Accounting Business Reporting for Decision Making

CHAPTER 6 Statement of profit or loss and statement of changes in equity 261

Required

Access the information available on the IASB website and answer the following questions:

a. Summarise the timeline associated with the development of the revenue recognition standard

indicating the major milestones.

b. Provide the rationale as to why a new revenue recognition standard was required.

c. An area of debate in revenue recognition is the presentation of the adjustments to revenue for

the uncollectibility of revenue associated with customer credit risk. Explain what difference it

makes to the statement of profit or loss, and key items within the statement, if any uncollectible

charges are deducted from revenue or included in operating expenses.

6.43 Calculating revenue    LO4, 5, 9

Joe Phum operates a wholesale clothing operation called Phum’s Designs. All the sales and pur-

chases of the business are made on credit. The opening and closing balances for accounts receiv-

able, accounts payable and inventory are shown below.

At start of period At end of period

Accounts receivable $3 000 $5 800

Inventory 12 000 15 200

Accounts payable 4 000 6 100

During the reporting period, Joe Phum received $58 000 from accounts receivable and paid $36 000

to suppliers.

Required

Calculate the revenue from sales, cost of sales and gross profit for the reporting period for Phum’s

Designs.

Decision-making activities

6.44 Groupon is a US company with a deal-of-the-day website that features discounted gift certificates

usable at local or national companies. Since its formation, it has faced a number of questions

relating to its accounting practices. The following is a compilation of statements extracted from

articles discussing two of Groupon’s questionable accounting practices.

In its latest filing, Groupon says that it has restated its financial results for the last three years ‘to correct

for an error’ in the way it reported revenue. Before, the company reported as revenue all the money it

collected from customers, including cash that was later paid out to Groupon’s merchant partners. Now,

Groupon is reporting what it calls ‘net revenues’, which exclude the retailer payouts...

The other accounting problems related to certain assumptions and forecasts the company used

to calculate its results. In particular, the company said it underestimated customer refunds for

higher-priced offers like laser eye surgery. Groupon collects more revenue on such deals, but they also

carry a higher rate of refunds. The company honours customer refunds for the life of its coupons, so

those payments can affect its financials at various times. Groupon deducts refunds within 60 days from

revenue; after that, the company has to take an additional accounting charge related to the payments.

Source: De La Merced, M & Rusli, E 2011, ‘Accounting change cuts Groupon’s revenue’, The New York Times,

23 September; De La Merced, M 2012, ‘Groupon’s shares fall on revision’, The New York Times, 30 March.

Required

a. Use the following to illustrate the difference between reporting gross or net revenue. Groupon

collected $1.52 billion in revenue from customers during a six month period. Of this, $0.832

billion was paid to merchant partners.

b. Explain if the reporting of gross billings or net revenue affects the company’s bottom line.

c. Discuss what factors Groupon should consider when estimating customer refunds.