Trueblood case by Deloitte - Case Study

Memorandum

To:

From:

Date: October 18, 2020

Re: Hi-Tech Commerce Co. (HTC)

Facts

Hi-Tech Commerce Co. (HTC) sells and provides service of efficient end-to-end communications and IT systems and solutions. One of the company’s key products and services includes Telecom and IT hardware (hardware and equipment). HTC maintains premium resale relationships and certifications with a variety of branded technology manufacturers, which allows HTC to provide a wide array of telecommunications and IT infrastructure equipment to meet the needs of its customers. 

For the sale of hardware and equipment, HTC engages with customers to determine the best solution for a customer’s hardware needs. After HTC finalizes the combination of products that will fulfill a customer’s requirements and determines the price, the customer submits a purchase order to HTC and the company places the order with the manufacturer. 

Once the customer’s equipment needs are identified, HTC prepares a bill of materials and a quote for the customer. While the company may develop various solutions that meet the customer’s requirements, the ultimate selection of the hardware and the manufacturer that will provide the hardware is at the sole discretion of the customer. The solution selected by the customer determines which manufacturer HTC will use. 

HTC’s return policy states that the company will only accept returns if it has return rights with the manufacturer. HTC’s sales representatives assist customers with (1) determining the manufacturer’s return policy and (2) communicating with the manufacturer regarding return requests.

Objective 1

Identify the distinguishing factor that should be considered when determining whether Hi-Tech Commerce Co. (HTC) is acting as a principal or as an agent.

Guidance

ASC 606-10-55-36 through 55-40 provides guidance on determining whether an entity’s status is a principal or an agent.

ASC 606-10-55-36 states that in a performance obligation when an entity delivers goods or services to a customer then the entity is considered a principle. Whereas, when an entity arranges a party to provide those goods and services to a customer then the entity is considered an agent. In each specified goods or services promised to a customer, an entity should determine whether it is a principal or an agent. An entity can be a principal or an agent in a contract if it involves more than one specified good or service.

ASC-606-10-55-36A states to determine the nature of the obligation, an entity should identify the specified goods or services to be provided to the customer and assess whether it controls each of the specified goods or services before transferring it to the customer.

ASC 606-10-55-37 states that an entity is a principal if it controls the legal title of the specified good or service before transferring it to a customer. In this case, the entity can satisfy its performance obligation to delivering goods or services itself or by using another party.

ASC 606-10-55-37A states when a party is arranged to provide good or service to a customer, a principal entity should control one of the following aspects of a performance obligation.

a. An asset or good from other parties to provide to the customer.

b. A right to a service provided by other parties that provides the entity with the ability to direct the service to the customer on the entity’s behalf.

c. A good or service from another party which is combined with other goods or services before providing specified goods or services to a customer.

ASC 606-10-55-38 states an entity is an agent if the performance obligation is to arrange another party to provide specified goods or services to a customer. An entity that is an agent does not control the specified good or service before it is provided to the customer.

Solution

The distinguishing factor that should be considered when determining whether HTC is acting as a principal or as an agent is provided in ASC 606-10-55-36 through 55-40. In this case study, factors to consider when making determination are

· Whether manufacturer or HTC controls the legal title of specified goods or services before transferring to a customer.

· Whether HTC control the right to service provided by other parties to the customer.

· Whether HTC combines good or service to good or service from another party before delivering specified goods or services to the customer.

Objective 2

Identify indicators that should be considered when determining whether HTC controls the specified good or service before it is transferred to the customer.

Guidance

ASC 606-10-55-37 states that an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily have to control a specified good or service if the entity obtains a legal title for the good even if it is momentarily before transferring to a customer.

ASC 606-10-55-37A states when a party is arranged to provide good or service to a customer, a principal entity should control one of the following aspects of a performance obligation.

a. An asset or good from other parties to provide to the customer.

b. A right to a service provided by other parties that provides the entity with the ability to direct the service to the customer on the entity’s behalf.

c. A good or service from another party which is combined with other goods or services before providing specified goods or services to a customer.

Solution

Based on ASC 606-10-55-37 and considering three main indicators in ASC 606-10-55-37A, indicators that HTC controls the good or service before it is transferred to the customer are HTC has the legal title to the hardware while it is in transit even if the manufacturer is responsible for shipping and HTC never takes physical possession of the hardware.

Objective 3

Identify facts that support the view that HTC is the principal in the hardware product sales arrangement.

Guidance

ASC 606-10-55-37 states an entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. However, an entity does not necessarily control a specified good if the entity obtains legal title to that good only momentarily before the legal title is transferred to a customer. An entity that is a principal may satisfy its performance obligation to provide the specified good or service itself or it may engage another party (for example, a subcontractor) to satisfy some or all of the performance obligation on its behalf.

ASC 606-10-55-39 states indicators that an entity controls the specified good or service before it is transferred to the customer include, but are not limited to, the following:

a. The entity is primarily responsible for fulfilling the promise to provide the specified good or service. This typically includes responsibility for the acceptability of the specified good or service (for example, primary responsibility for the good or service meeting customer specifications). If the entity is primarily responsible for fulfilling the promise to provide the specified good or service, this may indicate that the other party involved in providing the specified good or service is acting on the entity’s behalf.

b. The entity has inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer (for example, if the customer has a right of return). For example, if the entity obtains, or commits to obtain, the specified good or service before obtaining a contract with a customer, that may indicate that the entity has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service before it is transferred to the customer.

c. The entity has discretion in establishing the price for the specified good or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity has the ability to direct the use of that good or service and obtain substantially all of the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices in order to generate additional revenue from its service of arranging for goods or services to be provided by other parties to customers.

Solution

HTC resells manufacturer maintenance contracts on equipment and hardware and provides installation services. HTC has a legal title of goods while in transit from manufacturer to customer even though HTC never has physical possession of goods. Also, HTC provides hardware installation services per customer request. Based on ASC 606-10-55-37 and ASC 606-10-55-39, HTC is the principal in the hardware product sales, as shown by an analysis of the factor below

· Sales representatives of HTC assist customers in determining the manufacturer’s return policy.

· HTC has legal title to the hardware

· HTC engages with customers to determine the best solution for a customer’s hardware needs. 

Objective 4

Identify facts that support the view that HTC is an agent in the hardware product sales arrangement.

Guidance

ASC 606-10-55-38 states an entity is an agent if the entity’s performance obligation is to arrange for the provision of the specified good or service by another party. An entity that is an agent does not control the specified good or service provided by another party before that good or service is transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified goods or services to be provided by the other party. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.

Solution

HTC is an agent in the hardware product sales, as shown by an analysis of the factor below

· The manufacturer is responsible for transporting the goods, including determining when to ship, the method in which the goods are shipped, and the shipping carrier.

· HTC’s return policy states that the company will only accept returns if it has return rights with the manufacturer. 

· Discounts that manufacturers provide to HTC vary based on the level of certifications, volume of business, and manufacturer’s promotions. 

Objective 5

Determine whether HTC should record revenue for the sale of its hardware products on a gross or a net basis under ASC 606.

Guidance

ASC 606-10-55-37B states when (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred.

Solution

Analysis in solution 3 and facts supports the view that HTC is a principal in the hardware product sale. Therefore, based on ASC 606-10-55-37B, HTC should record revenue from the sale of its hardware products on a gross basis.

Reference FASB. (n.d.). Accounting Standards Codification. Retrieved October 2020, from https://asc.fasb.org/link&sourceid=SL51788753-203046&objid=123410239