EITF 01-9.doc

EITF 99-19 ISSUE
1.        Diversity exists regarding whether a company should report revenue based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to a customer less the amount paid to a supplier) because it has earned a commission or fee. The issue often arises with companies that sell goods or services over the Internet. Many of those companies do not stock inventory and may arrange for third-party suppliers to drop-ship merchandise on their behalf. Those companies also may offer services that will be provided by a third-party service provider. However, the issue is not limited to companies that sell products or services over the Internet. For example, the issue may arise in, but is not limited to, transactions related to advertisements, mailing lists, event tickets, travel tickets, auctions (and reverse auctions), magazine subscription brokers, and catalog, consignment, or special-order retail sales.
2.        How companies report revenue for the goods and services they offer has become an increasingly important issue because some investors may value certain companies on a multiple of revenues rather than a multiple of gross profit or earnings. Net income generally does not differ based on whether a company reports revenue on the gross amount billed to the customer or the net amount retained.
3.        The issue is whether a company should report revenue based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee. The accounting model in this Issue is consistent with the requirements of SAB 101. Those requirements are included in SAB 101 in the interpretive response to question 10 of Topic 13-A and are as follows:
        In assessing whether revenue should be reported gross with separate display of cost of sales to arrive at gross profit or on a net basis, the [SEC] staff considers whether the registrant:
1.        acts as principal in the transaction,
2.        takes title to the products,
3.        has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and
4.        acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis.
If the company performs as an agent or broker without assuming the risks and rewards of ownership of the goods, sales should be reported on a net basis. [Footnote reference omitted.]
4.        This Issue excludes from its scope transactions for which guidance is provided under categories (a) and (b) of the GAAP hierarchy, including:
•        Sales of financial assets, including debt and equity securities, loans, and receivables
•        Lending transactions
•        Insurance and reinsurance premiums
•        Revenue transactions in specialized industries addressed in AICPA accounting and auditing guides (for example, airlines, casinos, investment companies, not-for-profit organizations, construction contractors, and federal governmental contractors).
5.        This Issue also excludes from its scope other gross-versus-net income statement display issues such as those associated with (a) shipping and handling revenues and costs, which are addressed in Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," and (b) rebates, coupons, incentives, and free products, which are addressed in Issue No. 00-14, "Accounting for Certain Sales Incentives." Also excluded from the scope of this Issue are those display issues that will be addressed in future issues on accounting for vendor promotional activities, multiple-element revenue arrangements, and "point" and other loyalty programs. This Issue does not address when  revenue should be recorded, including whether  revenue should be deferred (a liability established) because the earnings process is not complete.
EITF 99-19 DISCUSSION
6.        The Task Force reached a consensus that whether a company should recognize revenue based on (a) the gross amount billed to a customer because it has earned revenue from the sale of the goods or services or (b) the net amount retained (that is, the amount billed to the customer less the amount paid to a supplier) because it has earned a commission or fee is a matter of judgment that depends on the relevant facts and circumstances and that the factors or indicators set forth below should be considered in that evaluation.
Indicators of Gross Revenue Reporting
7.        The company is the primary obligor in the arrangement—Whether a supplier or a company is responsible for providing the product or service desired by the customer is a strong indicator of the company's role in the transaction. If a company is responsible for fulfillment, including the acceptability of the product(s) or service(s) ordered or purchased by the customer, that fact is a strong indicator that a company has risks and rewards of a principal in the transaction and that it should record revenue gross based on the amount billed to the customer. Representations (written or otherwise) made by a company during marketing and the terms of the sales contract generally will provide evidence as to whether the company or the supplier is responsible for fulfilling the ordered product or service. Responsibility for arranging transportation for the product ordered by a customer is not responsibility for fulfillment.
8.        The company has general inventory risk (before customer order is placed or upon customer return)—Unmitigated general inventory risk is a strong indicator that a company has risks and rewards as a principal in the transaction and, therefore, that it should record revenue gross based on the amount billed to the customer. General inventory risk exists if a company takes title to a product before  that product is ordered by a customer (that is, maintains the product in inventory) or will take title to the product if it is returned by the customer (that is, back-end inventory risk) and the customer has a right of return. Evaluation of this indicator should include arrangements between a company and a supplier that reduce or mitigate the company's risk level. For example, a company's risk may be reduced significantly or essentially eliminated if the company has the right to return unsold products to the supplier or receives inventory price protection from the supplier. A similar and equally strong indictor of gross reporting exists if a customer arrangement involves services and the company is obligated to compensate the individual service provider(s) for work performed regardless of whether the customer accepts that work.
9.        The company has latitude in establishing price—If a company has reasonable latitude, within economic constraints, to establish the exchange price with a customer for the product or service, that fact may indicate that the company has risks and rewards of a principal in the transaction and that it should record revenue gross based on the amount billed to the customer.
10.   The company changes the product or performs part of the service—If a company physically changes the product (beyond its packaging) or performs part of the service ordered by a customer, that fact may indicate that the company is primarily responsible for fulfillment, including the ultimate acceptability of the product component or portion of the total services furnished by the supplier, and that it should record revenue gross based on the amount billed to the customer. This indicator is evaluated from the perspective of the product or service itself such that the selling price of that product or service is greater as a result of a company's physical change of the product or performance of the service and is not evaluated based on other company attributes such as marketing skills, market coverage, distribution system, or reputation.
