PORTFOLIO

Revenue Recognition: Product Sales and Service (Portfolio 5101)

Portfolio 5101-2nd, Revenue Recognition: Product Sales and Services, analyzes the revenue recognition principles applicable to both product sales and the provision of services. 

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DESCRIPTION

Portfolio 5101-2nd, Revenue Recognition: Product Sales and Services, analyzes the revenue recognition principles applicable to both product sales and the provision of services. A number of revenue recognition principles apply to all types of transactions, whether they involve products or services and whether they are completed in one step or involve a long-term contract. This Portfolio refers to these principles as “fundamental principles.”
The Portfolio analyzes in detail these fundamental principles with respect to product sales, discussing their application in the context of delivery and performance. The Portfolio discusses revenue recognition when a right of return exists, examining the circumstances under which the guidance concerning right of return applies and its effect on a vendor's recognition of revenue. The Portfolio also discusses in detail accounting for separately priced extended warranty and product maintenance contracts and product financing arrangements.
The Portfolio includes a thorough analysis of revenue recognition issues that arise when services are provided. These issues focus primarily on the timing of revenue recognition and the completion of performance. The payment of upfront fees often complicates the question of whether, when, and to what extent a service provider should recognize revenue. This Portfolio addresses these issues in the context of nonrefundable fees and refundable fees (and services) subject to cancellation privileges. The Portfolio also discusses revenue recognition issues relevant to franchise fee revenue, license and patent fees, and sales of future revenues.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5101-2nd, Starczewski, Beil, and Mallek, Revenue Recognition: Product Sales and Services (Accounting Policy and Practice Series).


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AUTHORS

LISA MARIE STARCZEWSKI, J.D.
Lisa Marie Starczewski, J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987-88) and has practiced law with Morgan, Lewis & Bockius and Schnader, Harrison, Segal & Lewis. She has also taught at the Villanova University School of Law. Ms. Starczewski has coauthored, in addition to this work, two other Accounting Policy and Practice Portfolios: 5100-2nd, Revenue Recognition: Fundamental Principles, and 5114, Accounting for Leases: Fundamental Principles. She has also authored numerous Tax Management Portfolios (also published by BNA). She has received the Tax Management Distinguished Author Award and is a member of the Tax Management U.S. Income Advisory Board.

FRANK J. BEIL, JR., CPA
Frank J. Beil, CPA, MS (Accounting), University of North Dakota, consults for the FASB in the areas of Revenue Recognition for Products, Services, Multiple Element Transactions, Contractor Accounting, and Accounting for Software Transactions. He is a Senior Lecturer in Accounting and Adjunct Professor of Management at the Carlson School of Management, University of Minnesota. Mr. Beil conducts seminars on Revenue Recognition, Accounting for Pensions, Accounting for Leases, and FASB Update and consults for public and private companies on applying accounting standards.

J. RANDOLPH MALLEK, CPA, PH.D.
J. Randolph Mallek, CPA, Ph.D. (Accounting), The University of Texas at Austin; MPA (Master in Professional Accounting), The University of Texas at Austin; MS (Information Systems), American University; MS (Administration), University of California at Irvine. Licensed as a CPA in the state of Texas, Dr. Mallek has taught undergraduate and graduate financial, managerial, and accounting information courses at the Leventhal School of Accounting at the University of Southern California and was an Associate Professor of Accounting at Al Akhawayn University in Morocco and an Assistant Professor of Accounting at American University in Washington, D.C. Dr. Mallek works as a Professor of Accounting at Stevenson University in Baltimore. M.D.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

A. General Background

B. Distinguishing a Product Sale From a Service Transaction

1. Definition of Product Sale

2. Definition of Service Transaction

C. Revenue Recognition Methods

1. In General

2. Product Sales

3. Service Transactions

D. Application of Fundamental Principles to Product Sales and Service Transactions

1. In General

2. Earned and Realized or Realizable

3. Four "Recognition" Criteria

4. Substantial Accomplishment of Benefits Represented by Revenue

E. Determining Whether a Multiple Element Arrangement Exists

F. Revenue Recognition Issues - Product Sales

G. Revenue Recognition Issues - Service Transactions

II. Product Sales

A. Delivery and Performance

1. In General

2. Bill and Hold Arrangements

3. Layaway Sales Arrangements

4. Consignment

5. Other Title Issues

a. Transactions That Resemble Consignment or Financing

(1) In General

(2) Effect of Retained Security Interest - U.S. Jurisdiction

(3) Foreign Jurisdictions Without a U.S. UCC Equivalent

(4) U.S. Companies With UCC Lien That Also Retain Title in Shipped Goods

6. Significance of Shipping Terms

a. In General

b. Other Shipping Issues

(1) Partial Shipments

(2) Fraudulent Shipping Practices

7. Customer Acceptance Clauses

a. In General

b. When Is Customer Acceptance Deemed to Occur?

