A COMPARATIVE STUDY ON THE ACCOUNTING PROCEDURES BY FLASH SALES

MARKET REGARDING THEIR REVENUE RECOGNITION

A Thesis Presented to the

UST-AMV College of Accountancy

University of Sto. Tomas

In Partial Fulfillment

of the Requirements for the Degree of

Bachelor of Science in Accounting

By

Group 8: Section 4A4

Marie Josephine Cabantog, Stephanie Janel Co,

Jefferson Lexus Jonson, Eunice Lim,

Natasha Monica Ong

Chapter 1: Problem: Rationale and Background

Introduction

Flash sale, or deal-of-the-day, is an ecommerce business model that had risen

popularly in the internet today. Offering potential customers with high discounted

products and services, the said model continually expands up to date, with many

companies trying such tactic to win an easy customer by the hour.

Websites offering a flash sales service let potential customer sign up for an

account for them to buy different deals flashed in the home page. These deals are

online coupons or vouchers that have a high discount rate for a product or service

offered by different companies, often lasting for a maximum number of slots and hours

in which it would be availed.

For the past nine years, flash sales have existed and with different companies

ready to edge out the competition, the said business model will continually grow, having

forecasted to have a customer spending in the US of about $4 billion (Kelsey, 2011).

Within these factors that questions about proper accounting procedures, such as

revenue recognition standards, be raised not just on transacting companies but also to

website companies offering these flash sales services. Being new to the market, the

underlying question goes to the proper revenue reporting standard to be applied in the

said business model and if such standard is being observed uniformly by companies

today.

Furthermore, it is also of question as to the transparency of each transaction and

revenue recognized, having high discount rates offered by companies and having

different cost that goes along with the transactions. The credibility of each transaction is

the put to the test.

Research Question

This study was conducted for the purpose of determining what accounting

procedure and what accounting standards are being used by the companies involved

during the period of research. Specifically, the study attempted to answer the following

questions:

What accounting procedures and standards are applied by transacting

companies and host websites in reflecting their revenues and discounts? Considering

the absence of such transaction on existing local standards, are companies uniformly

applying a certain standard that would reflect revenues properly? Do the host websites

and the transacting companies share a principal/agent relationship?

Theoretical Framework

IFRS has some provisions regarding promotional ventures by a company to

generate customers, such as loyalty programs, premiums and coupons, and gift

certificate. However, these standards do not define, in its entirety, the proper accounting

procedures done on flash sales transactions; flash sales transactions, being viewed as

a combination of these standards.

IAS 18, on the other hand, covers the general revenue recognizing standard; in

this standard, companies are guided as to when revenue may be recognize or when

should it be deferred.

FIG 1.1 General measurements of revenues according to IAS 18.

IAS 18 shows the basic revenue recognition standard. This standard basically

shows the accrual and/or deferral of revenue.

There are two types of recognizing revenue, accrual and cash basis.

Under accrual basis, the revenue is to be recognized by the seller only when the

rewards and benefits related to the items sold or service provided is transferred, where

the amount can be estimated reliably and when it is recoverable.

Revenue is recognized in selling goods when the risk and rewards associated to

the goods are transfered to the buyer. When goods are sold on credit, the revenue is

recognized along with a receivable. In case of services, revenue is recognized on the

completion of the service specified in the contract.

Revenue is recognized on the basis of stage of completion of the services

specified in the contract in case of the rendering of services. Any receipts from the

customer in excess or short of the revenue recognized in accordance with the stage of

completion are accounted for as prepaid income or accrued income as appropriate.

Under the cash basis, revenue is recognized when the cash is received.

The researchers, now, would want to have a comparative analysis of the

standards used by companies practicing flash sale, and would want to cover the

appropriateness of IFRS based standards on flash sales. As mentioned before, these

IFRS based standards are limited to a certain nature of transactions. Flash sales, being

new to the market, would test the effectiveness of said standards—whether they are

sufficient to cover the transactions present on the said sales or there is a need to

develop a new reporting standard more appropriate to use on such transactions.

