"Airbus Flight Shows Off Troubled A380" Issue Analysis

939 words - 4 pages

Overview:European Aeronautic Defence and Space Co., the parent company of Airbus, announced the two-year production delay of Airbus’ A380. The Franco-German defense group warned that there will be a 4.8 billion euros profit wipe off, due to the accumulated delay for the past two years. FedEx canceled its 10 orders for A380 and switched to Boeings, while Singapore Airlines ordered more. In order to turn profit and cover the total cost of 15 billion euros, EADS needs to at least sell 420 A380s. Despite the fact that they will not make a profit in short runs, the management of EADS believe A380 “should be operating for the next 40 years”.Issue: How to recognize the revenues generated from A380, whether revenues are recognised by reference to the stage (percentage) of completion of the contract activity, or recognized only on delievery when risk and reward transferred.Revenues are recognized when the following criteria are met:1.Earnings process is substantially complete2.Measurability if reasonably assured,3.Collectibles is reasonably assuredRevenue recognized at stagesRevenue recognized on delivery·Recognition (section 3400)-The CICA HB Section 3400.08 states that in the case of rendering services and long-term contracts, performance should be determined using either the percentage of completion method or the completed contract method…Such performance should be regarded as having been achieved when reasonable assurance exists regarding the measurement of consideration…-In the case of producing A380, the aircrafts are built over long period of time, often spanning more than one fiscal year ends. -Customers who order A380 entered long-term contract with EADS. In this contract, there is a mixture of “service” and “goods” component. EADS not only receive the order of providing the service (build the aircraft), but also selling the goods (the aircrafts) -Opposed to one critical event or discrete act, the earnings process of the long-term contract between customers and EADS has numerous significant events. Therefore, the earnings process is considered as continuous earnings process.-According to CICA HB Section 3400.14, the percentage of completion method is used when performance consists of the execution of more than one act, and revenue would be recognized proportionately by reference to the performance of each act…-There is not sufficient information in this case shows whether the customers are billed at different stages. However, based on industry practice of the aircraft manufacture, it is reasonable for EADS to bill the purchase at intervals, as recognition of various points of the production are reached. These production points are considered as the significant events of the continuous earnings process. Accounting records may reflect this by recording sales when payments are made.-Revenue of A380 recognized under PCM should be determined on a rational and consistent basis. Revenue, costs and...

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