Question

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 PCM, 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 has been controversial.

Assume that Overstock.com sold you a product for $200 that cost $150. The company’s profit on the transaction clearly is $50. Should Overstock recognize $200 in revenue and $150 in cost of goods sold (the gross method), or should it recognize only the $50 in gross profit (the net method) as commission revenue?

- Access the FASB Accounting Standards Codification at the FASB website (www.fasb.org). 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?

Answer 1

The FASB ASC citation 606-10-55-37 to 606-10-55-40 guides whether an entity like Overstock.com should record revenue on a gross or net basis, based on if it acts as a principal or agent in the transaction.

Step-by-step explanation:

The question relates to how online retailers like Overstock.com should recognize revenue for transactions where they act as intermediaries rather than holding an inventory of the goods they sell.

According to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), Overstock.com should assess whether it is acting as a principal or as an agent in the transaction to determine the correct revenue recognition method. The specific nine-digit Codification citation that provides guidance on whether to record revenue on a gross or net basis is 606-10-55-37 to 606-10-55-40. When acting as a principal, Overstock.com would record the full $200 as revenue and $150 as the cost of goods sold, recognizing the gross amount. In contrast, if Overstock.com acts merely as an agent, it should only recognize the $50 as commission revenue, using the net method.