No One-Size Revenue Accounting for All App-Based Companies
September 21, 2021
First published on Bloomberg Tax, by Nicola White.
There isn’t a one-size-fits-all revenue accounting formula for platform-type companies whose apps connect customers to deliver takeout or offer taxi rides.
There may be subtle, but important, differences in the business models of seemingly similar app-based companies. The differences affect accounting, and can lead to companies reporting different top lines in their income statements, Securities and Exchange Commission Corporation Finance Chief Accountant Lindsay McCord said Tuesday.
“Often I hear, ‘Well, this company, you let go over here is following this revenue recognition policy, but you’re still tying me up’,” McCord said at a Workiva Inc. (NYSE:WK) conference. “Often the people on the phone who are talking to me may be securities counsel and not even an accountant. They’re not even appreciating the difference in the business between the Company A and Company B.”
The distinctions can mean a lot when it comes to companies tallying revenues, as prescribed in the Financial Accounting Standards Board’s ASC 606 and its international counterpart, IFRS 15. Depending on how a company operates and how it defines its customers, companies with similar business models, such as Uber Technologies Inc. or Lyft Inc., can have higher or lower revenue results depending on how they account for things like perks and incentives they offer to customers.
The definition of a customer matters, too. Some app-based companies may consider the customer to be the person who orders a pizza, while others consider the customer to be the delivery driver. The judgment calls can be so complex that many companies voluntarily consult with the SEC, or pre-clear their accounting, before they commit to it.
The complexities came to the forefront in August, when Grab Holdings Inc., a Singapore-based ride hailing and food delivery company that plans to go public this year, announced it had to slash its full-year 2020 revenue by more than half. The company revised its previously reported revenues after a voluntary review with the SEC. Grab had earlier tallied customer perks and incentives as marketing expenses instead of deducting them from its overall revenue, the company said.
Grab initially considered its drivers and merchant partners its customers, which led to the company treating discounts as marketing expenses. But the market regulator came to a different conclusion. Those who order takeout or hail rides from their phones are Grab’s customers, the SEC said, according to Grab. This decision meant Grab had to report less revenue.
McCord didn’t mention any company names in her remarks on Tuesday.
She said companies need to make sure every disclosure they make is carefully evaluated to make sure a last-minute revision of, for example, a business’s description doesn’t materially change the revenue recognition accounting policy. The SEC will carefully review not just the financial statements, but also the websites of the companies, she said.
“Involving the right people throughout the process—even when time is crunched—and actually making sure that your business as you’ve described it in the document matches the accounting—that cannot be stressed enough,” she said.
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