Revenue Recognition: Barter Transactions

Should exchanges or barter (non-monetary exchanges, that is no cash or cash equivalents are exchanged) transactions of products or services be recorded as revenues and expenses? The basic issue is whether the earnings process has been completed. Measurement is the next issue: Should revenue and expense be recognized at the fair value of the products or services surrendered or received in the exchange, or at the carrying or book value of the exchanged product or service. The fair value of the exchanged products or services may not be readily measurable or available.

When the exchanges involve dissimilar products or services, the earnings process has been completed and revenue and expense recognition at fair value (must be determinable within reasonable limits) is appropriate. However, this recognition is not permitted for exchanges of similar productive assets. See APB Opinion (APBO) No. 29, Accounting for Nonmonetary Transactions. The Emerging Issues Task Force (EITF ) of the FASB has deliberated many issues related to barter transactions. EITF Issue No. 99-17, Accounting for Advertising Barter Transactions, focused on exchanges of advertising and permitted revenue and expense recognition at fair value only if the fair value of the advertising surrendered was available from the company’s historical practice of receiving cash or similar instruments for similar advertising from parties not related to the counterparty in the barter transaction. The EITF also noted that offsetting exchanges of cash and cash equivalents could not be used as evidence of fair value.

Where the fair value of advertising surrendered cannot be established within the stringent rules of EITF 99-17, the transaction must be recorded at the book or carrying amount of the advertising surrendered, which is expected to be zero. Barter transactions have spread far beyond exchanges of advertising by Internet companies. Recent transactions have included exchanges of software, databases, broadband capacity, and fuel in addition to many other products and services. EITF Issue No. 01-02, Interpretation of APBO No. 29 , provides rules that will enable companies to determine whether barter transactions are monetary or non-monetary transactions. When the cash exchanged represents 25% or more of the fair value of those exchanges, they must be treated as monetary transactions.

Where the earnings process is complete, monetary and non-monetary transactions are recorded at the fair value of the products delivered or services received, whichever is more readily determinable. Fair value must be established by reference to the recent history of cash sales of the same products or services in similar sized transactions. Nonmonetary exchanges not representing the culmination of an earnings process are recorded at the carrying amount of products delivered, which is generally zero.

EITF Issue No. 00-24, Revenue Recognition: Sales Arrangements That Include Specified-Price Trade-in Rights, concerns transactions involving sales of products and services that include trade-in rights towards future purchases. The issue addresses trade-in rights that are determined at delivery as a fixed amount or percentage of the original sales price and available for a specified period of time.

A majority of the Task Force members take the following view: No adjustment to revenue is required and no liability must be recognized for the trade-in right, if

1. On the sale date, the value of the trade-in right is equal to or less than the estimated fair value of the product at the trade date, and
2. The purchase price of the new product requires payment of a significant incremental amount in addition to the trade-in credit.

Post-sale date accounting: A loss must be recognized when it is deemed probable that a loss will be incurred on the exercise of the trade-in right.

Note that this not an EITF Consensus and the Task Force continues to discuss the issues.