Worldwide Wires

1578 Words Oct 8th, 2010 7 Pages
Worldwide Wires

“Revenue Recognition Woes”

Introduction Worldwide Wires (“WW”) is a company that provides computer network and communications services around the globe. The company offers its services either directly to the customer or through a network of partners that are scattered around the globe. Their business model can be compared to that of a principal and an agent, with WW being the former and the partners being the later. The company and the partners enter into 5 year service agreements which give each side has their own rights and responsibilities. Below are just a few key elements of those rights and responsibilities: • The partner has the responsibility to execute the legal contract with the customer • The
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The most relevant and authoritative is FASB Codification: 605-45-45-1, and it pertains to revenue recognition and most importantly to principal and agent consideration. The standard basically states that if you are considered the principal, then you recognize revenues at gross amounts. On the other hand, if you are considered an agent, then you recognize revenues at net amounts. The standard is broken up in the following two sections.
Indicators of gross revenue reporting: 1. The entity is the primary obligor in agreement 2. The entity has general inventory risk 3. The entity has latitude in establishing sales price 4. The entity changes the product or performs part of the service 5. The entity has discretion in supplier selection 6. The entity is involved in the determination of product or service specifications 7. The entity has physical loss inventory risk 8. The entity has credit risk
Indicators of net revenue reporting: 1. The entity’s supplier is the primary obligor in the agreement 2. The amount the entity earns is fixed 3. The entity’s supplier has credit risk
Given the above standard, one can begin to make a case for choosing either the gross method or the net method of revenue recognition.
Argument For Gross Method As was mentioned earlier, Worldwide Wires currently uses the gross method for recognizing revenues.
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