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Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
Trans share inc - case study submission 12 sep 09 v1.1
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Trans share inc - case study submission 12 sep 09 v1.1

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  • 1. Case Study – Trans Share Inc. Case Study Trans Share Inc. Submission Date 12-Sep-2009 Class EPGP– 09-10 Subject Financial Reporting and Analysis Submitted by  Abhishek Pangaria  Mandeepak Singh  Rajendra Inani  Saravanan Logu  Tarandeep Singh  Vivek Edlabadkar Table of contents Objectives............................................................................................................................2 Case Background.................................................................................................................2 About the Company.........................................................................................................2 Company’s need...............................................................................................................2 Analysis of current Business Model....................................................................................4 Current Revenue recognition practices................................................................................5 Available Revenue recognition options for analysis...........................................................5 In case a change in business model can be an option, and Trans Share is open to re- engineering its processes, we would recommend that it opts for leasing out its aircrafts instead of transferring ownership..................................................................5 Recommended Approach.....................................................................................................5 Approach: Revenue Recognition for multiple deliverable..............................................5 Benefits of proposed approach.....................................................................................7 Snapshot of Transactions and Revenue Recognition...................................................8 Page 1 of 8
  • 2. Case Study – Trans Share Inc. Objectives To suggest suitable revenue recognition methods to Trans-share Inc for its fractional interest programs and other offered services. The recommendation should be an appropriate revenue recognition practices to EITF, based on the model suggested to Trans-share Inc. Case Background About the Company Name of the company Trans-Share Inc. Line of Business Buy-Sale of aircrafts, maintenance and operational support Products Offered: Partial / full ownership of aircrafts Services Offered: Maintenance of aircrafts Aircraft operations support - Pilot & Crew - Flight planning Purchasing & selling aircrafts in secondary market Brokerage & Marketing of aircrafts to 3rd party buyers Company’ s need Trans-share is preparing for IPO and wanted to ensure that its prospectus reflects the real picture of the company by implementing the right revenue recognition methods. In addition, Trans-share wants to be proactive by planning for the impending revenue recognition guidelines from Financial EITF (Emerging Issues Task Force), to be followed in its financial accounting. About EITF A professional financial reporting control group of 13 members, associated with SEC, Financial Accounting Standards Board and the American institute of Certified Public Accountants. This group is focused on early identification of emerging issues affecting the financial reporting and problems in implementing the corrective measures. Page 2 of 8
  • 3. Case Study – Trans Share Inc. Page 3 of 8
  • 4. Case Study – Trans Share Inc. Analysis of current Business Model Trans Share Inc. (TSI) New Re-sale of Aircraft Management Purchase / Sale of Aircraft Interest Interest Agreement Aircraft Sale without Sale with Finance Put Option Call Option Finance option option Sale is confirmed Buyback Aircraft Sale is confirmed Return for buying Buyback Aircraft Interest on Title transferred to Return after one another Aircraft Interest before completion of Title transferred to buyer year waiting period (Usually done after expiry of Management buyer 5 year completion) agreement period Agreement Payment is completion Payment is received in received in full installment as per Sale to a third terms of finance party (after TSI first acquire right Aircraft sale to TSI to re-acquire declined ) Customer wants another Aircraft Five year management agreement is signed Interest? Activities would be handled as per Management Agreement Flow Found a buyer within 180 days? Yes No Fair value price paid to New Aircraft Interest customer sold Sale to a Third Party completed and TSI Aircraft sale to TSI act as broker Management Agreement Purchase / Sale of Aircraft Maintenance Transport service Service Aircraft purchase Aircraft sale in the from Market Market Pilot, Fuel, Aircraft Insurance and Availability of maintenance and other running standby Aircraft parking at fixed expenses on cost Hourly basis Buy / Lease and maintenance Revenue Realization Options needs to of standby Aircraft be identified Page 4 of 8
