Revenue recognition by Reseller (VAR) for service contract

My 2 cents....The cost of service (during the 3 years) is not borne by the reseller but the supplier and as such revenue should be recognized on day of sale (day 1). The reseller's cost is the cost of purchase of the service agreement. Matching revenue (amortized revenue recognition) and the 3 year service cost does not apply to the reseller.

I would look at the agreement between the "reseller" and the buyer and make sure about your statement that essentially, the reseller is purchasing the service agreement. Is there really a sale of service agreements between the supplier and reseller? Is this not just a commission type arrangement? Who receives the money from the end users and how is the supplier paid? etc. etc.?

Thought: If the binding relationship between Reseller and Client is 3 Years AND the contract between the Reseller and the Supplier is also 3 Years I would then (Cash and Revenue Recognition is very different) record my Supply Invoice as a Prepaid Cost under Assets and then e.g. book 1/36 of the Prepaid per Month on my PL as a Cost - same goes for the Service Contract between the Reseller and the Client. Here I'd record 1/36 of the Whole Contract a Revenue every Month - leaving the Remainder ofthe amount on Deferred Income. This approach is used in e.g. Insurance - where services and coverage often streches over longer periods of time.

If it's possible to make another "Trend line" than the 1/36 per month (e.g. season peaks etc.), then that can/should be used as the Trigger for COGs and Revenue recognition, in order to make/give the best/most correct picture of your P&L.

Cheers,
Rino

EITF 99-19...look at who the primary obligor is...i.e. it's not you...therefore you can reocognize all the profit up front...in fact you should recognize only the profit...in other words you should net the presentation of your revenue and COGS in your revenue line.