Requirement 2
Excerpt from Orbitz’s 2010 Annual Report:
Revenue Recognition
We recognize revenue when it is earned and realizable, when persuasive evidence of an arrangement exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. We have two primary types of contractual arrangements with our vendors, which we refer to herein as the "merchant" and
"retail" models. Under both the merchant and retail models, we record revenue earned net of all amounts paid to our suppliers.
Under the merchant model, we generate revenue for our services based on the
difference between the total amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the supplier charges us for that product.
Customers generally pay us for reservations at the time of booking. Initially, we record these customer receipts as accrued merchant payables and either deferred
income or net revenue, depending on the travel product. In the merchant model, we do not take on credit risk with the customer, however we are subject to chargebacks and fraud risk which we monitor closely; we have the ability to determine the price; we are not responsible for the actual delivery of the flight, hotel room or car rental; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the customer chooses the supplier. We recognize net revenue under the merchant model when we have no further obligations to the customer. . . .
Under the retail model, we pass reservations booked by our customers to the travel supplier for a commission. In the retail model, we do not take on credit risk with the customer; we are not the primary obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have no ability to determine or change the products or services delivered; and the customer chooses the supplier. We recognize net revenue under the retail model when the reservation is made, secured by a customer with a credit card and we have no further obligations to the customer.
© The McGraw-Hill Companies, Inc., 2013
5–130 Intermediate Accounting, 7/e
Case 5–21 (continued)
Excerpt from priceline.com’s 2010 Annual Report:
Merchant Revenues and Cost of Merchant Revenues
Name Your Own Price® Services: Merchant revenues for Name Your Own Price®
services and related cost of revenues are derived from transactions where the Company is the merchant of record and, among other things, selects suppliers and determines the price it will accept from the customer. The Company recognizes such revenues and costs if and when it fulfills the customer’s non-refundable offer.
Merchant revenues and cost of merchant revenues include the selling price and cost, respectively, of the travel services and are reported on a gross basis. . . .
Merchant Price-Disclosed Hotel Service: Merchant revenues for the Company’s merchant price-disclosed services are derived from transactions where its customers purchase hotel room reservations or rental car reservations from suppliers at disclosed rates which are subject to contractual arrangements. The Company records the
difference between the customer selling price and the supplier cost of its merchant price-disclosed reservation services on a net basis in merchant revenue.
Agency Revenues
Agency revenues are derived from travel related transactions where the
Company is not the merchant of record and where the prices of the services sold are determined by third parties. Agency revenues include travel commissions, customer processing fees and global distribution system (“GDS”) reservation booking fees and are reported at the net amounts received, without any associated cost of revenue. Such revenues are generally recognized by the Company when the customers complete their travel.
© The McGraw-Hill Companies, Inc., 2013
Solutions Manual, Vol.1, Chapter 5 5–131
Case 5–21 (concluded) Requirement 3
a) Orbitz’s “merchant model” revenues
This is reported net: “We record revenue earned net of all amounts paid to our suppliers under both our merchant and retail models.”
b) Orbitz’s “retail model” revenues
This is reported net: “We record revenue earned net of all amounts paid to our suppliers under both our merchant and retail models.”
c) priceline.com’s “merchant revenues for ‘Name Your Own Price®’ services”
This is reported gross: “Merchant revenues and cost of merchant revenues include the selling price and cost, respectively, of the travel services and are reported on a gross basis.”
d) priceline.com’s “merchant revenues for ‘Price-Disclosed Hotel’ services”
This is reported net: “The Company records the difference between the selling price and the cost of the hotel room reservation as merchant revenue.”
e) priceline.com’s agency revenues:
This is reported net: “Agency revenues . . . are reported at the net amounts received, without any associated cost of revenue.”
Requirement 4
Yes, it appears that relatively similar services can be accounted for as gross v. net depending on how they are structured. Priceline’s “Name your own Price®” service appears similar to services that Orbitz might offer under its merchant model, yet Priceline would recognize revenue gross and Orbitz would recognize revenue net.
If similar things are treated differently, comparability is reduced.
© The McGraw-Hill Companies, Inc., 2013
5–132 Intermediate Accounting, 7/e