Though IFRS covers accounting for these types of transactions, the inherent limitation

to it is in the nature of these incentive programs. IFRS based standards focuses on

certain types of transactions

Conceptual Framework

In order to evaluate the companies’ accounting principles as to revenue

recognition, the researchers have come up with a conceptual framework which will

weight its differences.

The researchers will draft a survey which will be based on generally accepted

accounting standards. Through here, the researchers will seek for the differences of

each company as to their revenue recognition. This will be then the basis for the

researcher to evaluate each company’s accounting principle in recognizing their

Based on this principle, the company’s

_______ ‘s Accounting Policy is more appropriate.

Difference

Accounting Principles

vs.

Accounting Principles

Company BCompany A

Principle

revenue. Using the generally accepted accounting principles, the researcher will be into

a conclusion on which accounting principle is more appropriate in the flash sales

market.

Significance of the Study

The researchers consider this study beneficial, not only to themselves, but also

to different companies that are affected by flash sales through assisting them what

proper accounting procedure to apply in different transactions covered by flash sales.

This may help them have a better judgment on reporting properly the different accounts

affected by each transaction, especially revenue-related accounts.

The researchers also believe that this study is significant for companies hosting

flash sales website. This may guide them in assessing each transaction faced by their

website and how transparently they may report revenue for different stakeholders.

This research may also be of interest by people in the Board of Accountancy

(BOA). This research may help them analyze existing accounting standards and let

them deem whether to create or modify existing standards for the fitting of flash sales

transactions.

This research is also may also be valued by those in the academe and the rest of

the student body. This research seeks to sustain critical thinking on students and

professors. This research hopes to generate opinions on both students and professors

regarding transactions on flash sales.

Mostly, this study would be beneficial for the development of the researchers as

they gain more knowledge and expertise on the said issue.

Scope and Limitations

The research focuses on selected companies that use flash sales as a marketing

strategy and selected companies that host flash sales.

Furthermore, the study is only a comparative study about accounting procedures

and accounting standards used by these companies. This study only seeks whether

companies use a uniform standard as to the accounting of transactions, and if so, the

study also seeks the said standard that is applied on those transactions.

The research focuses only on the revenue recognition aspect and related aspect

of each transaction. The study does not cover other accounting matter such as

inventory accounting.

Though the research seeks a uniform standard to be applied on transactions

done in flash sales, especially revenue recognition standard, it does not aim to suggest

a specific standard on the said matter, considering the age of this business model in the

country and further developments in accounting procedures.

Hypothesis

1. Both the transacting companies and host websites are using IFRS based

standard in accounting for revenues under flash sales transactions.

2. Both transacting companies and host websites are not using IFRS based

standards in accounting for revenues under flash sales transactions but use a

common standard adopted from other GAAP.

3. In its absence in the local standards, there is no uniformity as to the standard

being applied by each company on flash sales transactions.

Assumptions

1. Companies may adopt other standards in the absence of such standard in the

IFRS.

2. Companies are not limited as to the adoption of US GAAP and may adopt other

GAAP.

3. There is an inherent limitation as to the use of IFRS based standards on the

transactions done on these transactions.

Definition of Terms

1. Flash sales: an online marketing activity that uses social media to transform

discounted ecommerce promotions into social buying experiences (Boon, Wiid,

&DesAutels, 2012).

2. IAS 37: It sets out the accounting and disclosure requirements for provisions,

contingent liabilities and contingent assets, with several exceptions (IFRS, 1999).

3. IAS 18: outlines the accounting requirements for when to recognize revenue

from the sale of goods, rendering of services, and for interest, royalties and

dividends. Revenue is measured at the fair value of the consideration received or

receivable and recognized when prescribed conditions are met, which depend on

the nature of the revenue (IFRS, 1993).