Accounting for Internet-Based Barter Transactions
DeMark, Eugene F., Dell'Aera, Mario R., The CPA Journal
BECAUSE ADVERTISING BARTERED BETWEEN INTERNET COMPANIES is not always sold for cash, determining fair value is often difficult and can be highly subjective.
The Internet has rapidly revolutionized the way that companies conduct business. The relationship between suppliers, customers, distributors, partners, and competitors has undergone a radical transformation. The Internet has also wrought changes in the practice of barter transactions, the exchange of goods or services instead of cash between companies.
Barter transactions are not new. For many years, media companies have exchanged television airtime, radio spots, newspaper ads, and billboard space. Real estate companies exchange land and buildings, while pharmaceutical companies trade intellectual property. Often, companies engaging in these and similar barter transactions can draw upon wellestablished accounting standards for guidance in determining the valuation and timing of revenues and expenses.
That guidance, however, does not always hold when applied to Internet-- based barter transactions. Internet companies have embraced web-based advertising, accounting for $8 to $10 billion of activity. Barter accounts for an estimated 5% of this total revenue. The exchange of advertising is especially appealing to startups, because the company receives the services without a cash outlay, and the barter arrangement may allow companies to utilize excess Internet capacity while receiving some benefit in return.
Consider the hypothetical case of a clothing retailer that receives advertising space on a shoe retailer's website in exchange for hosting the shoe retailer's advertisement. (Assume this is the first barter transaction for each company.) The arrangement could feature identical types of items, like a banner-for-banner exchange, or different types, like a banner-srp exchange. The exchange agreement would typically specify the duration of the placement, based on length of time or number of impressions.
In this example, assume that the companies agree to exchange 10,000 impressions. In a separate cash transaction, the clothing retailer previously sold a total of 20,000 impressions in a similar cash deal at a cost per thousand (CPM) of $10. Given these assumptions, what value should the clothing retailer assign to this barter transaction?
The Accounting Principles Board (APB) and FASB's Emerging Issues Task Force (EmF) have noted that barter transactions should generally be recorded at the fair value of the assets surrendered. The challenge lies in determining this fair value. Because advertising bartered between Internet companies is not always sold for cash, determining fair value is often difficult and can be highly subjective.
To address this situation, the EnT has placed limits on the amount of barter advertising a company may recognize as revenue. …