Financial Reporting Issues: The Dot.Com World

1
Financial Reporting IssuesThe Dot.Com World

• Ashwinpaul C. Sondhi, Ph. D.
• President
• A.C. Sondhi Associates, LLC
• January 26, 2000

2
Regulatory Initiatives

• October 1999 SEC Memorandum, Issues in Accounting
  for Internet Activities
• SEC Staff Accounting Bulletin No. 101 - Revenue
  Recognition in Financial Statements
• Emerging Issues Task Force Activities

3
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Gross versus net presentation of revenues and
  costs of sales
• Does the company
• act as a principal in the transaction
• take title to the products
• have risks and benefits of collection, delivery,
  or returns
• serve as a broker or agent with no risks or
  benefits of ownership

4
Priceline.com Revenue Recognition

• Services
• Airline tickets hotel reservations
• Automobile services
• Home financing
• Adaptive marketing

• Revenue Recognition
• Gross price net of taxes
• Fixed fees from buyer and seller
• Percentage of net revenues generated
• Fees

5
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Recognition of up-front (listing) and back-end
  (transaction-based) fees
• Up-front fees should be recognized over the
  listing or performance period
• Recognition of transaction fees depends on the
  contractual agreement between the host, buyers,
  and sellers

6
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Servicing (hosting) arrangements versus
  licensing arrangements with service elements
• Application of SOP 97-2 to sales of software
• Delivery requirements of SOP 97-2

7
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Revenue Recognition in advertising contracts with
  guarantees of hits or impressions
• Yahoo! Guarantees minimum number of impressions
• Revenue is deferred until the minimum guarantee
  levels are met
• Issue Transparency of deferral

8
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Reporting advertising barter transactions
• Value of bartered ads must be reliably measurable
• Transparency of Disclosures

9
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Rebates and free or heavily discounted
  introductory offers
• Practice revenue recognition at full price and
  treatment of discount as marketing expense
• AICPA Technical Practice Aid (Section 5100.07,
  One-cent Sales) says this practice is not
  acceptable for financial reporting

10
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Classification of expenses between operating
  categories
• Segment reporting

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October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Shipping and handling charges
• Costs of service outages

12
October 1999 SEC Memorandum, Issues in
Accounting for Internet Activities

• Microsoft - Deferred Revenue and Sales Growth

13
SEC Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements

• Revenue Recognition Criteria
• Revenue is realized or realizable and earned
  when
• Persuasive evidence of an arrangement exists
• Delivery has occurred or services have been
  rendered

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SEC Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements

• Revenue Recognition Criteria
• Revenue is realized or realizable and earned
  when
• The sales price is reasonably fixed or
  determinable
• Collectibility is reasonably assured

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SEC Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements

• Income Statement Presentation
• Disclosure Requirements

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SEC Staff Accounting Bulletin No. 101 - Revenue
Recognition in Financial Statements

• Examples
• Nonrefundable initiation fees
• Technology access fees
• Nonrefundable activation fees

17
Emerging Issues Task Force Deliberations

• Derivative Financial Instruments Indexed to, and
  Potentially Settled in a Companys Own Stock
• Issues in AICPA SOP 97-2, Software Revenue
  Recognition

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Other Issues

• Options issued to non-employees
• Accounting for Income Taxes - Valuation
  Allowances and Earnings per Share

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Other Issues

• Examples
• Priceline.com
• eBay Inc., Yahoo! And Verisign

20
Stock Compensation

• Proposed Interpretation
• Analysis of pro forma disclosures in two
  industries