accounting

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ACC 305 Research and Writing Assignment #2: Revenue Recognition

Due Date: Thursday, November 9 at 3:00 pm

Soft Copy: Upload your file to Isidore; Hard Copy: Bring one printed copy to MH 405

Assignment Goals:

- Obtain research experience in the Accounting Standards Codification

- Obtain experience using SEC filings and the SEC website

- Practice writing concise accounting-related deliverables

Points: 10 points - The memo will be graded for content, research, and writing. See the below

information for expectations. Late submissions that arrive during class or within 2 hours of the

due date and time will receive a 10% penalty. Submissions after this time will not be accepted.

Note: You may complete the assignment on your own or with one other person in the course. If

you complete the assignment with a classmate, you must turn in one, joint assignment.

Assignment Description:

Scenario:

After graduating from the University of Dayton, you joined the accounting staff of Potbelly

Corporation (the Company). Your supervisor has asked you to evaluate specific questions about

the application of soon-to-be-implemented Topic 606. To address these questions, your

supervisor has asked you to perform research in the FASB’s Accounting Standards Codification

and write a research memo.

Tip: Before you get started, review memo examples on Isidore, as well as Appendix 1. They will

provide you with a sense of the appropriate tone and detail to include in a research memo.

Memo Format:

 Prepare a memo using the format in Appendix 1 attached.

 Length: Your write-up should be no more than 3 pages in length

 Spacing: Single-spaced

 Font size and Style: 12 point Times New Roman

 Margins: One-inch on all sides

 Footer: Insert page numbers in the footer.

 Cover Sheet: A cover sheet is not necessary.

 Use the APA format to cite the sources. A reference page is not counted as a page.

 An appropriate in-text reference to the ASC is generally in the following format: XXX-XX-

XX-XX. The first time you reference a topic and subtopic (XXX-XX) in your memorandum,

it is helpful to use words to describe the topic and subtopic. For example, one of your sample

memos states “ASC 605–45 (Revenue Recognition—Principal Agent Considerations)”.

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 Provide proper citations and references. Keep in mind that your textbook is not an appropriate source to cite in this assignment. References should be to the Accounting

Standards Codification.

8 Step to Approach an Accounting Research and Memo Writing?1

Step 1:

Understand the facts/background of the transaction(s).

The below resources provide appropriate information for the memo background AND provide

appropriate information for background on the research issues. Where appropriate, use these

resources to understand the company and the background for each issue. (Tip: You might want to

glance through Step 2 before reading so that you know what the issues are.)

Resources for understanding the facts/background:

Perform the following to develop an understanding of Potbelly’s business and its revenue

streams:

 10-K - Go to www.sec.gov  Filings  Company filings search to find the December 25,

2016 10-K for Potbelly Corporation (Ticker symbol: PBPB). Recall that a 10-K is filed

weeks to months after year end so a filing date is later than a year-end date.

o Read the first few pages of Item 1. Business of Potbelly in the 10-K to obtain

background on the Company’s business. Your understanding of the company’s

business is necessary to discuss the below issues. I have not provided all of the details

in the prompt, as I would like for you to navigate the 10-K. Give particular attention

to Page 10 of Item 1 – Franchising, which describes the services provided to

franchisees.

o Read Part (q) Revenue Recognition of Note (2) Summary of Significant Accounting

Policies to understand Potbelly’s current revenue streams and recognition policies

prior to implementation of Topic 606. (Note: Revenue recognition after the

implementation of Topic 606 might be similar or different than the description

currently provided by the Company.)

 Resources for Royalties and Fees - Understand the Company’s franchise royalties and fees

by performing the following

o Watch a short Investopedia video if you are unfamiliar with the franchise concept:

http://www.investopedia.com/video/play/franchise/

o Obtain information on the dollar amount of a typical investment (franchise fee) paid

by a franchisee to the Company (the franchisor or Potbelly Franchising LLC)

(https://www.potbelly.com/franchising/investment)

o Watch a short Investopedia video if you are unfamiliar with the royalty concept:

http://www.investopedia.com/terms/r/royalty.asp

1 Steps are primarily from Guide to Intermediate Accounting Research by Shelby Collins.

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o Obtain information on the typical calculation of royalty fees paid by a franchisee to

the Company (https://www.potbelly.com/franchising/faq)

 Potbelly Perks - Understand Potbelly Perks, a customer engagement or loyalty program

launched in 2017: https://www.potbelly.com/perks

 Gift Card Breakage – Read a short Investopedia definition on gift card breakage:

http://www.investopedia.com/terms/b/breakage.asp

Note: It is not acceptable to copy and paste language from the above sources. Use your own

language.

Step 2: Define the problem. That is, identify the “researchable question”.

