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
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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.
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3. Case Study – Trans Share Inc.
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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
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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.
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6. Case Study – Trans Share Inc.
1. Sale of interest in Aircraft - Using Sales Method (Revenue fully recognized at sales)
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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.
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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
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