Suggested Solution:

User Analysis
Users Objectives
Danny and Manny Evaluation of purchase offers
Prospective Purchasers Evaluation of purchase offers

The main use on the financial statements, in the foreseeable future, is in regards to the assessment of
the purchase price offers. Accordingly, the revenue and net earnings figures are important to both the
current and prospective owners.

Fantasyfootball.net
Analysis of Accounting Issues and Assessment of Purchase Price Offers

Note: Also relate all items below to the users and their objectives

1) Revenue Recognition of Annual Magazines

Issue: When should the revenue be recognized for the annual magazines that have been shipped to
Books. Additionally, how should the revenue be measured? Specifically, the revenue recognition issue
can be identified as follows:
 Measurable: should the revenue be recognized at $3, $3.50 or $4.00 per magazine;
 Collectible: Yes – magazine subscriptions are paid for upfront, reducing collectability issues;
 Performance complete: The right of return clause for any unsold magazine makes it difficult to
determine when performance has been completed.

Implication: The recognition and measurement of revenue will impact the revenue and net earnings
reported in the financial statements, and therefore, impact the purchase price.

Alternatives:
Because the measurement of the revenue is a function of the total number of units sold (recognized),
recognition will be discussed first.

Alternative 1 – Recognize 100% of revenue on when magazines are shipped

 Performance can be deemed to be complete as the magazines have been developed,
printed and shipped.

Alternative 2 – Recognize revenue as Books sells the magazines

 Performance can be deemed to be complete as Books sells the magazine because any
unsold magazines can be returned to FFN for a full refund. Therefore, FFN maintains the
risk and reward of ownership until Books sells the magazines.
 Books could be contacted to determine how many books were sold as of August 31. Given
that Books is such a large company, it is reasonable to assume that they have a
sophisticated information system to track their inventory.
 Alternative 3 – Recognize revenue based on historical trends
 Performance can be deemed to be complete when the books are shipped based on
historical trends of the percentage of magazines sold.
 Historical records indicate that 70% of magazines are sold prior to August.
 Therefore, a total of 28,000 (70% × 40,000) magazines could be considered to be sold.

Recommendation
 Alternative two or three would be the most consistent with ASPE. If the historical trends are
consistent with the current year, then there should not be a major difference between
alternative two and three. However, if the current year’s sales are higher than the prior year,
alternative two would be more favourable.
 Based on the information available, alternative three should be adopted at this time. This would
result in 28,000 magazines being sold.
o Therefore, revenue per magazine should be recorded at $3.50 per magazine.
o This will result in revenue of $98,000 (28,000 × $3.50) being recorded as opposed to the
$120,000 recorded.
 If additional magazines are sold such that the per price amount changes, that change could
recorded in the future period.

2. Annual Magazine Redesign Costs

Issue: FFN incurred $95,000 in expenses in the current year to upgrade the magazine graphics, layout,
etc. Manny has capitalized $45,000 of these costs as an intangible asset. Should this be recognized as
an asset or expensed?

Implication: Expensing the costs would reduce net earnings and therefore negatively impact the
purchase price.

Alternatives
Alternative 1 – Continue to recognize as an asset
 It could be argued that the costs met the definition of an asset:
o embodies a future benefit to contribute to future cash flows because FFN now
has a new design for the magazines that will add to cash flows.
o has a benefit that can be controlled (used or sold) by FFN;
o is the result of past transactions (costs incurred to redesign).

Alternative 2 – Recognize the costs as an expense

 It could be argued that the costs do not met the definition of an asset given that any
future benefits from the any future sales are too remote and uncertain.

Recommendation
 I would recommend that the costs be recognized as an expense, as opposed to being capitalized
as an asset, since the costs are more likely to not meet the definition of an asset (alternative
two). This will have a negative impact on the purchase price.

3. Website Redesign Costs

Issue: FFN incurred $95,000 in expenses in the current year to redesign their website. Manny has
capitalized the entire amount $95,000 of these costs as an intangible asset. Should this be recognized as
an asset or expensed?

