TechMall Case

1
TechMall Case
2
SAB 101

• Question 10
• If the company performs as an agent or broker
  without assuming the risks and rewards of
  ownership of the goods, sales should be reported
  on a net basis.
• i.e., principal versus agent.
• Question 5
• Unless the up-front fee is in exchange for
  products delivered or services performed that
  represent the culmination of a separate earnings
  process, the deferral of revenue is appropriate.
• I.e., is the customer paying for something of
  value separate and distinct from the future
  services that will be provided?

3
EITF 99-19

• Provides guidance on how to implement the concept
  specified in Question 10 of SAB 101 (determining
  whether agent or principal)
• Indicators that acting as principal
• Primary obligor
• Bears inventory risk
• Sets price
• Changes product or performs part of service
• Determines the supplier
• Determines product or service specification
• Bears credit risk.

4
EITF 99-19

• Indicator that acting as agent
• Not the primary obligor
• Fixed fee per transaction
• Doesnt bear credit risk

5
(No Transcript)
6

• How long has the company been in business?
• Who owns the company?
• Have there been any recent changes in ownership?
• Who are the key players?
• What is the relationship among the players?
• What is the business model?
• How well is the company performing financially?
• Are there any contracts tied to the reported
  financial statements that might influence
  managements accounting decisions?
• What business decisions must the company make?
• What factors are driving this business decision?
• Do you think this proposed transaction is in the
  interest of the company?
• What accounting decision or decisions must the
  company make?
• What is the accounting authority that is relevant
  to making these decisions?
• What does this authority say?
• SAB 101 issued by SEC (Level 1)
• EITF 99-19 issued by EITF of FASB (Level 3)
• SOP 97-2 issued by AcSEC of AICPA (Level 2)

7
Take-away from the Case

• Basic concept behind revenue recognition for
  multi-element sales.
• Allocate the purchase price among the component
  elements if possible and apply revenue
  recognition criteria to each component.
• If cannot allocate purchase price, then defer
  immediate recognition.
• Gross versus net accounting for internet sales
  depends upon whether in substance you are the
  principal or the agent.

8
For Testing

• Know the contents of this overhead (excluding the
  list of questions!)