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Revenue Recognition: Product Sales and Service (Portfolio 5101)

Product Code: TPOR45
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Revenue Recognition: Product Sales and Services, written by Lisa Marie Starczewski, J.D., Frank J. Beil, Jr., CPA, Carlson School of Management at University of Minnesota, and J. Randolph Mallek, CPA, Ph.D., Accounting Consultant at Buchanan Ingersoll & Rooney, PC, is the second of four portfolios dedicated to revenue recognition. This Portfolio analyzes the fundamental revenue recognition principles—those that apply to all types of transactions, whether they are completed in one step or involve a long-term contract—applicable to both product sales and the provision of services.  

This Portfolio begins by examining how to distinguish a product sale from a service transaction.  It identifies revenue recognition methods and outlines revenue recognition issues for both products and services. 

This Portfolio then provides a detailed analysis of the fundamental principles as they apply to a product’s delivery and performance.   Issues addressed include: 

  • analyzing the circumstances under which FASB Statement 48 applies to a right of return and its effect on a vendor's recognition of revenue,
  • accounting for separately priced extended warranty and product maintenance contracts, and
  • distinguishing financings from sales and accounting for product financing. 

Revenue Recognition: Product Sales and Services then provides 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 and include: 

  • upfront membership fees,
  • franchise fees,
  • licensing/royalty/patent fees, and
  • sales of future revenues. 

This Portfolio addresses these issues in the context of nonrefundable fees and refundable fees (and services) subject to cancellation privileges and discusses revenue recognition issues relevant to franchise fee revenue, license and patent fees, and sales of future revenues. 

Revenue Recognition: Product Sales and Services allows you to benefit from: 

  • Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
  • Invaluable practice documents including tables, charts and lists.
  • Guidance from world-class experts.
  • Real-world and in-depth analysis that lets you explore various options.
  • Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
  • Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

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

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:

 

Frank Beil
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
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 an Accounting Consultant in the Washington, D.C. office of Buchanan Ingersoll & Rooney, PC. 
Lisa M. Starczewski
Lisa Marie Starczewski, Smith College, B.A. (magna cum laude, 1985); Villanova University School of Law, J.D. (summa cum laude, 1988); Editor-in-Chief, Villanova Law Review (1987-88); member of adjunct faculty, Villanova University School of Law; former associate, Morgan, Lewis & Bockius; Schnader, Harrison, Segal & Lewis; author, 714 T.M., Partnerships — Allocation of Liabilities; Basis Rules; 550 T.M., At-Risk Rules; 565 T.M., Installment Sales; 621 T.M., IRS National Office Procedures — Rulings, Closing Agreements; co-author, 517 T.M., Scholarships and Educational Expenses; 5100 T.M., Revenue Recognition: Fundamental Principles (Accounting Series); 5101 T.M., Revenue Recognition: Product Sales and Services (Accounting Series); 5114 T.M., Accounting for Leases: Fundamental Principles (Accounting Series); 5117 T.M., Leases: Lessee Perspective (Accounting Series); 5118 T.M., Leases: Lessee Perspective — Selected Topics (Accounting Series); author of several chapters in the Tax Practice Series and contributor to various tax publications; recipient of Distinguished Author award; member, Tax Management U.S. Income Advisory Board.