P5-33. Analyzing and Interpreting Revenue Recognition Policies and Risks (LO1)
Amazon.com, Inc., provides the following explanation of its revenue recognition policies
in its 10-K report.
On January 1, 2010, we prospectively adopted ASU 2009-13, which amends
Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. Under
this new standard, we allocate revenue in arrangements with multiple deliverables
using estimated selling prices (ESP) if we do not have vendor-specific objective
evidence or third-party evidence of the selling prices of the deliverables. Estimated
selling prices are management’s best estimates of the prices that we would charge our
customers if we were to sell the standalone elements separately.
Sales of our Kindle e-reader are considered arrangements with multiple deliverables,
consisting of the device, 3G wireless access and delivery for some models, and
software upgrades. Under the prior accounting standard, we accounted for sales of the
Kindle ratably over the average estimated life of the device. Accordingly, revenue and
associated product cost of the device through December 31, 2009, were deferred at
the time of sale and recognized on a straight-line basis over the two-year average
estimated economic life.
As of January 2010, we account for the sale of the Kindle as multiple deliverables.
The revenue related to the device, which is the substantial portion of the total sale
price, and related costs are recognized upon delivery. Revenue related to 3G wireless
access and delivery and software upgrades is amortized over the average life of the
device, which remains estimated at two years.
Because we have adopted ASU 2009-13 prospectively, we are recognizing $508
million throughout 2010 and 2011 for revenue previously deferred under the prior
accounting standard.
Required
a. What is a multiple-element contract? What product does Amazon sell that involves a
multiple element contract? Explain.
b. Explain how companies account for multiple-element contracts, in general.
c. Compare the accounting for the Kindle under the old and new accounting standards for
revenue recognition. Amazon discloses that $508 million of previously deferred revenue
will now be recognized earlier. Explain.
d. Assume that Amazon sells a Kindle with 3G capabilities for $180 and the company
estimates a selling price (ESP) of $20 per unit for 3G access and future software upgrades.
Compute the revenue that Amazon would recognize at the point of sale under the old and
the new accounting standards.
e. Use the financial statement effects template to record the initial sale of a Kindle and the
accounting adjustment required at the end of the first quarter for the new accounting
standards.