Essay on Ppp Fashions, Inc.

780 Words Apr 9th, 2014 4 Pages
MEMORANDUM

TO: Professor John Eckroth
DATE: 12/03/2013
SUBJECT: Project #2 – PPP Fashions, Inc.

The purpose of this memo is to address the accounting issues related to how PPP Fashions should record the $25 Referral Credit on the books. The Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic No. 605-50 (Revenue Recognition/Customer Payments and Incentives) provides guidance pertaining to sales incentives including discounts on future purchases. The general rule of accounting for coupons and discounts indicates sales incentives that are offered voluntarily, without charge by a company, may be used by a customer as a result of a single transaction, and will not result in loss on the sale are
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The Company is required to ensure the rules of the ASC are followed under the code ASC 605-50-45-1, and the Referral Credit would have to meet the two scenarios in this code, as described above. In addition, PPP Fashion would have to keep a close eye on how the $25 Referral Credit is valued and ensure the beneficiary is the Existing Customer, not the New Customer. The ASC is clear on this stance; businesses cannot give away free product or service with the intention of gaining new customers. This would automatically become an expense instead of a reduction to revenue. Another guideline the Company should examine would be ASC 605-50-25-7, Contingent Sales/Incentives, which is the cash consideration that a vendor can offer future customers or purchasers with regards to the cumulative level of revenue transactions or for how long the buyer remains a customer. This guideline could be applied to The Company as the method implemented is based on incentives for sales and the gain of new customers.
The Company is planning to adopt International Financial Reporting Standards (IFRS) in the near future and should be made aware of the International Accounting Standards Board’s (IASB) relevant accounting guidelines. While FASB has extensive revenue recognition guidelines, IASB only has one, IAS 18. IASB’s revenue recognition guideline for the sales of goods [IAS 18.14] states that revenue

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