Academic journal article Issues in Accounting Education Revenue Recognition in the Internet Economy

Academic journal article Issues in Accounting Education Revenue Recognition in the Internet Economy

Article excerpt


This case will help you explore the impact of authoritative revenue recognition literature in the context of e-commerce. In addition to better understanding e-commerce companies, you will have the opportunity to consider important GAAP literature that significantly impacts the revenue recognition practices of numerous organizations. Further, you will gain an appreciation for the fact that decisions regarding revenue recognition policies must often be made in a setting of significant professional and personal pressure.

Monday Morning (1)

It had been a long weekend for Sheri Brinker. She had joined, Inc. seven months ago, following its acquisition by She had never worked harder than now in her position as TechMall's first Vice President of Finance. It had required a Herculean effort to build her new finance team and to help TechMall meet its new public reporting responsibility that accompanied its acquisition by TechMall's amazingly fast growth since beginning operations just three years ago had fostered an environment where financial reporting and internal controls were quite loose. TechMall had (until the acquisition by Wahoo) been financed by a small group of private investors who were much more focused on technology and marketing than on accounting systems and financial reports. Because TechMall had never required any debt financing, the company never even had to respond to the reporting requirements of a bank or loan officer. As a result, Sheri often found herself to be the bearer of bad news as she and her newly hired finance team worked through one accounting issue after another.

Early in December, with the end of TechMall's fiscal year (and its first audit) approaching at the end of the month, Sheri turned her attention to the issue of revenue recognition. Her previous public accounting work caused her to be reasonably familiar with SAB No. 101--the Securities and Exchange Commission (SEC) Staff Accounting Bulletin on revenue recognition--as well as EITF (Emerging Issues Task Force) No. 99-19, Recording Revenue Gross as a Principal versus Net as an Agent, which was released by the Financial Accounting Standards Board (FASB). However, prior to her employment at TechMall, Sheri had little previous experience with Internet companies and their typically aggressive approach to revenue recognition. As a result, Sheri's long weekend had been spent carefully rereading all the material she had collected on SAB No. 101 and EITF No. 99-19. She wanted to be ready at Tuesday's weekly Executive Committee meeting to outline all possible revenue recognition problems TechMall might be facing as it he aded into its first audit.

As Sheri sat reviewing her notes on Monday for the next day's Executive Committee meeting, Steve Tambasco, TechMall's VP of Marketing, burst into her office and proudly announced, "I've solved the revenue problem. We're going to make the end-of-year bonus for sure!" Sheri didn't say a word, but simply waited for the details.

Steve rushed on:

I've spent the entire morning on the phone with You know how hard I've been working these past two months on a partnership with them to combine our inventory fulfillment system with their merchant base and roll out a new channel for sports equipment merchants in the Wahoo portal. The big problem with closing this deal has been getting an agreement on how we're going to split the revenues in the partnership. I think I may have been pushing their president a little hard today on that issue because he was getting frustrated and said something about how he wished he could just buy our technology and roll out the new channel himself. I think he's right. Why not sell them our technology? I know that's never been part of our business model before. However, if we put into the contract all kinds of noncompete agreements and guarantees that they won't resell our technology to anyone else, this could solve the problem I've been having getting PlayBall to agree to the kinds of splits on merchant revenue we normally have in our partnerships with other merchant aggregators. …

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