Implication: Expensing the costs would reduce net earnings and therefore negatively impact the
purchase price.

Alternatives
Alternative 1 – Continue to recognize as an asset
 It could be argued that the costs met the definition of an asset:
o embodies a future benefit to contribute to future cash flows because FFN now
has a new website which will add to cash flows. Given the nature of the
business, the website is a vital asset.
o has a benefit that can be controlled (used or sold) by FFN;
o is the result of past transactions (costs incurred to redesign).

Alternative 2 – Recognize the costs as an expense

 The program development costs and advertising costs do not meet the definition of an
asset; advertising costs should not be capitalized.

Recommendation
 I would recommend that the advertising and programming costs be recognized as an expense,
as opposed to being capitalized as an asset, since the costs are more likely to not meet the
definition of an asset (alternative two). This will have a negative impact on the purchase price.

4. Revenue Recognition for Early Bird Registrations

Issue: When should the revenue be recognized for the early bird registration.

Implication: The recognition of revenue will impact the revenue and net earnings reported in the
financial statements, and therefore, impact the purchase price.

Alternative 1 – Recognize Early Bird Registration upfront

 Performance can be deemed to be complete as the fee is non-refundable.
 In addition, no additional costs will be incurred to service the contract as the vast majority
of all costs are fixed and not variable.

Alternative 2 – Recognize revenue on the basis of the services provided

 Performance can be deemed to be complete on a yearly basis as the service is provided to
the users. Even though the contract is non-refundable, performance can be seen as the
offering of the fantasy football service to the users which only occurs over time.

Recommendation
 The first alternative takes more a legal form perspective, whereas the second alternative is more
consistent with the nature of the agreement’s service offering.
 Therefore, alternative two would be the most consistent with ASPE; however, this would result
in a reduction in the revenue and net earnings of $75,000 ($15 × 5,000).
 5. Revenue Recognition of Three Year Memberships
Issue: When should the revenue be recognized for the three year membership.

Implication: The recognition of revenue will impact the revenue and net earnings reported in the
financial statements, and therefore, impact the purchase price.

Alternative 1 – Recognize Three Year Registration upfront

 Performance can be deemed to be complete as the fee is non-refundable.
 In addition, no additional costs will be incurred to service the contract as the vast majority
of all costs are fixed and not variable.

Alternative 2 – Recognize revenue on the basis of the services provided

 Performance can be deemed to be complete on a yearly basis as the service is provided to
the users. Even though the contract is non-refundable, performance can be seen as the
offering of the fantasy football service to the users which only occurs over the three year
period.

Recommendation
 The first alternative takes more a legal form perspective, whereas the second alternative is more
consistent with the nature of the agreement’s service offering.
 Therefore, alternative two would be the most consistent with ASPE; however, this would result
in a reduction in the revenue and net earnings of $140,000 ($20 × 7,000).

Purchase Price Assessment

Based on the above adjustments, the following is an analysis of the purchase price offers:

Net Revenue Earnings Selling

Revenue Earnings Multiple Multiple Price
    2014 2014   2 4   Average
2,145,00
Draft Statements 975,000 536,250 1,950,000 0 2,047,500
1) Magazine revenue reversal -120,000 -120,000 -240,000 -480,000 -360,000
- record revenue based on history 98,000 98,000 196,000 392,000 294,000
2) Early Bird Registration -75,000 -75,000 -150,000 -300,000 -225,000
3) Three Year Registration reversal -140,000 -140,000 -280,000 -560,000 -420,000

4) Magazine redesign costs 0 -45,000 0 -180,000 -90,000

5) Website redesign costs 0 -38,000 0 -152,000 -76,000

Revised amounts 738,000 216,250   1,476,000 865,000   1,170,500

The above analysis reveals that, after the adjustment, the purchase price would be approximately $1.1
million, which is much lower than the $2 estimated by Danny and Manny.