TechMall.com: Revenue Recognition in the Internet Economy

MEMO

To: Doug Liddle, President
From: Sheri Brinker
Date: March 11th, 2011
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Re: Revenue Recognition

As we approach the close of the fiscal year, the following issues should be addressed in regards to our current revenue recognition policy: the use of gross versus net revenue, the recognition of setup fees, and potentially the recognition of revenue from the sale of technology to PlayBall.com. The following memo offers my solution in conformance with the FASB rules and regulations. First, it is in question whether TechMall should report revenue based on (a) the gross amount of earned revenue billed to a customer from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) due to the commission fee (FASB 605.45.45.1). This issue often arises with companies that sell goods or services over the Internet or offer services provided by a third-party vendor. Essentially, the process for making this determination boils down to evaluating the relationships between the supplier, the company, and the end customer. According to FASB 605.45.05.1, reporting revenue gross or net “depends on whether the entity functions as principal or agent.” Gross reporting treats the transaction as the company purchasing a product or service from the supplier and then selling that product or service to the end-user. However, net reporting treats the transaction as the end-user making a purchase from the supplier, with the company acting as a sales agent. There are set indicators that help evaluate which is best if recognizing revenue, which are listed under the FASB Codification 605.45.45, entitled “Overall Considerations of Reporting Gross as a Principal versus Net as an