Question

How to make a Revenue Recognition memo with this information?

Background: Using Implementation Guidance Heavenly Tours Heavenly Tours (HT) was the brainchild of four college friends: Bart, Ava, Carla and Dave. They wanted to create a one-stop, high-touch, discounted tour experience for visitors to two local theme parks. Park Survival provides various simulated survival experiences. Park Adrenaline provides numerous adventures guaranteed to provide visitors with adrenaline rushes. Bart is responsible for managing the relationship with both parks and obtaining discounted admissions for HT’s customers. Ava is responsible for the tour guides, who help customize the experience for visitors. Carla is responsible for working with high-end restaurants in the area surrounding the parks to obtain discounts on food and beverages. Dave is responsible for merchandise, which can be sold to HT’s customers. Historically, HT has reported all cash collected as revenue. A private investor is requesting financial information prepared in accordance with generally accepted accounting principles before investing in HT. The investor has indicated a particular interest in HT’s total revenues. The four friends are meeting with their local accountant to discuss next steps. The accountant informs them they will need to analyze each revenue stream to determine whether HT is acting as a principal or an agent. The accountant states this determination is necessary for proper accounting treatment because when a principal satisfies a performance obligation, the gross amount of consideration is recorded as revenue; however, when an agent satisfies a performance obligation, only the amount of the fee or commission earned is recorded as revenue. Background: The accountant asked Bart to explain the relationship with both parks. Bart explained that he had been able to obtain a 15% discount from Park Survival. HT customers can access Park Survival’s website and use a discount password provided by HT. Under this agreement, HT’s customers are charged 90% of the full entrance price on their credit card when their order is accepted on Park Survival’s website. Once the order is processed on Park Survival’s website, the customer is given a pass that can be used for entrance to Park Survival and 5% is remitted to HT. The negotiations with Park Adrenaline had been more difficult because it was a newer park and in need of cash. Accordingly, HT purchased 100 passes for 90% of the face value. These passes are good for one year from the date of purchase. Any passes that are not used during the year would simply expire. HT has obtained the right to each pass purchased to provide the pass holder with access to the park. HT is free to sell these passes to its customers at any price, as long it doesn’t exceed the face value of the pass. The customer pays an agreed-upon amount when an order is accepted on HT’s website. Park Adrenaline retained the full responsibility for fulfilling its obligation to customers who entered the park with a pass purchased from HT.

ASSIGNMENT REQUIREMENTS:

Read ASC 606-10-55-36 through 40 in ASC 606, Revenue from Contracts with Customers, discussing implementation guidance for principal versus agent determination.

Review the examples in ASC 606-10-55-316 through 334F.

1. For each park, determine if HT is a principal or an agent and, accordingly, how the revenue should be recorded.

2. Prepare a professional accounting research memorandum in proper form with reference to the appropriate sections of the FASB codification.

3. In the memo provide a thorough explanation of your conclusions and the rationale behind your conclusion referencing the appropriate sections of the FASB codification.

Answer 1

Memo for principal v/s agent evaluation

An entity is an agent if the entity’s performance obligation is to arrange for the provision of the specified goods or services by another party. An entity that is an agent does not control the specified goods or services provided by another party before that goods or services is transferred to the customer. Following are the key indicators that the agent controls the goods and services before they are transferred to the end customer:

• The entity is primarily responsible for fulfilling the promise to provide the specified good or service
• The entity has inventory risk before the specified good or service has been transferred to a customer, or after transfer of control to the customer
• The entity has discretion in establishing the prices for the specified goods or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices in order to generate additional revenue from its service of arranging for goods or services to be provided by other parties to customers.

Management needs to apply judgment when assessing the indicators. No single indicator is determinative or weighted more heavily than other indicators, although some indicators may provide stronger evidence than others, depending on the circumstances. Physical receipt of cash on a net or gross basis, however, is not an indicator of which party is the principal in an arrangement.

In light of the above guidance, the transactions with both the parks are evaluated as follows:

Park Survival

In case of Park Survival, the final responsibility of providing the service, i.e. visit to park remains that of the Park management.

The tickets of the park though, are never in control of the HT Tours. All the tickets are controlled on the website of the Park. HT Tours just has an access to a special discount code, wherein they get a discount of 15% and pass on 10% of that discount to the end customer, retaining a 5% discount as their profit.

HT Tours does not even have discretion in establishing the prices of the tickets. The prices of the tickets, and the commission that HT Tours earns, is fixed.

Therefore, we can conclude that in case of Park Survival arrangement, HT Tours acts as an agent as it does not have control over the tickets in general and no discretion in establishing the prices as well.

Park Adrenaline

In case of Park Adrenaline as well, the final responsibility of providing the services rests with the Park management.

However, in this case, effectively, the ownership of the tickets of the part is transferred to HT Tours. In case the tickets are not sold, the loss on the purchase price of tickets is borne by HT Tours. Further, HT Tours has the discretion to determine sale price, subject to a cap imposed by the park. The cap is the maximum price of the pass, over and above which, no customer would typically buy the pass in any case.

Therefore, we can conclude that in the case of Park Adrenaline, HT Tours is a principal.

Accounting treatment

In case of Park Adrenaline, where HT Tours is concluded to be a principal, it will record gross sale price as its revenue and the cost paid to Park Adrenaline for the tickets will be recorded as a separate cost.

In case of Park Survival, HT Tours is an agent. Therefore, it will not record the gross collection as its revenue. Only the commission portion which is retained by HT will be recorded as revenue.