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How do I account for a revenue share with a vendor.

We entered into a revenue share agreement with a vendor in which we buy the product from them and then sell it. They are entitled to 50% of the revenue, which is then reduced by the cost of the product we purchased. Ex: we sell $40k of widgets for which we paid $5k for. We then owe them $40k x 50% less the $5k, so $15k. How should that be recorded? My thought is it should be the invoice they send us would be COGS for $15k, is that correct or would it be a reduction to sales? Also we have sales commissions on these products for which it sounds like the reps commissions should be reduced. Does that sound correct? I have searched for articles and anything on this and I am coming up with nothing.

Thank you in advance for any assistance!

Answers

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

Anon,

Regardless of what you decide in the end, ask your auditor. Generally, they're the expert (on what they will later decide)
Personally, I see it as COGS. It's a variable cogs, but it is COGS. It is not unlike Contingent Rent (which is not contra-revenue...it is rent).

My bias comes from: what does a third-party care about when looking at your top-line? They care about your % of the market. They care about how much customers are compensating your for the widgets. Contra-revenue, in this case, would disguise that and make your operations less transparent. I generally like to reserve contra-revenue for things that affect the net amount that the customer remits to you (returns, discounts, and allowances).

Separate issue: sales commissions. Regardless of how you account for this stuff, your comp plan should account for the treatment appropriately. EG; don't cut commissions in half because the accounting treatment changed. That would not make your sales team happy. Similarly, don't double it for similar reasons. Amend the sales plan to accommodate the (potential) discrepancy between business logic (the amount of net revenue generated by the sales activity, whether through contra-revenue or cogs), and the top-line reporting decision.

Cheers

Keith

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