  • 5. Case Study – Trans Share Inc. Current Revenue recognition practices 1. For Sale of fractional interest of aircraft, the revenue is recognized at the time of sales. 2. For other services related to this fractional interest of aircraft, each transaction is made and the revenue is recognized at various times of sales cycle. Available Revenue recognition options for analysis 1. Fractional interest program to be converted into an Operating Lease or Service Contract Model. In case a change in business model can be an option, and Trans Share is open to re-engineering its processes, we would recommend that it opts for leasing out its aircrafts instead of transferring ownership. This will provide the following benefits: a. Predictability of revenues can be garnered easily. Also as the revenue will come in installments (e.g. monthly lease amounts) it will represent a true picture of company’s performance over a period of time. b. Ownership remains in one hand. Hence all risk, benefits and depreciation can be accounted for easily. c. Removal of complex processes like put and call and their respective overheads for both the company and its customers. d. Revenue recognition method for all transactions in this case would be of type “Delivery”. 2. Fractional interest program to be treated for accounting for multiple-element sale arrangements. This is elaborated below as the recommended approach. Recommended Approach Approach: Revenue Recognition for multiple deliverable In this case, we would treat Trans Share Inc. offering as different deliverables. Companies may offer customers many related and unrelated products and services sold together (“bundled”) or separately. The substance of the transaction should be considered to determine whether the various components should be treated as a single deliverable or accounted for separately (multiple element accounting). General recognition criteria are then applied to each component of the contract. We have three major types of deliverables, and therefore three unit of accounting needs to be done. Page 5 of 8
  • 6. Case Study – Trans Share Inc. 1. Sale of interest in Aircraft - Using Sales Method (Revenue fully recognized at sales) Page 6 of 8
  • 7. Case Study – Trans Share Inc. 2. Finance Backed Sale of interest in Aircraft. Using Installment Method (Revenue recognized will be only the current installment) 3. Maintenance and Transport services. Using Delivery method (Revenue recognized to the point of service delivered) Benefits of proposed approach 1. It conforms to what SEC has in its objectives very appropriately. 2. The nature of deliverables is different and should not be clubbed under single revenue recognition method. Sales method of revenue recognition Item Dr. Asset / Liability Cr. Asset / Liability Sale of interest in Aircraft Cost of Aircraft Installment method of revenue recognition Item First Year Next Year Installment of interest in Aircraft Cost of Aircraft proportioned Delivery method of revenue recognition Item Dr. Asset / Liability Cr. Asset / Liability Fixed Monthly fee proceeds Usage fee proceeds Cost of Maintenance Expenses, Wages, Insurance, etc. Page 7 of 8
  • 8. Case Study – Trans Share Inc. Snapshot of Transactions and Revenue Recognition No. Event Transaction(s) Dr. Cr. Revenue Recognition Method 1 Purchase of aircraft Purchase of aircraft Asset : Aircraft Asset : Cash Sale Inventory 2 Sale of aircraft Sale of aircraft Asset : Cash Asset : Aircraft Sale Inventory 3 Sale of interest in Sale of interest in Asset : Cash Asset : Aircraft Sale aircraft (Non-finance aircraft Inventory option) 4 Sale of interest in Sale of interest in Asset : Loans Asset : Aircraft Sale aircraft (Finance aircraft Receivable Inventory option) 5 Payment of loan Interest received Asset : Cash Asset : Interest Installment interest by customer from customer Receivable 6 Payment of loan by Loan repayment by Asset : Cash Asset : Loans Installment customer customer Receivable 7 Expenses - Aircraft Expenses - Aircraft Liability : Asset : Cash Sale Maintenance Maintenance Retained Earnings 8 Expenses- Wages Expenses- Wages Liability : Asset : Cash Sale Retained Earnings 9 Expenses- Hangar Expenses- Hangar Liability : Asset : Cash Sale Rent Rent Retained Earnings 10 Expenses- Flying Expenses- Flying Liability : Asset : Cash Sale Costs (Fuel etc) Costs Retained Earnings 11 Expenses - Insurance Expenses - Asset : Prepaid Asset : Cash Sale Insurance Insurance 12 Maintenance Charge Contract Fees Asset : Cash Liability : Delivery as per Contract Retained Earnings 13 Hourly Charge as per Usage Fees Asset : Cash Liability : Delivery usage Proceeds Retained Earnings 14 Depreciation on stand- Depreciation Liability : Asset : Sale by aircraft + remaining Depreciation Accumulated parts of aircraft Expenses Depreciation possessed by self Page 8 of 8

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