As you are new to accounting research, I will give you the questions to research, but Professor

Stover likely will not provide you with questions since that is more “real world”. Even though I

am giving you the questions, you do need to make sure you spend time on Step 1. You cannot

appropriately answer the questions without understanding the company’s business or the fact

pattern. In other words, do not skip over steps. Following the steps really does help! In this

assignment, your supervisor has instructed you to consider the following questions:

 Issue #1: Does the Company have more than one performance obligation to the

franchisee in return for the franchise fee it receives at the beginning of the franchise

contract?

 Issue #2: Does a loyalty or discount program such as Potbelly Perks create a

performance obligation at the time that customers earn points towards future rewards?

How does this impact the allocation of the transaction price, if at all?

 Issue #3: When should the Company record revenue from gift card breakage?

Step 3: Stop and think: Based on what you know from class (and your general intuition

from the conceptual framework), what accounting treatment will likely be appropriate?

You do not need to include this step explicitly in your memo, but it helps with the next step.

Often, the item you are researching might be familiar to you, but you are uncertain about the

precise answer. Using what you know to focus your search can be incredibly helpful. Your

textbook and EY’s Technical Line can be helpful to you, but keep in mind that neither can be

used to support your conclusions.

Step 4: Search potentially relevant sources of guidance, copying any relevant guidance into

a Word document

For this class, you will use the Accounting Standards Codification for research. The ASC is

available at http://aaahq.org/ascLogin.cfm. (User ID: AAA51174 and Password: N34FxPJ). You

might not use all research that you find, but copying any possible relevant guidance into a Word

document will help you to keep track of what you do find. Make sure you include the location of

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the guidance in your working document. It will help with writing your final memo. Here are

some considerations for your search:

 Browse the topic in the codification that you feel will be most relevant

 Follow all leads that appear relevant. For example, if the codification uses a term you do

not know, make sure you dig in by following any references to other parts of the ASC or

going to the ASC glossary to understand the definition of the term and whether it applies

to your setting.

 Review the guidance you have collected and weed out sources that appear less relevant

Please keep in mind that your textbook and EY’s Technical Line are not citable sources for a

research assignment. You may use them to help you with Step 3, but you cannot use them or

resources not mentioned in this document to support your conclusions.

Step 5: Analyze any alternatives you have identified, considering the applicability of each

one.

This step is not explicitly in your memo. However, try to keep track of your thought process as

you are weighing your alternatives. You will use that thought process in the next step.

Step 6: Determine which accounting treatment is most appropriate and document your

conclusion

After completing the first five steps, summarize your conclusion for each issue using two or

three sentences. Place your conclusion for each issue into the Conclusion sections of the memo.

Step 7: Justify and explain your conclusion

Step 7 focuses on writing. Break down the writing of the memo into separate parts. You do not

need to repeat information in the backgrounds. If it is mentioned once, you may assume that the

reader remembers it. Assume that the reader does not have access to the Potbelly website so you

need to explain Potbelly’s fact pattern in your memo.

Background and Facts of Memo: Summarize pertinent company background and state the

purpose of your memo in “Background and Facts”. See Appendix 1 and examples on Isidore for

suggestions. You do not need to dive into details here. Pertinent details can be provided in the

Background for specific issues. Finish this section by stating the purpose of the memorandum.

Background for Each Issue: Summarize important information for the reader of your memo in

the “Background” for Issue 1 (and then Issue 2). Act as if the reader knows nothing about the

situation. Any key facts pertinent to your ultimate issue conclusion need to be provided by you in

the background for the issue.

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Research and Analysis for Each Issue: This section is the most challenging section of the

memo to write. Carefully review the examples on Isidore and the tips in Appendix 1. In this

Section, consider the following:

 Use succinct quotes from your research to explain and support the reasons for your

conclusion.

 Explain and document the key factors at the Company that you considered when arriving

at your conclusion. Make sure you link these factors back to specific research that you

found.

 Most of all, make sure someone unfamiliar with the process can understand why/how you

arrived at your conclusion.

Please keep in mind that this is not a homework problem where you are evaluated on copying

and pasting the “right” research into the memo. Instead, this is a research and writing assignment

where you are evaluated on your ability to identify appropriate research, interpret the research

for the reader, and link that research back to your specific company situation to arrive at your

conclusions.

Step 8: Review your memorandum for appropriate content and writing

Items to Consider as You Self-Review Your Content

Your memorandum should be written in a manner that enables a person who is not involved with

the issue to understand the issue background, relevant research, and your interpretation of the

research.

 Would someone unfamiliar with the company and the issues be able to understand background on the company and the issues? In other words, are you providing the

appropriate company background to allow someone to understand the issues in the context of

the company?

 Do your research, your analysis, and your conclusion answer the question(s) being asked?

