiang & Penman, 2013). These new revenue accounting principles will positively impact capital providers and other stake holders’ economic investment and credit decisions. The new principles will also comply with the Emerging Issues Task Force’s authoritative pronouncements on multiple deliverables.
Trans-Share Inc.'s Revenue Streams:
Trans-Share Inc. sells business aircraft under a fractional interest program. The program implies that the company sells an aircraft share, and then manages the aircraft on the customer's behalf. The buyer is, hence, not the full owner of the aircraft until the expiry of the agreed period. The share owner of the aircraft restricts to a five year management agreement at the time of purchase. A monthly fee of flight per hour is then charged by the shareowner (Hawkins, 2001). The major areas of business where the company derives its revenues are as follows: (Hawkins, 2001).
1. Aircraft Share Sale Revenue
The company purchases aircrafts from the manufacturer at a favorable discount and then sells the aircraft at share proportions of list price. From this sale it obtains a profitable value as re venue for its business. Some revenue also comes from the financed purchases of the company.
2. Monthly Management Revenue
This is the fee charged by the company for the work of managing the aircraft on behalf of the owner. Trans-share Inc. charges a monthly management fee and hourly based flight fee to cater for the fixed and variable expenses incurred in operating the aircraft. The fee is counted as revenue in advance whether or not the services are rendered.
3. Sale of Pre-owned Aircraft Revenue
After one year of the share owner’s usage of the aircraft, she/he has the right to sell the aircraft to the third party. Trans-share Inc serves as the sole agent and broker of the shareowner in the third party sell and benefit from a percentage free from the fraction.
Share owner has the right to sell its interest after one year waiting period. The company also exercises the buyback provision and sells pre-owned aircraft on secondary market for profit. This could happen after 180 days over which the third party buyer would have not been located.
Current's Revenue Recognition:
Trans-Share Inc. recognizes all the aircraft share sale revenue at the very time of sale. The other forms of revenues; revenue generated from monthly management revenue and sale of pre-owned aircraft are accounted as separate transactions. The transactions are only accounted for when the services are rendered.
Recommended Revenue Recognition Method:
After a diligent analysis of Trans-Share Inc's business model and its multiple revenue-generating activities, I recommend that there should be a bit of modifications in the current revenue recognition methods in the company. The objective of this recommendation is to help Trans-Share Inc formulate a more transparent financial reporting standard, make provision in observance of the Emerging Issue Task Force's authoritative decision, and comply with additional reporting and procedural obligation in preparation of initial public offering. The recommendation will also ensure that the rules of consistency are followed in accordance with the accounting policy which fosters for the consistency of revenue recognition procedures across companies (Jiang & Penman, 2013).
Recognition of Aircraft Share Sale Revenue
The sale of goods and services in most cases involves the provision of multiple components, as known as multiple deliverables. The company determines whether the contract or arrangement contains more than one unit of accounting. When certain criteria are met, such as when the delivered item has value to the customer on a standalone basis, the recognition criteria are applied to the separate identifiable components of a single transaction to reflect the substance of the transaction. Conversely, two or more transactions may be considered together for revenue recognition purposes, when the commercial effect cannot be understood without reference to a series of transactions as a whole. Revenue is allocated to the separate components based on their relative fair value.
Sales of aircraft fractional shares are considered together with the related purchase and management agreement for purpose of revenue recognition. According to an entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time. And Trans-Share Inc.'s fractional interest agreement met the requirement of the Accounting Standards Council. Revenues from such sale are recognized over the five year period or the period prior to the termination of contact, whichever shorter; during which the related services are rendered to the customer. At the time of share sale, the proceeds from sale are recorded in other liabilities as deferred revenues. The carrying value of the fractional share aircraft is transferred to other assets as fractional ownership deferred cost. It is charged to cost of sales over the same period. An entity shall present the effects of financing separately from revenue from contracts with customer and interest income is recognized only to the extent that a contract asset is recognized in accounting for a contract with a customer. Therefore, interest income related to aircraft financing is recognized over the term of applicable loans that produces a constant rate of return on the investment and is included in financing income.
Recognition of Monthly Management Revenue
Monthly management fee and hourly based flight fee are recognized at the time the service is rendered to the share owner. This is in accordance with accrual basis accounting where an entity that receives payment in advance is considered a liability until when the service will be rendered. Only after the entity has completed its work according to the arrangement with the customer is when it can be considered revenue.
Recognition of Sale of Pre-owned Aircraft Revenue
Trans-Share Inc served as exclusive agent of existing share owner in any third party sale. Based on accounting principles, Trans-Share's commission revenue is the net amount of consideration retains after paying remarketing fee. The net consideration is recognized at the time of sale.
Revenues from the sale of pre-owned aircraft are supposed to be recognized when recognized when the goods have been delivered; risks and rewards of ownership have been transferred to the customer. The amount of revenue can be measured reliably, and collection of the receivable is reasonable assured.
Conclusion
Recognition of Revenue for Trans-Share Inc seems to meet the demands of the company and the needs of the customers’ altogether. Except for a few changes that need to be implemented of the recognition of certain entities, the current revenue recognition formula is sufficient to account for the earnings of the company. The company is hence, able to use the revenue recognition tool to compare with and beat its competitors by predicting the expected revenues (Myers et al. 2015). Investors are also interested in the revenue records to know if they can invest in at the same market.














 

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