Analyzing and Interpreting Revenue Recognition Policies and Risks (LO1) Amazon.c
ID: 2420031 • Letter: A
Question
Analyzing and Interpreting Revenue Recognition Policies and Risks (LO1) Amazon.com, Inc., provides the following explanation of its revenue recognition policies in its 2010 10-K report. On January 1, 2010, we prospectively adopted ASU 2009-13, which amends Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition. Under this new standard, we allocate revenue in arrangements with multiple deliverables using estimated selling prices (ESP) if we do not have vendor-specific objective evidence or third-party evidence of the selling prices of the deliverables. Estimated selling prices are management's best estimates of the prices that we would charge our customers if we were to sell the standalone elements separately. Sales of our Kindle e-reader are considered arrangements with multiple deliverables, consisting of the device, 3G wireless access and delivery for some models, and software upgrades. Under the prior accounting standard, we accounted for sales of the Kindle ratably over the average estimated life of the device. Accordingly, revenue and associated product cost of the device through December 31, 2009, were deferred at the time of sale and recognized on a straight-line basis over the two-year average estimated economic life. As of January 2010, we account for the sale of the Kindle as multiple deliverables. The revenue related to the device, which is the substantial portion of the total sale price, and related costs are recognized upon delivery. Revenue related to 3G wireless access and delivery and software upgrades is amortized over the average life of the device, which remains estimated at two years. Because we have adopted ASU 2009-13 prospectively, we are recognizing $508 million throughout 2010 and 2011 for revenue previously deferred under the prior accounting standard. Required What is a multiple-element contract? What product did Amazon sell that involved a multiple-element contract? Explain. Explain how companies account for multiple-element contracts, in general. Compare the accounting for the Kindle under the old and new accounting standards for revenue recognition. Amazon disclosed that S508 million of previously deferred revenue would now be recognized earlier. Explain. Assume that Amazon sold a Kindle with 3G capabilities for $180 and the company estimated a selling price (ESP) of $20 per unit for 3G access and future software upgrades. Compute the revenue that Amazon would recognize at the point of sale under the old and the new accounting standards. Use the financial statement effects template to record the initial sale of a Kindle and the accounting adjustment required at the end of the first quarter for the new accounting standards.Explanation / Answer
a) The multiple-element contract is where company enters into the contract which includes combination of services, software, hardware and/or financing. It has more than one unit of accounting which can be known if the following criteria are met a) The delivered item(s) has value to the client on a stand-alone basis; b) There is objective and reliable evidence of the fair value of the undelivered item
b). If above criteria are met for each element and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative fair value. If these criteria are not met, the arrangement is accounted for as one unit of accounting which would result in revenue being recognized on a straight-line basis or being deferred until the earlier of when such criteria are met or when the last undelivered element is delivered
c) Old method: Revenue and associated cost were deferred at the time of sale and recognized on straight line basis over the two years average estimated economic life
New: Revenue and related cost is recognized at delivery.So $508 revenue will be recognized
d) Old methos: the revenue will be deferred for two year $180 million
New method: It would be recognized at the time of delivery i.e. now $180 million will be recognized revenue