Let's say Company A is working on a project to partner up with Company B. Company A incurs expenses (payroll, capital expenditures, development, etc.) to meet the requirements of Company B. Later, Company B determines that the costs incurred by Company A were significant and agrees to give Company A $1,000. Should Company A record the $1,000 as revenue or as a reduction of expense? Obviously, there is a great deal of flexibility depending on how you "paper" the transaction, but interested in thoughts on a holistic level.
Revenue or Contra Expense
Answers
Sounds like an expense reduction, assuming that the revenue is coming from a shared customer/client base external to both A and B.
Revenue is recognized when earned. Clearly the $1,000 is being received to offset the costs incurred by Company A. I say Company A should reduce the expenses as recorded on their books, in order to reflect the true cost of establishing the partnership.
In a normal professional services organization, where you are billing for both time on the one hand and reimbursable expenses (air fare, hotel, meals) on the other, you record the reimbursables separately as revenue and expenses, even if there is no margin.
Not sure if your scenario is any different.
4
Doug,
The problem with your interpretation of GAAP or GAAP itself is that reimbursement is not revenue (for clarity sake, there is no margin, which would be revenue).
So by adding "paper" revenues to your company you are in effect:
1) Misleading readers of the financials as to your revenue
2) Skewing all ratio's and financial measurements
3) Possibly paying additional taxes or fees based on your stated revenue
As far as reimbursable expenses WITH margin.
If the company policy is to mark-up expenses (whether or not a particular reimbursable expense has been marked up), then that is revenue and I would agree with one exception. You need to record the expenses as a COGs account, otherwise you would still be misleading your financial readers and skewing the measurements. However, taxes and fees would be correct if they are based on revenues.
Actually, EITF 01-14 specifically states that expense reimbursement related to providing services is to be presented as revenue, even if there is no margin. However, that's not the exact case presented in the example.
In response to Wayne's post, a positive margin is not a requirement for revenue recognition in any existing accounting literature. It should not be a consideration.
BTW, after some additional research one could make the argument on the presentation of the revenue and expense, but in any event the inclusion (and again I'm talking about reimbursed expenses that are billed at zero margin by policy) is actually misleading and for some firms the amounts presented can be not only considerable but materially misleading.
EITF 01-14 is a principle, not a rule. As a principle IMHO it is wrong because most readers of financial statements (i.e., investors and creditors) never hear of, nor really care about EITF 01-14.
What is important is consistent treatment of like-kind events (the basic theory behind GAAP). A simple footnote to the financials can overcome any EITF, FASB, ASC.
7
This response is dangerously wrong and I implore all readers to ignore it. You should never pick and choose which
An EITF is a rule, not a principle. EITF's are contained within the GAAP hierarchy as level 3 authoritative guidance and can only be nullified or modified by guidance issued at level 1 or level 2. I think you missed the boat on this one. Within GAAP, we still live in a rules based world. Maybe as we progress (if we ever do) more towards IFRS or some other principles based standard, that may change, but it hasn't yet. There is no way to footnote that you are applying an ASC or FIN or EITF in any way other than as prescribed. That's simply a divergence from GAAP. You can't say something is correct if you apply it wrong, but consistently wrong. Something is revenue if it meets the criteria of CON 6 which makes no mention of margin. If someone chooses (or is stupid enough) to sell something at below margin, that doesn't change the inflows revenue characteristic.
Footnotes explain the detail behind the numbers, which numbers have been accounted for in accordance with GAAP and the footnotes themselves have specific requirements under GAAP (with the allowance to disclose more if it will help a reader). Their purpose is not to disclose when you account for something inconsistently.
Sorry, Wayne. I'm not with you on this one.
Wayne, I have read notes to financial statements. I have written notes to financial statements that have been filed with the SEC. I've audited notes to financial statements, and I've consulted with partners at the largest auditing firm in the world on notes to the financial statements. I'm familiar with notes to financial statements.
It's clear you do not have a strong understanding, nor an appropriate respect for, accounting principles and US GAAP. And honestly, there is no problem with that if it's not a key part of your job. I'm warning others, as strongly as I possibly can based on my expertise and experience, to not heed your advice when it comes to applying US GAAP accounting principles (which, by the way, ARE rules).
You can rationalize it all sorts of ways, and you've certainly tried, but simply listing a few accounting principles you heard about in Accounting 101 doesn't justify ignoring others.
