Eitf 99-19

EITF ABSTRACTS Issue No. 99-19 Title: Reporting Revenue Gross as a Principal versus Net as an Agent Dates Discussed: March 16, 2000; May 17–18, 2000; July 19–20, 2000 References: FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses fromthe Sale of Investments FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities FASB Statement No. 136, Transfers of Assets to aNot-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information FASB Concepts Statement No. 6, Elements of Financial Statements AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts SEC Staff Accounting Bulletin No. 101,Revenue Recognition in Financial Statements SEC Staff Accounting Bulletin No. 101B, Second Amendment: Revenue Recognition in Financial Statements SEC Regulation S-X, Rule 5-03, Income Statements 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) thenet 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
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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 onwhether 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] staffconsiders 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.

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