Question:
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection,
validation,
indexing, and forwarding of submissions by companies and others who are required by law to file forms
with the U.S. Securities and Exchange Commission (SEC). All publicly traded domestic companies use
EDGAR to make the majority of their filings. (Some foreign companies file voluntarily.) Form 10-K
which includes theannual report, is required to be filed on EDGAR. The SEC makes this information
available on the Internet.
Required:
1. Access EDGAR on the Internet. The web address is www.sec.gov .
2. Search for the most recent 10-K’s of Orbitz and priceline.com. Search or scroll to find the
revenuerecognition note in the financial statements.
3. For each of the following types of revenue, indicate whether the amount shown on the income
statement is “net” or “gross” as those terms have been used with respect to revenue recognition in our
course, and briefly explain your answer.
a. Orbitz’s “merchant model” revenues.
b. Orbitz’s “retail model” revenues.
c. priceline.com’s “merchant revenues for ‘Name Your Own Price’® services.”
d. priceline.com’s “merchant revenues for ‘Price-Disclosed Hotel’ services.”
e. priceline.com’s agency revenues.
4. Consider your responses to 3a through 3e. Does it look like there is the potential for noncomparability
when readers consider Orbitz and priceline.com? Indicate “yes” or “no,” and briefly explain your answer.
Answer:
, Requirement 2
Excerpt from Orbitz’s 2010 Annual Report:
Revenue Recognition
We recognize revenue when it is earned and realizable, when persuasive evidence of an arrangement
exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably
assured. We have two primary types of contractual arrangements with our vendors, which we refer to
herein as the "merchant" and "retail" models. Under both the merchant and retail models, we record
revenue earned net of all amounts paid to our suppliers.
Under the merchant model, we generate revenue for our services based on the difference between the total
amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the
supplier charges us for that product. Customers generally pay us for reservations at the time of booking.
Initially, we record these customer receipts as accrued merchant payables and either deferred income or
net revenue, depending on the travel product. In the merchant model, we do not take on credit risk with
the customer, however we are subject to chargebacks and fraud risk which we monitor closely; we have
the ability to determine the price; we are not responsible for the actual delivery of the flight, hotel room or
car rental; we take no inventory risk; we have no ability to determine or change the products or services
delivered; and the customer chooses the supplier. We recognize net revenue under the merchant model
when we have no further obligations to the customer. . . .
Under the retail model, we pass reservations booked by our customers to the travel supplier for a
commission. In the retail model, we do not take on credit risk with the customer; we are not the primary
obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have
no ability to determine or change the products or services delivered; and the customer chooses the
EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, performs automated collection,
validation,
indexing, and forwarding of submissions by companies and others who are required by law to file forms
with the U.S. Securities and Exchange Commission (SEC). All publicly traded domestic companies use
EDGAR to make the majority of their filings. (Some foreign companies file voluntarily.) Form 10-K
which includes theannual report, is required to be filed on EDGAR. The SEC makes this information
available on the Internet.
Required:
1. Access EDGAR on the Internet. The web address is www.sec.gov .
2. Search for the most recent 10-K’s of Orbitz and priceline.com. Search or scroll to find the
revenuerecognition note in the financial statements.
3. For each of the following types of revenue, indicate whether the amount shown on the income
statement is “net” or “gross” as those terms have been used with respect to revenue recognition in our
course, and briefly explain your answer.
a. Orbitz’s “merchant model” revenues.
b. Orbitz’s “retail model” revenues.
c. priceline.com’s “merchant revenues for ‘Name Your Own Price’® services.”
d. priceline.com’s “merchant revenues for ‘Price-Disclosed Hotel’ services.”
e. priceline.com’s agency revenues.
4. Consider your responses to 3a through 3e. Does it look like there is the potential for noncomparability
when readers consider Orbitz and priceline.com? Indicate “yes” or “no,” and briefly explain your answer.
Answer:
, Requirement 2
Excerpt from Orbitz’s 2010 Annual Report:
Revenue Recognition
We recognize revenue when it is earned and realizable, when persuasive evidence of an arrangement
exists, services have been rendered, the price is fixed or determinable, and collectability is reasonably
assured. We have two primary types of contractual arrangements with our vendors, which we refer to
herein as the "merchant" and "retail" models. Under both the merchant and retail models, we record
revenue earned net of all amounts paid to our suppliers.
Under the merchant model, we generate revenue for our services based on the difference between the total
amount the customer pays for the travel product and the negotiated net rate plus estimated taxes that the
supplier charges us for that product. Customers generally pay us for reservations at the time of booking.
Initially, we record these customer receipts as accrued merchant payables and either deferred income or
net revenue, depending on the travel product. In the merchant model, we do not take on credit risk with
the customer, however we are subject to chargebacks and fraud risk which we monitor closely; we have
the ability to determine the price; we are not responsible for the actual delivery of the flight, hotel room or
car rental; we take no inventory risk; we have no ability to determine or change the products or services
delivered; and the customer chooses the supplier. We recognize net revenue under the merchant model
when we have no further obligations to the customer. . . .
Under the retail model, we pass reservations booked by our customers to the travel supplier for a
commission. In the retail model, we do not take on credit risk with the customer; we are not the primary
obligor with the customer; we have no latitude in determining pricing; we take no inventory risk; we have
no ability to determine or change the products or services delivered; and the customer chooses the