 Would someone unfamiliar with the research you are citing be able to understand what you found in the codification? Tip: You are encouraged to include well-cited quotes from the

codification.

 Would someone unfamiliar with the company and the research you are citing be able to understand how you arrived at your conclusions? In other words, does your analysis (i.e.,

your discussion) illustrate how your research applies to the specific company facts? Tip: Do

not make the reader “work” or require the reader to re-interpret the research. Interpret how

the research applies to the specific circumstances for the reader.

 Are your conclusions clearly stated?

 Does the research that you cited clearly lead to the conclusions that you provided?

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Items to Consider as You Self-Review Your Writing

Your write-up should be clear, concise, complete, free of spelling and grammatical errors, and

professional looking.

 Is your memo professional looking? For example, do you use the same font type and size throughout? Do you avoid “orphan” headings or subheadings? Have you removed the

“Appendix 1” heading from the memo template? Is a large quote from the codification

appropriately indented (see sample memorandums)?

 Do your tone and word choice fit your audience and the purpose of the memo (e.g., no contractions, no casual phrases, avoid use of “I” or “we”, avoid use of strong or

inflammatory words)?

 Is your writing grammatically correct?  Do you refer to a company as an “it” (correct) as opposed to a “they” (incorrect)?  Do you use “its” and other possessive words correctly?  Do you use “their”/“there” and other words that are often confused correctly?  Do you avoid sentence fragments?  Do you avoid run on sentences?  Do you use commas appropriately and where needed?

 Is your writing concise and easy to read? (Business memos do not require large words or complex phrases.)

 Do you avoid passive writing?

In addition, you may use writing support from the Knowledge Hub for this assignment. In

the Knowledge Hub, all UD students can receive free research and writing assistance on any

assignment, at any stage of the writing process.

Expectations for Writing and Research Assignment:

Acceptable Resources

 You may only use the resources mentioned above in this assignment. You do not need to cite the 10-K or sources mentioned above, but you do need to cite the Accounting Standards

Codification in the text (e.g., ASC XXX-XX-XX-XX).

 You must complete the assignment individually or with one classmate. You may not share your memo or your answers with other students. Using resources other than your textbook

and those resources mentioned in this assignment (e.g., classmates, parents, CPA friends,

other students’ prior course memos, assignments or resources that you find online) is a

violation of the Honor Code. See the syllabus and Honor Code to understand implications of

completing the assignment using unauthorized assistance.

Academic Honesty:

Here is some advice to help you avoid plagiarizing:

It is best to express the ideas you use in your own words. In the case of both individual and

group work, words or ideas that come from someplace or someone else must be cited: “A good

rule of thumb is this: Whenever you consciously borrow any important element from someone

else, any sentence, any colorful phrase or original term, any plan or idea—say so, either in a

footnote, bibliography, or parenthesis” (from “Academic Honesty in the Writing of Essays and

Other Papers,” Carleton College, 1990).

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Appendix 1

MEMORANDUM

To: The Potbelly Corporation’s Accounting Files

From: Student name

Date: Month Day, Year

Re: Accounting Issues Related to Revenue Recognition (Topic 606)

Background and Facts

Please see examples on Isidore for further ideas on what to include in each section. This section

can be a few sentences that provides background on the company. For example, is this a public

or private company? What is its primary business? What event (without going into a lot of detail)

has taken place that is the reason for evaluating the accounting issues that have arisen? It is

acceptable and encouraged to state at the end of this discussion “The purpose of the

memorandum is to….” Write the memo as of today. Your role, as a member of the accounting

department, is to research specific issues for the implementation of Topic 606 and how it applies

to Potbelly Corporation.

Issue #1: Does the Company have more than one performance obligation to the franchisee in

return for the franchise fee it receives at the beginning of the franchise contract?

Background

Make sure someone unfamiliar with the issue who has not read the company’s financial

statements can understand the issue at hand and the significance of the issue based on your

background. Describe pertinent facts that have happened in the real world. Then, describe any

relevant accounting decisions by the Company about Issue 1.

Conclusion

Tip: In a few sentences, summarize your conclusion for the issue. The next section (Research

and Analysis) describes the research you found and how you arrived at your conclusion. The

second part of the previous sentence is the analysis and is important.

Research and Analysis

Tip: Make sure this section includes 1) what you find in the codification (a well-cited quote is

acceptable) and 2) your interpretation of what you find in the codification including how it

applies to the Company and leads to your conclusion. Keep in mind that you want your memo to

be clear to someone who does not know the company’s issues at hand. Do not make the reader

work or re-think the issues.

Issue #2: Does a loyalty or discount program such as Potbelly Perks create a performance

obligation at the time that customers earn points towards future rewards? How does this impact

the allocation of the transaction price, if at all?

Issue #3: When should the Company record revenue from gift card breakage?