Read the following discussion and give response: Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1)

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Read the following discussion and give response:

Lookhere.Com and StopIn.Com enter into a reciprocal agreement whereby (1) StopIn.Com is given valuable advertising space on the home page of Lookhere.Com and (2) Lookhere.Com is given valuable advertising space on the home page of StopIn.Com. The main source of revenue for both StopIn.Com and Lookhere.Com is sales of advertising on their respective websites. Both companies recognize advertising revenue received from the other company and recognize advertising expense paid to the other company. Accounting regulators express support for the accounting treatment applied by these companies.

1. Do you believe these companies should be allowed to recognize revenue in conjunction with the advertising agreements described above?

2. Why do you believe these companies want to record revenue along with its offsetting expense for these transactions?

3. How would you assess such transactions in an analysis of these companies?

This revenue recognition issue stirs controversy. Many believe that it is reasonable for both companies to record offsetting advertising revenues and advertising expenses from this contract. This is justified in that the transaction seemingly meets the usual revenue recognition criteria. Opponents of this treatment worry about uncertainty and completeness of the earning process.

Revenues and revenue growth are considered good indications of future prospects for Internet companies. Accordingly, Internet companies want to maximize the amount of reported revenues; even if those revenues are entirely offset with expenses.

An analyst should seek to determine the percent of revenues that come from advertising in such barter transactions verses revenues from cash-paying customers. Some believe that barter-based revenues should be segregated and viewed in a different light from that of more than normal revenues. This might affect revenue multiples in determining stock price or decisions in other applications that reply on financial statements. Analysts should adjust their models according to their beliefs about the relative merits of such revenues.