Worldwide Wires
Worldwide Wires
“Revenue Recognition Woes”
Introduction Worldwide Wires (“WW”) is a company that provides computer network and communications services around the globe. The company offers its services either directly to the customer or through a network of partners that are scattered around the globe. Their business model can be compared to that of a principal and an agent, with WW being the former and the partners being the later. The company and the partners enter into 5 year service agreements which give each side has their own rights and responsibilities. Below are just a few key elements of those rights and responsibilities: • The partner has the responsibility to execute the legal contract with the customer • The partner has the responsibility to collecting revenue from the customer • The partner retains the risk of customer bad debt • The partner is responsible to pay amounts due for services provided by other partners • WW has the right to approve customers • WW sets the price the customer pays • WW sets any deviations from standard pricing of products. • WW has the right to invoice the partners for the gross amounts billed to customers.
There are a few more, but these are definitely the more important ones. As you can see, WW has a lot more rights than responsibilities.
Main Issues The last bullet point mentioned above constitutes the main issue in this case and it pertains to the age old dilemma of revenue recognition. As we all know, the revenue recognition principle provides that companies should recognize revenue (1) when it is realized or realizable and (2) when it is earned. Sounds simple enough to implement, but in reality the revenue recognition principle is one that can be manipulated and defined in a vast variety of manners. All one has to do is look at the cause of the majority of financial restatement for public companies and the culprit will most likely be revenue recognition. The case that we are
“Revenue Recognition Woes”
Introduction Worldwide Wires (“WW”) is a company that provides computer network and communications services around the globe. The company offers its services either directly to the customer or through a network of partners that are scattered around the globe. Their business model can be compared to that of a principal and an agent, with WW being the former and the partners being the later. The company and the partners enter into 5 year service agreements which give each side has their own rights and responsibilities. Below are just a few key elements of those rights and responsibilities: • The partner has the responsibility to execute the legal contract with the customer • The partner has the responsibility to collecting revenue from the customer • The partner retains the risk of customer bad debt • The partner is responsible to pay amounts due for services provided by other partners • WW has the right to approve customers • WW sets the price the customer pays • WW sets any deviations from standard pricing of products. • WW has the right to invoice the partners for the gross amounts billed to customers.
There are a few more, but these are definitely the more important ones. As you can see, WW has a lot more rights than responsibilities.
Main Issues The last bullet point mentioned above constitutes the main issue in this case and it pertains to the age old dilemma of revenue recognition. As we all know, the revenue recognition principle provides that companies should recognize revenue (1) when it is realized or realizable and (2) when it is earned. Sounds simple enough to implement, but in reality the revenue recognition principle is one that can be manipulated and defined in a vast variety of manners. All one has to do is look at the cause of the majority of financial restatement for public companies and the culprit will most likely be revenue recognition. The case that we are
Cited: Financial Accounting Standards, Codification (605-45-45-1): Topic: 605 Revenue Recognition, Subtopic: 45 Principal Agent Consideration, Section: 45 Other Presentation Matters, Subsection: 1 General Emerging Issues Task Force. Financial Accounting Standards Board. Reporting Revenues Gross as a Principal versus Net as an Agent. 2000. Print. Collingwood, Harris. "Revenue Recognition: What Is a Sale, and When Do You Book It?" FT Press: Leading Business, Finance, Life and Science Knowledge. 29 Aug. 2003. Web. 13 Oct. 2010. .