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SAB 101 – Question 10

SAB 101 – Question 10. Samantha Yap Soung Won (Kevin) Moon Kim Kimura. Question 10-Facts. Company A manages a website that sells the products of Company T Company A never takes title to or risk/responsibility of product. Question 10.

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SAB 101 – Question 10

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  1. SAB 101 – Question 10 Samantha Yap Soung Won (Kevin) Moon Kim Kimura

  2. Question 10-Facts • Company A manages a website that sells the products of Company T • Company A never takes title to or risk/responsibility of product

  3. Question 10 • Should Company A report revenue on a gross basis as $175 along with cost of sales of $150 or on a net basisas $25, similar to commission? • Answer: • Company A should report revenue on a NET BASIS similar to a commission when product order has been fulfilled and shipped to customer.

  4. Criteria for Revenue Recognition • Issue Type: Gross method vs Net method • Revenue can be recognized when: • Realized or Realizable – Gross Method • Earned – Net Method • SEC believes that revenue generally is realized or realizable and earned when all of the following criteria are met: • Persuasive evidence of an arrangement exists • Delivery has occurred, or services have been rendered • The seller’s price to the buyer is fixed or determinable (Net Method) • Collectability is reasonably assured

  5. ASC 605-45 (Principal Agent Considerations) • ASC 605-45 gives the following criteria to support reporting revenue under NET basis – • ASC 605-45-16: Entity’s Supplier is Primary Obligor of Arrangement • Entity does not have risks and rewards • Supplier is responsible for fulfillment of product order • ASC 605-45-17: Amount the Entity Earns is Fixed • Entity earns fixed dollar amount per transaction (regardless of amount billed to customer) or earns stated percentage of amount billed to customer • ASC 605-45-18: Supplier has Credit Risk • Credit risk is assumed by supplier, not the entity

  6. Demo Problem - Facts • Keiki Inc. manages a website that sells the products of Acme Co. • Keiki Inc. earns 15% of every sale made on behalf of Acme Co. for commission and cost of sales • Keiki Inc. does not take risk and rewards of ownership of product • Customer purchases product online on 01/01/11 for $200 • Product order is forwarded to Acme Co. • Product order is fulfilled and shipped by Acme Co. on 01/05/11

  7. Demo Problem – Journal Entry • Keiki Inc. cannot recognize revenue until product order has been fulfilled and shipped to customer by Acme Co. (earned) • Entity will report $30 for commission and cost of sales ($200 x 15%) 01/05/11 Dr. Cash 30 Cr. Commission Revenue 10 Cr. Cost of Sales 20

  8. Real World Example:Amazon.com, Inc. Facts: Ashford.com, Inc. is a online retailer of luxury goods such as gems, jewelry, and watches. Amazon.com, Inc. and Ashford.com, Inc. entered into two contracts. One of the contracts was called the New Customer Agreements which Ashford.com agreed to pay to Amazon.com which is commission for promotional placements (meaning that consumers can buy Ashford.com’s products at discounted rates), and marketing services. In addition, Ashford.com agreed to pay extra which is commission if Amazon.com brings more Amazon customers. On Valentine’s Day, 2000, Amazon issued coupons to customers for discounts on Ashford’s products, but coupons were not assigned with unique serial numbers. As a result, large number of non-Amazon users could redeem the coupons.

  9. Real World Example: Amazon.com, Inc. Violation: Many non-Amazon users redeemed the coupons, only Amazon benefited from that, because Ashford and Amazon agreed that Ashford would benefit if customers were Amazon users. However, many of them were just public users. Amazon reported the sales from non-Amazon users on a gross basis claiming that the goods were Amazon’s title because their agreements said so. SEC took notice of that, then came in to audit Amazon. SEC told Amazon that Amazon would only get a fixed portion of the sales revenue which was commission. Amazon later reinstated its financial statements on a net basis and lowered its income about eight million dollars.

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