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Revenue recognition by Reseller (VAR) for service contract

What is the correct revenue recognition accounting by a reseller who resells e.g. 3 year service contracts (with service performed by the supplier, not the reseller). The reseller essentially purchase the service agreement from the supplier, and resell it at a mark-up to the end customer. Should the reseller recognize revenue over 3 year, or can we record revenue and COGS for the contract on day 1 when the customer is entitled to service? Many thanks!

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

My 2 cents....The cost of service (during the 3 years) is not borne by the reseller but the supplier and as such revenue should be recognized on day of sale (day 1). The reseller's cost is the cost of purchase of the service agreement. Matching revenue (amortized revenue recognition) and the 3 year service cost does not apply to the reseller.

I would look at the agreement between the "reseller" and the buyer and make sure about your statement that essentially, the reseller is purchasing the service agreement. Is there really a sale of service agreements between the supplier and reseller? Is this not just a commission type arrangement? Who receives the money from the end users and how is the supplier paid? etc. etc.?

Rino Patrick Unold
Title: Business Controller
Company: Fresenius Kabi
(Business Controller, Fresenius Kabi) |

Thought: If the binding relationship between Reseller and Client is 3 Years AND the contract between the Reseller and the Supplier is also 3 Years I would then (Cash and Revenue Recognition is very different) record my Supply Invoice as a Prepaid Cost under Assets and then e.g. book 1/36 of the Prepaid per Month on my PL as a Cost - same goes for the Service Contract between the Reseller and the Client. Here I'd record 1/36 of the Whole Contract a Revenue every Month - leaving the Remainder ofthe amount on Deferred Income. This approach is used in e.g. Insurance - where services and coverage often streches over longer periods of time.

If it's possible to make another "Trend line" than the 1/36 per month (e.g. season peaks etc.), then that can/should be used as the Trigger for COGs and Revenue recognition, in order to make/give the best/most correct picture of your P&L.

Cheers,
Rino

Adam Kuehl
Title: Controller
Company: Global Technology Resources, Inc.
(Controller, Global Technology Resources, Inc.) |

EITF 99-19...look at who the primary obligor is...i.e. it's not you...therefore you can reocognize all the profit up front...in fact you should recognize only the profit...in other words you should net the presentation of your revenue and COGS in your revenue line.

Nancy Ngan
Title: consultant
Company: Finance Consulting
(consultant, Finance Consulting) |

Thanks all for the input! In our case we resell a system and the 3 year support contract, and we provide installation and implementation. The 3 year support is provided by the system manufacturer. We have pricing influence on the whole deal (product and service), and we are ultimately responsible customer acceptability. So I think we may argue we do not meet the criteria of net reporting.

What are your thoughts? go either 1/36 of service revenue each month, or recognize gross revenue and cogs upfront without deferral because we do not incur any further cost of service?

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