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.