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Product cover image for Reike Technology: Revenue Recognition and Pay-When-Paid Clauses

Reike Technology: Revenue Recognition and Pay-When-Paid Clauses

Lixin Pan; Ying Yu; Lei Li

Product #:9B17B016
Supplier:Ivey
Discipline:Accounting, International Business
Setting:China, 2013
Details:Case (PDF) • 12 pages • 2017-07-26

Subjects:

OutsourcingHuman resource managementFinance and investingBusiness managementAccountingInternational business

Industries:

Business services sector

Geography:

ChinaAsia
Your Price:$9.71

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In December 2013, Reike Technology Co. Ltd. (Reike), a Chinese information technology and outsourcing company, faced an accounting revenue recognition problem. Reike had a well-deserved reputation in the software outsourcing industry, having built partnerships with Fortune 500 companies since the 1990s. However, in 2012, it collaborated on a project with a multinational software company that included a “pay-when-paid” clause in the contract. According to this clause, payments to Reike would be based on the percentage of the project completed upon review, as long as the software company received the corresponding proportion of payments from the owner. As the project progressed, Reike’s managers became troubled by the following issues: Should the “pay-when-paid” contract containing legal risks have been signed? When should Reike recognize the project revenue? How should the company deal with the project costs considering there was unrecognized revenue at the end of the year? Would there be any effect on performance assessments?

Learning Objectives

This case is suitable for accounting courses at the post-graduate (MBA) or undergraduate level. It focuses on the accounting processing challenge of an IT outsourcing company that is cooperating with a multinational software company in an emerging market. Students have an opportunity to
  • analyze the nature of a transaction when there is a “pay-when-paid” clause and the risks for accounting revenue recognition;
  • assess whether the specific conditions of the percentage-of-completion method have been met and make a proper choice when recognizing project costs;
  • evaluate the efficiency of risk management in an IT outsourcing company; and
  • consider how to build a sound relationship between a company’s accounting system and business risk management.
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Case Study: Reike Technology: Revenue Recognition and Pay-When-Paid Clauses (English version) | Ivey Publishing