Custom «Revenue Recognition Principle» Essay Paper Sample
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eBay recognizes revenue when four criteria are met namely; services have already been rendered, convincing evidence of an arrangement exist, collectability is reasonably assured, and selling price can be determined or is fixed. GAAP on the other hand recognizes revenue in four different transactions. The first one has to do with revenue gotten from selling inventory which ought to be recognized at the date of sale which is commonly interpreted to mean the date of delivery. Revenue gotten from performing services on the other hand ought to be recognized the date those services have been performed. The third transaction has to do with the revenue gotten from permission to use the assets of the company, i.e. interest, rent, and royalty for using money, fixed assets, and intangible assets respectively. This revenue is normally recognized as time passes or allocated in a reasonable manner in course of the time these assets are being used. The last transaction has to do with the sales of any other asset other than the inventory. Normally this kind of revenue is recognized at that point of sales of that asset.
eBay is company that can be said to provide an online auction service. In this case a seller has to register with the company (eBay), list the merchandise that he or she intends to sell and, optionally, state a minimum price, and in some cases a reserve price below which he or she will not sell that item. There is also a predefined period of time for buyers to place their bids after which eBay authenticates if a bid exceed the reserve prices (incase it has been) set, and the minimum price (Stallworth, & Digregorio, 2004). If the sale successfully adheres to these criteria, eBay notifies both the buyer and the seller via email and then organizes to the consummate the deal. However for the services, eBay charges what it calls a success fee which is normally a certain percentage of the selling price. Invoices are then sent to the seller for the payment of all fees on a monthly basis. New seller ought to have a credit card account with eBay, this does not however mean that all payment have to be made via the credit card. Those sellers who choose to pay through a credit card are normally charged immediately after the invoice has been sent. If for whatever reason the sale has not been consummated then it is upon the seller to notify eBay from where eBay issues a credit to the seller (Stallworth, & Digregorio, 2004).
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Revenue recognition for replacement fee and success fee are recognized at the time the item has been listed and at the time the e-mail has been sent showing that the transaction has been successful respectively (Stallworth, & Digregorio, 2004). It (eBay) also makes an allowance for credit and doubtful debts, based on its five years that it has been existence, at the time recognizing revenue. Revenues of other segments of business that are related to auctions are also recognized at the accomplishment of the auction whereas revenue for the sponsorship agreements are spread and recognized over the life of the agreement. Comparing the revenue recognition of eBay and what has been recommended by GAAP one get the feeling that the eBay’s revenue recognition is unusual if not a violation of GAAP.
eBay gets its revenue from three major segments namely, market place, payments, and communication (eBay, 2009). Marketplace segment in this case comprise of the internet-based commerce platforms which enables sellers and buyers world-wide to not only interact but also trade with one another. Payment segment on the other hand consist of two online payment brands namely; PayPal, and Bill Me Later (eBay, 2009). PayPal in this case essentially refers to a system that enables businesses and individuals to easily, quickly, and securely send and receive payment online in about a hundred and ninety markets globally. Bill Me Later on the other hand enables merchants and consumers to offer and obtain respective, through its (Bill Me Later) transactional credit at the point of sale that forms part of its banking relationship. Communication segment comprise of Skype, a global internet communications entity that offers people all over the world a way of staying in touch over the internet via free voice, SMS, sending instant messages, video calls and free voice (eBay, 2009). Skype mainly generate income through fees that are charged to users before they connect to Skype internet communication products to mobile telephone and traditional fixed line (eBay, 2009).
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In order that the eBay revenue recognition can be consistent with the GAAP there are a number of measures that it should put in place. First, it should be more vigilant on whether the arrangement exists before capturing it as revenue. It should also consider how the arrangement consideration ought to be allocated among several other arrangements. The recognition of revenue from deliverables is also something that it ought to critically look at. Something that would greatly increase the accuracy of their revenue in relation to the cost is the delivery of all the elements of the arrangements. Lastly, it would be extremely important to consider whether the company receives benefits that can be separately identified from the purchase arrangements with the customers for which their fair value can reasonably estimate by the company.