TheShoppingMall.com (TSM) is an Internet business that provides a website with links to a variety of online shopping sites with which TSM has established “marketing partnerships.” TSM also provides advertising, promotions, and discount coupons for its partner shopping sites. TSM was incorporated under the laws of Canada about 12 years ago. The original financing to start TSM came from its president, Mr. Fogg, and several outside venture capital investors. Mr. Fogg’s plan is to issue common shares to the public after the business model has proven itself. The proceeds from this share issue will be used to repay the debt financing provided by Mr. Fogg and the venture capitalists. It is now late 20X2, and the financial results are being prepared for the year ended November 30, 20X2. Mr. Fogg believes that early 20X3 will be the right time to issue public shares.
The preliminary financial statements for the year ended November 30, 20X2, include the following items:
TSM contracted with three partners for $103.5 million to develop all their online shopping systems, including customer relation management and payment processing. The partners are name-brand product manufacturers that want to start direct online retailing. TSM has never completed this type of system before, but expects to complete it by the end of 20X4. TSM recorded $36.5 million of the $103.5 as revenues, deferring the rest to be reported when the work was completed.
TSM also provides an online auction service where individuals and businesses can list items for sale and interested purchasers can bid on them.
TSM provides the auction service, arranges delivery, and processes payments for a fee of 8% of the selling price. TSM recognized the full selling price of these auction items as revenue and the net 92% paid to the seller as “product costs.”
TSM provided an online travel agency, selling airline tickets and hotel rooms and car rentals. It recorded as revenue the entire fee paid by a customer for an airline ticket or hotel room. The amount TSM paid the airline or hotel chain that supplied the ticket or room was classified as “product costs.” TSM reported that it earned $152  million in revenues, and its product costs came to $134 million, leaving $18 million of “gross profits.” TSM’s other costs, such as advertising and salaries, netted out to a loss of $102 million. While a traditional travel agency, which has a fixed commission, would show only the commission as revenue, Mr. Fogg believes it is appropriate to use the gross bookings amounts as revenue, because, unlike a traditional travel agency, TSM purchased the hotel room outright, so it assumed the full risk of ownership and could control the profit made on each sale.
To build awareness for its site, TSM purchased $1 million of advertising on several other companies’ retailing websites. In exchange for advertising on these sites, TSM sold advertising worth $1million for these other companies on TSM’s site.
Mr. Fogg believes this bartering was an astute business move that “. . . saves us lots of cash and generates revenues at the same time.”
TSM used promotions to bring people to its website. For example, customers who bought a pizza from a national pizza chain received a coupon for $10 off their next TSM purchase. TSM accounted for these costs as marketing expenses rather than recording them as a cost of goods sold.
Mr. Fogg stated, “The gross profit line is verysensitive, so it is preferable to show these expenses below the gross profit line.” Other expenses that TSM includes in “marketing expenses” are costs of warehousing, packaging, and shipping goods to customers.
Mr. Fogg and several top TSM executives have received options to purchase common shares of TSM at a fixed price of $1 per share.
Mr. Fogg realized the TSM financial statements must provide some disclosure of the accounting policies chosen. TSM’s note on revenue recognition states, “Revenue is recognized when earned.”

Required:
TSM plans to issue its Initial Public Offering of shares in early 20X4. It will require a set of audited financial statements.
Assume the role of TSM’s auditor. What is your position on the accounting matters listed above?