It bears repeating: You cannot disclose away bad accounting. And why would you even want to attempt it? Why would you intentionally misstate your financial statements, and then try to explain why they're misstated in the notes? You're basically telling the world you don't care enough to try to get it right. I'd be embarrassed to do that, personally.
And I know this is petty, but they are accounting principles. Not principals. They don't walk the halls of an elementary school, and they're not deposited into a bank to earn interest.
Jeff -
From time to time I may post a contrarian or even wrong viewpoints (imbued with beliefs I might hold but don't implement) to stimulate discussion. It increases participation, draws a wider audience into the conversation and actually widens the available point of views.
However, as I said on another thread your penchant for nitpicking will not win you admirers. We are all busy professionals without (an assumption) of an assistant to proof-read what we write. We also (again another assumption) don't spend hours reviewing our writing to make sure we don't make silly or simple mistakes. Last time I look (or met other Proformative members) we were all human.
Take the error as a typo, and unless you really don't understand what was meant to be said (it happens, often) don't comment. Yes, as you said "it is petty" but by calling it out and then commenting with condescension makes you look not only so much smaller but unprofessional.
First, I apologize for offending your sensitivities. I tried to soften the criticism by acknowledging that it was a bit trivial. And it is the only time in this thread that I have been nitpicky. But I do believe attention to detail is important, and I know that other people will judge you based on your grammar and spelling, particularly when they are germane to the argument you're making.
Second, thank you for assuming I have an assistant. Man, I wish I was that far up the corporate ladder. Alas, it's just my own (again) attention to detail and OCD flaring up.
Third, and far more important than the first two, I implore you to stop intentionally posting wrong viewpoints, simply to "generate discussion". People visit these forums looking for advice and opinions from other professionals with some expertise, and I assume some of them actually take our advice. If people are randomly polluting the discussion with intentionally bad information, just to get a reaction from other posters, it defeats the purpose of these forums, and makes us all sound less credible.
Apology accepted - and I'm firing my assistant (me) as soon as possible. While I have had staff, I too have never had an AA or PA.
On the note of posting contrarian opinions, I find that we as Americans are very hesitant to question anything. Who makes GAAP? Is it "you" or I. Not really. Is it the public accounting firms or the SEC (more likely).
Wrong views are also important. The old cliche about many ways to skin a cat, well wrong views also allow people to educate why a view is or may be wrong (and in our society what is wrong today may just be right tomorrow by a reinterpretation of the underlying rules). Call it playing devil's advocate.
On a broader note: Is GAAP really right? Has it become super overly complicated, and if so who really has benefited; the public, Joe or Jane investor, the Bank?
We (and I'm talking the average
Is this anarchy?
Re: "Who makes GAAP?"
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220125621&acceptedDisclaimer=true
Re: "Is GAAP right?" It's not a matter of "right" vs. "wrong". It's about a group of professionals adopting a shared set of rules and standards and following them, so that there is consistency in practice.
Re: "We are just as capable as the SEC staffer or member of FASB to think, reason and analyze (the fundamentals of an accounting)"
With all due respect, no we are not. The people you mention have made it their life's work, and most of us are novices. Having worked directly with many SEC staffers and FASB members, they know A LOT more than any of us about accounting principles. We would be wise to acknowledge their expertise.
Let's remember that $1,000 is probably not material to the financial statements.
Sometimes the classics are the best. Check out FASB Statement of Concept 6, starting with para. 78 and continuing on (emphasis on the last phrase of the paragraph):
Revenues
78. Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central
I am not even sure why the EITF 01-14 discussion. As I understand the post, Company A is NOT a customer or client of Company B. Company A and B entered into a project (partnered up). While the phrase "to meet the requirement of Company B" is stated, I understood it to mean that there were NO services rendered by Co. B to A So EITF 01-14 does not apply. I agree with Jaime. It is an expense or a cost (project) reduction.
I think the following link provide useful guidance.
Occasionally, the university makes an agreement with an external entity to share the expenses of a particular activity. It might be more efficient or convenient for the department to initially pay all the expenses; however, the cost of that activity on the university’s books should only reflect its share of the expenses. In these situations, the funds received from the other party should be recorded as a reimbursement of expenses and not as revenue.
If the agreement with the external entity relates to a revenue-generating activity (e.g., a conference), then the full costs of the activity should be reflected, and support from an external entity would be considered another source of revenue.
https://www.dfa.cornell.edu/accounting/topics/revenueclass/expensereimbursement
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