Presentation to FEI

1
Presentation to FEI The Internet and
e-Business Issues,Accounting for Revenue

• Robert Uhl, Deloitte Touche
• November 6, 2000

2
Accounting for Revenue for Internet Activities

• There is no accounting guide for Internet
• Companies. Where do Internet
• companies go for accounting guidance?
• Some of the issues arise due to the new
• business model used in internet operations,
• while others are issues that also exist in
  businesses with no internet operations internet
  companies engaging in transactions that are
  similar to transactions entered into by
  traditional companies should follow already
  established accounting models 1999 SEC letter
  to EITF

3
Recognition of Revenue

• If nothing else applies, look to SAB 101, Revenue
  Recognition in Financial Statements
• SEC believes revenue may be recognized when
• There is persuasive evidence of an arrangement
• Delivery has occurred/ services have been
  rendered
• Price is fixed or determinable
• Collectibility is reasonably assured
• SECs Frequently Asked Questions on SAB 101

4
Other Recognition Issues

• Arrangements with up-front payments -SAB 101, Q.
  5
• Multiple element arrangements -EITF 00-21
• Hosting arrangements - EITF 00-3
• Point and loyalty programs - EITF 00-22
• Front-end and back-end fees EITF 00-?
• Access, maintenance, and publication fees EITF
  00-?
• Guaranteed impressions or click-throughs EITF
  00-?

5
Measurement of Revenue

• We want to make sure that the information
• being reported gives investors a true notion
• of what is really going on with revenues and
• that they are reliable numbers.
• L. Turner, interview with NY Times on internet
• barter transactions
• Advertising Barter Transactions- EITF 99-17
• Revenue recognized at fair value only if have
  historical evidence of cash sales establishing
  the value

6
Measurement of Revenue

• Revenue Gross as a Principal vs. Net as an Agent
• SAB 101 criteria
• EITF 99-19 indicators
• Gross indicators
• -Primary obligor -Supplier selection
• -General inventory risk -Product specifications
• -Pricing Latitude -Physical loss inventory risk
• -Perform part of service -Credit risk
• Net indicators
• -Supplier is primary obligor -Fixed commission
• -Supplier has credit risk

7
Classification of Revenues

• With the emergence of internet companies as a
  significant part of the economy and for which
  investment decisions have been based on revenues
  rather than earnings, income statement
  classification and presentation have become a
  critical area.
• -J. Adams, SEC Deputy Chief Accountant, 12/8/99

8
Revenue Classification Issues

• Shipping and Handling fees
• EITF 00-10
• Fees are included in revenue
• Sales incentives
• EITF 00-14, e.g., rebates and coupons
• Cash incentives are treated as reductions of
  revenue
• EITF 00-22, e.g., volume rebates and other
  loyalty programs
• EITF 00-25, e.g., slotting fees and co-op
  advertising

9
Questions