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  • 1.  BARTER

    Posted 13 days ago

    HI

     

    I am involved in my first barter transaction.   A very large piece of equipment is being traded for advertising time on a social media platform.     The estimate is it will take about 2 years to complete the transaction.

     

    I plan to set up the piece of equipment in a receivable account – crediting sales and debiting the receivable.   Each month I will take the estimated advertising cost and credit the receivable and debit advertising. 

     

    Do I show revenue immediately on the piece of equipment?    My business model is to sell the equipment in full – not by the month.  We sell to dealers who sell to the final customer – those are the ones who deal with payment plans.  I do not have any background on receiving periodic payments.  

     

    Appreciate any input.

     

    Thanks

    Roxanne

     

     

    A red and black logo Description automatically generated
    Roxanne Burr CPA,CMA | Controller

    Direct: 706.693.3688 | Office: 706.693.3600

    roxanne.burr@...
    519 Bonnie Valentine Way Pendergrass GA 30567
    takeuchi-us.com

     

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  • 2.  RE: BARTER

    Posted 12 days ago

    Hi,

    I want to work through your questions to ensure the transaction is accounted for correctly.  
     
    Summary of the Situation:
    • Transaction: You're exchanging large equipment for advertising time on a social media platform.
    • Duration: The advertising services will be provided over an estimated period of two years.
    • Current Plan:
      • At Equipment Delivery: Credit sales (revenue) and debit a receivable account for the full value of the equipment.
      • Monthly Adjustments: Credit the receivable and debit advertising expenses each month based on the estimated cost of advertising received.
    • Concern: You're unsure if you should recognize the full revenue immediately upon delivering the equipment, given that you typically sell equipment outright and don't have experience with receiving periodic payments.

    Applicable Accounting Standards and Suggested Accounting Treatment:

    To address your situation, we'll refer to the following U.S. Generally Accepted Accounting Principles (GAAP):

    1. ASC 606 – Revenue from Contracts with Customers
    2. ASC 845 – Nonmonetary Transactions

    Step-by-Step Accounting Treatment:

    1. Identify the Contract (ASC 606):

      • Contract Parties: Your company and the social media platform.
      • Agreed Exchange: Equipment for advertising services over two years.

    2. Identify Performance Obligations:

      • Your Company: Obligation to deliver the equipment.
      • Social Media Platform: Obligation to provide advertising services over two years.

    3. Determine the Transaction Price:

      • Fair Value Measurement (ASC 820):
        • Option 1: If the fair value of the advertising services is reliably measurable, use it.
        • Option 2: If not, use the fair value of the equipment.
      • Example: Let's assume the equipment's fair value is $100,000.

    4. Allocate the Transaction Price:

      • Since there's a single performance obligation (delivery of equipment), allocate the entire transaction price to it.

    5. Recognize Revenue When Performance Obligation Is Satisfied:

      • Transfer of Control: If control of the equipment transfers upon delivery, you can recognize the revenue at that point.
      • Non-Cash Consideration (ASC 606-10-32-21): Measure revenue at the fair value of the non-cash consideration received or the fair value of the goods transferred.

    6. Assess for Significant Financing Component (ASC 606-10-32-15 to 32-20):

      • Time Difference: There's a two-year gap between delivering the equipment and receiving full consideration (advertising services).
      • Evaluation:
        • If the timing provides a significant benefit of financing to either party, adjust the transaction price for the time value of money.
        • Practical Expedient: If the period between transfer and consideration is less than one year, you can ignore the financing component. In your case, it's two years, so assessment is necessary.
        • Conclusion: If the financing component is significant, you should adjust the transaction price using a discount rate reflecting the customer's creditworthiness.

    7. Record the Initial Transaction:

      • Without Significant Financing Component:
        • Debit Advertising Receivable: $100,000
        • Credit Sales Revenue: $100,000
        • Debit Cost of Goods Sold (COGS): [Your actual COGS]
        • Credit Inventory: [Your actual COGS]
      • With Significant Financing Component:
        • You would need to discount the receivable to present value and recognize interest income over time.

    8. Monthly Accounting Over Two Years:

      • Recognize Advertising Expense:
        • Debit Advertising Expense: $4,166.67 ($100,000 / 24 months)
        • Credit Advertising Receivable: $4,166.67
      • If Financing Component Exists:
        • Recognize interest income each period by unwinding the discount on the receivable.

    Impacts on Financial Statements with Examples:

    1. Income Statement:

      • At Equipment Delivery:
        • Sales Revenue Increase: $100,000
        • COGS Increase: [Assuming COGS is $60,000]
        • Gross Profit Increase: $40,000
      • Over Two Years:
        • Monthly Advertising Expense: $4,166.67
        • Total Advertising Expense Over Two Years: $100,000
        • If Applicable, Interest Income: Recognized periodically if there's a significant financing component.

    2. Balance Sheet:

      • At Equipment Delivery:
        • Increase in Advertising Receivable: $100,000 (or present value if discounted)
        • Decrease in Inventory: $60,000
      • Over Two Years:
        • Monthly Decrease in Receivable: $4,166.67
        • If Applicable, Increase in Interest Receivable: Recognized over time

    3. Cash Flow Statement:

      • Operating Activities:
        • No Immediate Cash Impact: Since it's a barter, no cash changes hands initially.
        • Adjustments for Non-Cash Revenue and Expenses: Necessary under the indirect method.
      • Over Two Years:
        • No Cash Flows from Receivable Reduction or Advertising Expense Recognition
        • If Interest Income Recognized: Adjustments may be needed for non-cash interest income.

    Conclusion and Recommendations:

    • Revenue Recognition: You can recognize the full revenue from the equipment sale immediately upon transferring control, measured at fair value.
    • Receivable Recording: Set up an Advertising Receivable for the fair value of the advertising services to be received.
    • Advertising Expense Recognition: Recognize advertising expense monthly as you receive the services, reducing the receivable accordingly.
    • Significant Financing Component: Evaluate whether the time difference introduces a significant financing component. If so, adjust the transaction price to present value and recognize interest income over time.
    • Documentation: Maintain thorough records of fair value assessments and evaluations of financing components.
    • Disclosures (ASC 606 and ASC 845): Ensure financial statement disclosures adequately describe the nonmonetary transaction, valuation methods, and any financing components.
    Your proposed approach is generally in line with U.S. GAAP, with the added consideration of assessing a significant financing component due to the two-year period over which you receive the advertising services. By carefully evaluating and documenting each step, you'll ensure compliance with accounting standards and provide clear, transparent financial information.  
    Regards,


    ------------------------------
    Ekkarit Gaewprapun CMA
    Academic
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    Original Message


  • 3.  RE: BARTER

    Posted 12 days ago

    Hi Roxanne,

    Your part of the contract is complete. What you contracted to do was to provide the equipment to the Advertising agency. Per ASC 606, "An entity should recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service." 

    This means that you can and need to recognize the revenue when the equipment changed ownership. The fact that the Ad agency is paying you back by providing services is just the payment terms. Your receivable should be split between a Current Receivable and a Long-Term Receivable.



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    David Belnap, CMA, CSCA, CPA
    Belnap Accounting
    Hollywood FL
    United States
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    Original Message


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