Landline Corporation, Case Study Example

This case is about Landline Corporation, a publicly-owned telecommunications firm that provides routing and billing services to specialty phone lines. As part of the firm’s contract with PRU, a provider of psychic services, Landline provides two services: 1) The entity routes the calls from callers to a psychic from PRU; 2) The entity bills for the call and transfers money to PRU based on the usage of psychic services. This memo will first explain general principles surrounding revenue recognition for entities that provide services for another entity; the memo will then explain how Landline should account for these transactions.

One of the main issues governing this case is revenue recognition. In particular, the following question is essential: should the entity recognize the gross revenue earned from customers that call the psychic hotline ($5 per minute) or, should the entity recognize the net revenue earned from the all ($1 per minute)? The FASB does not, according to my research, provide explicit guidance on this issue. That is, it does not specifically address how phone routing services should bill for services rendered to customers. However, the FASB Board does provide general guidance on revenue recognition measures that might be relevant to this case. Indeed, Board minutes from a 2009 meeting state that the revenue recognition decision should be based upon whether the entity: 1) provides the goods and services in question or; 2) arranges for the good or provision of services. Although there isn’t exact reference to the telecommunications (service connection) industry, the facts presented in the stimulus lead to the interpretation that the entity is providing the latter service: routing the call to be sent to a “psychic” who then provides the services in question.

There is a complicating factor, however, in the entity’s revenue recognition practices. Indeed, if the entity simply routed the call and had no further involvement in the transaction, one could (rightly) suggest that entity should just recognize the net revenue ($1 per minute) in the firm’s profit and loss statement. However, the entity essentially bills for the call-provides services technically during the entire call, although not the main service- and then transfers money to the PRU. This element suggests that the entity probably needs some accounting measure of the gross amount billed (otherwise the PRU would have no record) in order to delineate between gross revenue and net billing.

Based on the admittedly opaque guidance from the FASB, the entity should recognize the revenue received from routing calls to psychics in two different ways. Thus, the total gross revenue for each minute of provided service should be recorded. However, that aggregate total should then be disaggregated on the profit and loss statement. The two categories proposed for revenue recognition are: 1) revenue related to billing of other entities ($4 per minute transferred to PRU); 2) revenue received for services related to routing ($1 per minute).

This “bifurcation” method is arguably a gray area not fully covered in the extant literature. Indeed, if the entity was simply providing routing services to its customer that would likely obviate the need to record gross revenue as the entity is not related to the provision of any good or service. The billing function, however, requires a transfer (remittance) of $4 per minute to the PRU. This function complicates the entity’s role in the transaction. Thus, the most transparent way out is likely to break out the two different revenue categories on the firm’s profit and loss statement in order to record which money is being transferred and which money is being kept.

Source

FASB Codification Online.

FASB “Revenue Recognition” Board Meeting Minutes, 2009. Available at: http://www.fasb.org/revenue_recognition.shtml.