Revenue Recognition

http://cnrp.ccnmatthews.com/client/red_back_mining/release.jsp?year=2010&actionFor=1122996&releaseSeq=0

Summary

Red Back Mining Inc. is a Vancouver based mining gold company which had two mining sites in Africa currently operating. For the fiscal year ended on December 31st, 2009, Red Back reported a net income of $109 million and EPS was $0.48. These enhanced performance was mainly result of increased productions, decrease in cash cost and higher gold prices. These two minning sites, Chirano and Tasiast, were located in Ghana and Mauritania respectively. Despite the increase in net income, expenses escalated to a higher level due to increase in amortization expenses and administrative fees in the past year. Furthermore, costs of plant expansion are also recognized in this fiscal period as plant expansion in Chirano and Tasiast were completed.

Connection

This financial report is closely related to revenue recognition principle in Chapter 4. First of all, Red Back mining has a multiple lines of production in two African countries. Therefore, revenue and expenses in these mines are listed separately in the financial report in order to provide a clear performance evaluation of two gold mines. Secondly, all expenses that are related the revenue generation are recorded in the 2009 financial report. For example, an amortization expense is an evaluation of equipment, plant or machines that are used in mining. That might not directly relate to revenue, but because revenue was created from the damages to these plants, amortization must be recorded in the same period of the revenue.

Reflection

GAAP, General Accepted Accounting Principle, is used worldwide as guidelines for the production of financial statements. However, it has been an awkward situation that GAAP has not been made in law and in lots of case, business have the right to avoid following the GAAP. For instance, matching principle states company must incur all expenses that are related to revenue. It is possible or perhaps legal for company to manipulate expenses figures and create a unrealistic reflection of company’s performance. They can put all the expenses in the first period so that rest of the quarters will have significant increase in net income. In my opinion, GAAP should be made in laws to protect investors from fraud or scandals.