11. The company has discretion in supplier selection—If a company has multiple suppliers for a product or service ordered by a customer and discretion to select the supplier that will provide the product(s) or service(s) ordered by a customer, that fact may indicate that the company is primarily responsible for fulfillment and that it should record revenue gross based on the amount billed to the customer.
12. The company is involved in the determination of product or service specifications—If a company must determine the nature, type, characteristics, or specifications of the product(s) or service(s) ordered by the customer, that fact may indicate that the company is primarily responsible for fulfillment and that it should record revenue gross based on the amount billed to a customer.
13. The company has physical loss inventory risk (after customer order or during shipping)—Physical loss inventory risk exists if title to the product is transferred to a company at the shipping point (for example, the supplier's facilities) and is transferred from that company to the customer upon delivery. Physical loss inventory risk also exists if a company takes title to the product after a customer order has been received but before the product has been transferred to a carrier for shipment. This indicator may provide some evidence, albeit less persuasive than general inventory risk, that a company should record revenue gross based on the amount billed to the customer.
14. The company has credit risk—If a company assumes credit risk for the amount billed to the customer, that fact may provide weaker evidence that the company has risks and rewards as a principal in the transaction and, therefore, that it should record revenue gross for that amount. Credit risk exists if a company is responsible for collecting the sales price from a customer but must pay the amount owed to a supplier after the supplier performs, regardless of whether the sales price is fully collected. A requirement that a company return or refund only the net amount it earned in the transaction if the transaction is cancelled or reversed is not evidence of credit risk for the gross transaction. Credit risk is not present if a company fully collects the sales price prior to the delivery of the product or service to the customer (in other words, before the company incurs an obligation to the supplier). Credit risk is mitigated, for example, if a customer pays by credit card and a company obtains authorization for the charge in advance of product shipment or service performance. Credit risk that has been substantially mitigated is not an indicator of gross reporting.
Indicators of Net Revenue Reporting
15. The supplier (not the company) is the primary obligor in the arrangement—Whether a supplier or a company is responsible for providing the product or service desired by a customer is a strong indicator of the company's role in the transaction. If a supplier (and not the company) is responsible for fulfillment, including the acceptability of the product(s) or service(s) ordered or purchased by a customer, that fact may indicate that the company does not have risks and rewards as principal in the transaction and that it should record revenue net based on the amount retained (that is, the amount billed to the customer less the amount paid to a supplier). Representations (written or otherwise) made by a company during marketing and the terms of the sales contract generally will provide evidence as to a customer's understanding of whether the company or the supplier is responsible for fulfilling the ordered product or service.
16. The amount the company earns is fixed—If a company earns a fixed dollar amount per customer transaction regardless of the amount billed to a customer or if it earns a stated percentage of the amount billed to a customer, that fact may indicate that the company is an agent of the supplier and should record revenue net based on the amount retained.
17. The supplier (and not the company) has credit risk—If credit risk exists (that is, the sales price has not been fully collected prior to delivering the product or service) but that credit risk is assumed by a supplier, that fact may indicate that the company is an agent of the supplier and, therefore, the company should record revenue net based on the amount retained.
18.        The examples in Exhibit 99-19A are presented to illustrate the application of the consensus.
19.        The SEC Observer reminded registrants that Regulation S-X, Rule 5-03(b)(1), requires separate presentation in the income statement of revenues from the sale of products and revenues from the provision of services. Because commissions and fees earned from activities reported net are service revenues, this may often have the effect of requiring separate presentation of revenues reported gross and revenues reported net.
20. Some Task Force members observed that the voluntary disclosure of gross transaction volume for those revenues reported net may be useful to users of financial statements. Task Force members observed that such disclosure could be made parenthetically in the income statement or in the notes to the financial statements. However, if gross amounts are disclosed on the face of the income statement, they should not be characterized as revenues (a description such as "gross billings" may be appropriate), nor should they be reported in a column that sums to net income or loss.
Transition
21. The Task Force reached a consensus that the consensus guidance in this Issue should be applied by SEC registrants no later than the required implementation date for SAB 101. According to SAB 101B, that implementation date is the fourth quarter of a registrant's fiscal year beginning after December 15, 1999. Accordingly, all registrants, including those that already have adopted SAB 101, are required to apply the consensus guidance in this Issue in their financial statements for the fourth quarter of their fiscal year beginning after December 15, 1999. Nonregistrants should apply the consensus no later than in annual financial statements for the fiscal year beginning after December 15, 1999. Upon application of the consensus, comparative financial statements for prior periods should be reclassified to comply with the classification guidelines of this Issue. If it is impracticable to reclassify prior-period financial statements, disclosure should be made of both the reasons why reclassification was not made and the effect of the reclassification on the current period.
22. The SEC Observer noted that in Topic No. D-85, "Application of Certain Transition Provisions in SEC Staff Accounting Bulletin No. 101," the SEC staff has indicated that registrants should retroactively apply the guidance in SAB 101 regarding incom