Velocity Cellular Case

Topics: Market value, Vendor Specific Objective Evidence, Price Pages: 5 (1503 words) Published: April 5, 2013
Velocity Cellular Case Study

1- a. According to ASC 605-25-25-5 , a delivered item in an arrangement with multiple deliverables shall be considered a separate unit of accounting if the following criteria are met:

* The delivered item or items have value to the customer on a standalone basis, which is satisfied in this case. * When vendor-specific objective evidence or third-party evidence of selling price for deliverables is absent, the vendor is allowed to give an objective estimation of the price of deliverable unit on standalone basis (in accordance with ASU No.2009-13), which is generally satisfiable. * If the arrangement includes a general right of return relative to the delivered item, where the delivery or performance of the undelivered item is substantially in control of the vendor. In the Velocity Cellular case , there are no general rights of return held by the subscriber relative to the delivered item contained in the prepaid phone plan, therefore the this criterion is not applicable in this case.

The criteria is met for the Velocity Cellular case. The activation card is considered a separate deliverable and a separate unit of accounting in accordance with ASC 605-25 and therefore should be accounted for separately. Revenue recognition then shall be determined for each item separately at its proper time.

b. Assuming that the activation card is a separate unit of accounting, and the selling prices of the activation card and the prepaid voucher are $170 and $50, respectively, we allocate revenue in accordance to the relative selling price of each unit in the arrangement. That is, 170+50=220 total base , 170/220= 77.3% of the actual price of the arrangement to be allocated to the activation card , and 50/220 = 22.7% of the actual price of the arrangement to be allocated to the prepaid voucher. That would come out to be $154.60 to be allocated to the activation card, and $45.40 to be allocated to the prepaid voucher.

This method of allocating overall considerations to the different units in an arrangement is supported by the Accounting Standard Update No. 2009-13, where it allows the estimation of the stand alone price of a single unit in the arrangement, when vendor-specific objective evidence or third-party evidence of selling price for deliverables is absent. Furthermore it allows for the using of the relative selling price method instead of the previously used residual value method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price, which significantly improves the reporting of transactions to more closely reflect the underlying economics of the transactions.

c. According to ASC 605-10-S99-1, in the section concerned with Nonrefundable Upfront Fees, specifically with arrangements of separable units, it states that when the on-going rights or services being provided are essential to the customers receiving the expected benefit, the staff believes that up-front fees, even if nonrefundable, are earned as the services are performed over the term of the arrangement or the expected period of performance and generally should be deferred and recognized systematically over the periods that the fees are earned. Therefore, The $154.60 allocated for the activation card should be recognized at the time of the activation of the card, the rest of the amount which is $45.40 should be recognized as the minutes from the prepaid plan are used, that is as far as the prepaid plan did not arrive at its expiration date by the end of the 360 days window. If the plan hits up its expiration date, Velocity Cellular should recognize the earnings arising from the unused minutes, and if there was no activity in the subscriber amount for a consecutive period of seven months, the full amount of the prepaid plan, $45.40 in this case, should be recognized at the end of the seven month period....
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