c. Accounting for Returns

8. Effect of Installation Provisions

9. Upfront Fees in Supply Contracts

B. Fixed or Determinable Price

1. In General

2. Loyalty Cards

3. Estimates and Changes in Estimates Relevant to Product Returns

C. Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts

D. Revenue Recognition When Right of Return Exists

1. In General

2. Application of Statement 48

3. Recognizing Revenue Upon Sale Notwithstanding Right of Return

4. "Reasonable Estimates" of Future Returns

E. Product Financing Arrangements

1. In General

2. The Relevance of Statement No. 49 to Revenue Recognition

3. Distinguishing Financings From Sales

4. Transactions Specifically Excepted From Application of Statement No. 49

5. Accounting for Product Financing Arrangements

a. Comprehensive Example

b. Accounting for Purchase Commitment as Product Financing - Example

F. Sales With a Guaranteed Minimum Resale Value

G. Sales Arrangements That Include Specified Trade-In Rights

H. Accounting for Shipping and Handling Fees and Costs

I. Finance Charges

J. Sales of Leased/Licensed Departments

K. Bulk Sales

L. Accounting for Product Sales

1. In General

a. Cash Sales of Merchandise

b. Credit Sales of Merchandise

2. Collections on Behalf of Third Parties - Sales and Other Taxes

III. Service Revenue

A. Upfront Membership Fees

1. In General

2. Nonrefundable Fees

3. Refundable Fees/Services Subject to Cancellation Privileges

a. In General

b. To What Types of Service Transactions Will the Staff Allow an Analogy to Statement 48?

c. If an Analogy to Statement 48 Is Available, Is a Company Required to Apply it?

d. If an Analogy to Statement 48 Is Available, Is a Company Allowed to Change From the Statement 140 Method to Application of Statement 48?

B. Franchise Fee Revenue

1. FAS 45 â€" "Accounting for Franchise Fee Revenue"

a. Overview

b. The General Rules

c. Special Rules Relevant to Substantial Performance in Area Franchise Sales

d. Specialized Rules Applicable to Both Individual and Area Franchise Sales

(1) Relationships Between Franchisor and Franchisee

(2) Commingled Revenue

(3) Continuing Franchise Fees

(4) Continuing Product Sales

(5) Agency Sales

(6) Franchising Costs

(7) Repossessed Franchises

e. Disclosure Requirements

2. Are Agreements With "Area Developers" Considered Franchise Agreements?

3. When Do Franchise Agreements Create "Variable Interest Entities"?

4. Using Two Separate Agreements to Circumvent Application of FAS 45

C. Licensing/Royalty/Patent Fees

1. In General

2. Upfront Fees

3. Effect of Obligation to Defend Patents on Intellectual Property

D. Sales of Future Revenues

IV. Accounting for Contingencies


WORKING PAPERS

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Acronyms and Abbreviations

Worksheet 2 Relevant History of Generally Accepted Accounting Principles

Worksheet 3 Accounting for Franchise Fee Revenue

Worksheet 4 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

Securities and Exchange Commission Materials:

SEC Staff Accounting Bulletins (SAB)

SEC Memorandum

SEC AAERs and LRs

Financial Accounting Standards Board Materials:

FASB Concepts Statements

FASB Interpretations

FASB Project Updates

FASB Proposals

FASB Statements

Emerging Issues Task Force (EITF) Issues

FASB Technical Bulletins

FASB Invitation to Comment

American Institute of Certified Public Accountants Materials

Audit and Accounting Guides

Accounting Principles Board Opinions

AICPA Statements of Position (SOP)

AICPA Technical Practice Aids

UNOFFICIAL

Accounting Textbooks, Handbooks, Articles, and Speeches: