My company is purchasing a 60% stake in another firm. This is effective at year end. Currently we have an arrangement with this company where they are paid a % of gross margin when they refer business to us. We have booked this as sales expense as a referral fee below the gross margin line. They are booking it as revenue. Once the deal is done, we'll have consolidated financial statements.
I'm trying to figure out the appropriate way to present this agreement (which will continue) moving forward. The referral fee/revenue is a material amount for both companies. I've gone around and around whether this should net out on a consolidated basis (same line on P&L) or not.
Would someone be kind enough to point me to the relevant regulations regarding this?
Any opinions and feedback is greatly appreciated as well!
Thanks.
Accounting for revenue split between parent and subsidiary
Answers
This is not an answer, but probably an all too obvious suggestion: have you asked your audit partner? I can think of rationale for varying treatment (and would love to hear from others here about their take on this) but the one that will count come quarter or year-end will be that of your audit firm. In the past I would sweat out trying to come up with the "right" answer on my own. Now, in addition to posting on Proformative (which I do quite a bit), I also reach out to my service providers w/o hesitation on big items such as this. Their fee tends to be worth more than the cost of any re-work I (or my team) end up doing as the result of a poor decision up front.
When you do find the answer (if it's not answered in response to this post), please do put it out here. Thanks.
2
Currently, our group of wholly-owned companies has a similar arrangement among some lines of business, whereas we a portion of gross margin is shared/earned as a referral/admin fee among sister companies. We treat this element as an expense on one side and as revenue on the other side. When you consolidate your entities, these elements require elimination and therefore there will be no discerning impact upon your consolidated entity result. You should be fine with the way that you are recording it now, as long as you eliminate these elements within your consolidation process.
As Mark stated above, at a minimum, check with your auditors and run this past them.
Essentially i am assuming you are going to consolidate because you have 60% ownership which i assume means you control the entities (hence the resulting consolidation). The details of the revenue sharing agreement will be a footnote disclosure - given you are going to consolidate an entity where you have less than 100% ownership you are going to have a non-controlling interest component which will need to be shown in the income statement and the balance sheet of the subsidiary which will flow through to the consolidated financials presentation - essentially the profit and loss share that you do not own (40% in example above) will be shown as a separate line item on the income statement with a net profit/loss being shown after this amount which is what your company share is.
Upon consolidation you will need to post an EJE to remove the full amount of the revenue/expense that has been booked in the parent/subsidiary for the above revenue sharing agreement. This will ensure that the consolidated financials are not grossed up for this inter-company charge - You should have the revenue in the subsidiary - in the parent entity you will need to figure out whether the amount you pay the subsidiary is an expense or netted against revenue under Gross v Net literature - ASC 605-45-45 or old literature EITF 99-19 - however given it is all eliminated upon consolidation it is not a major issue where you book it in my opinion.
I have similar situations going on here where we eliminate certain inter-company transactions for the consolidated pl but show the gross up in the segments since the activity is a big cash flow factor for operating activities as it releases restricted funds. But of course we disclose profusely that these inter-company activities eliminate in consolidation.