Question

Wal-Mart Stores, Inc., provided the following disclosure in a recent annual report. New accounting pronouncement (partial) . . . the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101-"Revenue Recognition in Financial Statements" (SAB 101). This SAB deals with various revenue recognition issues, several of which are common within the retail industry. As a result of the issuance of this SAB . . . the Company is currently evaluating the effects of the SAB on its method of recognizing revenues related to layaway sales and will make any accounting method changes necessary during the first quarter of [next year]. In response to SAB 101 Wal-Mart changed its revenue recognition policy for layaway transactions, in which Wal-Mart sets aside merchandise for customers who make partial payment. Before the change, Wal-Mart recognized all revenue on the sale at the-time of the layaway. After the change, Wal-Mart does not recognize revenue until customers satisfy all payment obligations and take possession of the merchandise.

(a) Discuss the expected effect on income (1) in the year that Wal-Mart makes the changes in its revenue recognition policy, and (2) in the years following the change.

(b) Evaluate the extent to which Wal-Mart's previous revenue policy was consistent with the revenue recognition principle.

(c) If all retailers had used a revenue recognition policy similar to Wal-Mart's before the change, are there any concerns with respect to the qualitative characteristic of comparability? Explain.

Answer 1

A. When Wal Mart makes the changes in its revenue recognition policy, the effect is the sales recorded gets reduced with comparison to the previous periods.

And for the coming years also it will report low sales due to conservative revenue recognition policies.

B. Previous revenue recognition policy was not consistent with the revenue recognition principle, it was aggressive in its approach. As it recorded sales when itvdid not even materialized.

C. Yes, if all the retailers used the same aggressive policy then the quality of reporting and earnings would reduce and hence the true value of the operations is not depicted.