Question

The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as Amazon, Overstock.com, and PCM, Inc. Many of these companies often act as intermediaries between the manufacturer and the customer without ever taking possession of the merchandise sold. Revenue recognition for this type of transaction has been controversial.

Assume that Overstock.com sold you a product for $200 that cost $150. The company’s profit on the transaction clearly is $50. Should Overstock recognize $200 in revenue and $150 in cost of goods sold (the gross method), or should it recognize only the $50 in gross profit (the net method) as commission revenue?

Required:
1. Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). What is the specific nine-digit Codification citation (XXX-XX-XX-XX) that indicates what an entity assesses to determine whether the nature of its promise is to act as a principal or agent?

2-a. What indicators does the Codification list that suggest an entity is a principal?

2-b. Determine the specific nine-digit Codification citation (XXX-XX-XX-XX).

3. Using EDGAR (www.sec.gov), access Alphabet, Inc.’s 2017 10-K. Locate the disclosure note that discusses the company’s revenue recognition policy with respect to ads placed on Goggle Network Members' properties.

4. Do you agree with Alphabet’s reasoning with respect to choosing whether it reports revenue gross versus net with respect to these advertising services? Indicate “yes” or “no,” and explain.

Answer 1

Revenue recognition applicable to online retailers in a way that there is a contract between customer and online giant. So in that way Overstock is a agent of the manufacturer and customer. Therefore it recognized the commission earned I.e. 50$ in its books of account as gross profit.

Google report revenue on gross basis for its products and services. The reason being the accounting consistency as mandated by FASB. Yes we do agree with Google as it provides fuller view of operations.

. Google’s disclosure note relating to the company’s revenue recognition policy begins on page 53 of Google Inc.’s 2013 10-K and continues until half way down page 54.

b. Google recognizes revenue equal to the fees charged to companies using their advertising services each time a consumer clicks on an ad relating to the company. On the other hand, if the customer is using the cost-per-impression pricing, revenues are recognized each time an ad is displayed on behalf of the customer on a Google site or an affiliate of Google. Therefore, revenues related to ads or “Google Ad Sense” are recorded on a gross basis because primarily Google is the obligor.

Google breaks down revenue recognition for revenues concerning ads, hardware, and third-party products.

                i. As mentioned earlier Google uses the gross revenue recognition method in regards to Ad Sense as Google is the primarily obligor.

                ii. Hardware product sells are slightly different for Google Inc. Revenue recognition is not realized until products have been shipped, and the risk of the loss has transferred to the purchaser of the goods, and all allowances for returns or matter of the line can be reliably estimated. Furthermore, the revenues are reduced by the reliably estimated allowances. Therefore, Google determines revenue for hardware sales as net.

Topic 606 discusses revenue from customers in which it specifies how to determine to act as principal or agent.

An entity should be in control of the specified goods and services before it is transferrred to the customer to be identified as a principal.