Accounting Memo: Spider Web Corporations Accounting Memorandum

2811 words - 12 pages

Facts
Spider-Web Corporation (“Spider”) is a nonpublic U.S.-based company that owns and operates various Web sites, and earns revenue through online advertisement services. To generate revenue, Spider enters into agreements with advertisers and places advertisers’ ads or marketing messages on Web sites owned by Spider or Web sites owned by its network partners.
Spiders’ service fee is based on the type of advertising that is selected. Spider can charge a fee each time an ad is displayed on a Web site or can charge a fee each time an end user clicks on the linked ad from a key word search. A tracking software is used to give Spider monthly usage reports that help determine the fee for the advertisers. The advertisers are invoiced the month after their ads are displayed, and paid directly to Spider.
To place advertisers’ ads on Web sites not owned by Spider, an agreement is made between Spider and the network partners. First, the agreement specifies the space, size, and location on the partner’s Web site that must be available for ads. Second, the agreement specifies the partners’ fee. The fee includes the base cost to maintain the ad space and a percentage of the adjusted gross advertising revenue earned monthly from Spider. The partners can only collect the percentage of the adjusted gross advertising revenue until the advertisers pay Spider. Lastly, the agreement requires the partner to install the tracking software, and to keep Spider’s network footer at the bottom of its home page because Spider is paying for the base cost.
The term and conditions of the agreement allow partners to request Spider to remove an ad if not suitable for the partners intended demographic. Additionally, the advertisers only have an agreement with Spider; partners are under separate agreements with Spider. Spider is solely responsible for fulfilling its contracts with the advertisers.
The following picture illustrates the relationships between the parties in this arrangement.
Pays cost to maintain the ad space and a percentage of the adjusted gross advertising revenue earned monthly
Pays fee each time an ad is displayed or when end user clicks on linked ad
Spider-Web Corporation (“Spider”)
Network Partners (“Partners”)
Third-Party Advertisers
Allows Spider to manage/fill its own advertisement space
Displays ads on home page or linked to key search words
Spider must determine how to record the revenue it earns from placing ads for various third-party advertisers on Web sites owned by the partners.
Question
1. Should Spider record the revenue it earns from placing ads for various third-party advertisers on Web sites owned by the partners on a gross or net basis?
Analysis: Should Spider record the revenue it earns from placing ads for various third-party advertisers on Web sites owned by the partners on a gross or net basis?
FASB Accounting Standards Codification (ASC) 605-45-45 (Other Principle Agent Considerations) provides guidance for determining how an entity should...

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