The IASB was considering additional guidance on reporting revenues when other parties are involved in providing goods and services to a company's customer. The Board has been debating the conditions that must be present for a company to record revenue at the gross amount collected from the customer or the net amount the company keeps after reimbursing the other party for any related goods or services.
Instructions
Answer the following questions with respect to the gross versus net revenue issue.
(a) How can the contract-based model be applied to determine whether the revenues charged to customers should be at the gross amount collected from the customer or the net an10unt the company keeps after reimbursing the other party for any goods or services?
(b) 'What indicators might be used to signify that a company should record the revenue at the gross amount?
(c) 'What indicators might be used to signify that a company should record the revenue at the net amount?
(d) Apply the above discussions to the following scenario to determine if the company should report at gross or net revenue:
Office Supply Co. sells office supplies and office furniture. The company keeps catalogues from five different furniture suppliers on hand and customers make their orders from these catalogues. Once the order is received from the supplier, Office Supply Co. takes title of the goods, and records the amount as inventory until shipped to the customer. There is no other inventory kept on hand. Office Supply Co. invoices the customer, and the customer must pay within 60 days of delivery and installation of the furniture. At the point of delivery to the customer's premises, the customer takes title to the furniture. The supplier sets the selling price to the customer, as detailed in the catalogue. Office Supply Co. is allowed to keep 25% of the sale price and remits the difference to the supplier.
Office Supply Co. also charges for installation, and keeps this full amount. Office Supply Co. must pay the supplier for the furniture even if the customer has not yet paid. At the time of the sale, the customer is told that if there are any issues that arise after the sale dealing with damage, quality, wrong colour, wrong size, and so on, they may contact Office Supply Co., which will, in turn, contact the supplier to resolve the problem.