The birth of the Internet in the 1990s led to the creation of a new industry of online retailers such as Amazon, Overstock.com, and Insight Enterprises, Inc. Many of these companies often act as intermediaries between the manufacturer and the customer without ever taking possession of the merchandise sold. Revenue recognition for this type of transaction is challenging because it depends on whether a seller is classified for a particular transaction as a principal or an agent. Principals provide a “gross” presentation that includes revenue, cost of goods sold and profit. Agents provide a “net” presentation that includes as commission revenue only the difference between revenue and cost of goods sold.
Required:
1. Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org) and select Basic View for free access. What is the specific nine-digit Codification citation (XXX-XX-XX-XX) that indicates what an entity assesses to determine whether the nature of its promise is to act as a principal or agent?
2. What indicators does the Codification list that suggest an entity is a principal? Determine the specific nine-digit Codification citation (XXX-XX-XX-XX).
3. Using EDGAR (www.sec.gov), access Alphabet, Inc.’s 2020 10-K. Locate the disclosure note that discusses the company’s revenue recognition policy with respect to ads placed on Google Network Members’ properties.
4. Do you agree with Alphabet’s reasoning with respect to choosing whether it reports revenue gross versus net with respect to these advertising services? Indicate “yes” or “no,” and explain.
