eBay Revenue Recognition
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The issue of revenue recognition may seem, at first thought, trivial relative to the other areas of financial accounting. However, the way in which a company chooses to recognize its revenue can have a significant impact on the company's financial statements and may lead to an overstatement or understatement of revenues. With the increasing popularity of the Internet, the issue of revenue recognition is becoming even more important as hundreds of small companies are now issuing stock and attracting small investors who might not have participated in the stock market previously. In addition, there is increased competition for funds among publicly held companies, and being able to show higher revenues, rather than lower, can help a company both maintain a higher stock price and attract new investors. This research examines one Internet company, eBay, and its approach to revenue recognition.The most basic explanation of eBay is that it provides an on line auction service. Sellers (who must register with the site) list items for sale and, optionally, a minimum price (as well as a reserve price below which they will not sell the item). Buyers have a predefined period of time during which they may bid on items after which eBay validates if a bid exceeded the minimum price and the reserve price (if a reserve price has been set). If the sale was successful according to these criteria, eBay notifies the buyer and seller through e-mail and th
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ss fee for an item which sells for $500 would be $13.13. An item which sells for $10,000 would have a success fee of $138.75.
Invoices are sent to sellers for all fees (placement and success) on a monthly basis; new sellers are required to have a credit card account on file with eBay (although payment does not have to be made through the credit card). Those sellers who elect to pay by credit card are charged shortly after the invoice is sent. If a sale is not consummated, it is the seller's responsibility to notify eBay at which point a credit is issued to the seller (1999 Annual Report, 2000, p. 7).
Revenue Recognition
Revenue for placement fees are recognized at the time the item is listed while revenue for success fees are recognized at the time the e-mail is sent noting that the transaction has been successful. The company also makes allowances for doubtful accounts and credits (based on eBay's five-year history) at the time of recognition. Revenues for other business segments related to auctions are also recognized at the successful conclusion of the auction while revenues for sponsorship agreements are recognized over the life of the agreement (1999 Annual Report, 2000, pp. 54-55).
eBay has adopted an accrual approa
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Approximate Word count = 1326
Approximate Pages = 5 (250 words per page)
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