Methods to Declare Revenue and EBITDA Calculation

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First, I am not an accountant. I am recently a manager of a laboratory that was formerly a corporate internal lab, but is not commercial, working for a small LLC type corporation. So I am new to some of these calculations.

We have a couple of business processes for which I have poor EBITDA %ages (on a good month, around 23%, on a bad month, in the -5% vicinity). BUT.... I think there is something wrong with how the accounting is being done. So I'd like some advice on discussions with our accounting department, and suggestions on this (don't want to do anything not legal).

PROBLEM ONE - REBUILT UNIT

For proprietary reasons, I won't mention the actual products. We make a product where the customer sends in a unit. We rebuild the unit and reclaim some materials, give them a credit for the reclaim materials (some high value components can be recycled). We rebuild the unit and give back to the customer. Lets say for discussion that a new unit price is $3000, and a rebuilt unit price is $1000.

The accounting method used (and please excuse my lack of accountin terminology - although I took a semester in college and a year in high school) - is to declare a revenue on a rebuilt unit of $3000 in our P&L revenue column. Then, since it is a $1000 priced, rebuilt unit, they charge an expense of $2000 to bring us back down to the $1000 price of the rebuilt unit. So on $3000 of revenue, before even having the expenses really associated, we have an accounting expense of $2000. Then we also have our labor costs and material costs. This makes our revenue numbers look good, but our EBITDA is bad.

So, is this THE only way to account for this? If not, I urgently need some ideas of another way to recommend to our accounting department.

PROBLEM TWO - CONTRACTOR SERVICES

We receive equipment from customers, which we send out on their behalf to external companies for servicing. One of our services is that a customer has a bunch of different electronic equipment that has to go to different companies for servicing. We act as a single source for them and send out on their behalf, and charge a mark up to cover our costs.

For example, we might receive a piece of electronic equipment in and send it out for servicing by an outside company for Customer A. The external company charges (for example) $1000 for the service. We mark it up by 15% ($150) for the service, and also charge the customer what ever the cost is for shipping. The shipping cost is not part of the charges considered revenue.

The way our accounting is set up is that the $1000 external charge pluse mark up totalling $1150 is considered the revenue. Then we receive as an expense cost, the $1000 that the external company charged, leaving only approximately 15% margin. This, again is before we calculate in our expenses.

In this second case, it seems like there must be a way to consider the $1000 as managing customer funds, and that the revenue should be the $150, and our margin should be after we subtract our actual costs from the $150.

Please, any accountants out there, give me some advice.
 

bklynboy

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I am not an expert in this area as my background is more financial services, but from what you write, it looks like your company is inflating revenue and expenses. Under US GAAP, SAB 104 is the current guidance and I would apply to your examples as follows:

For Item 1, revenue is $1000 as that is the price charged to the customer for rebuilding the unit. There is no expense (expenses are usually incurred in the pursuit of revenues) I can see as your service is simply to rebuild the product. If their argument is that they are "buying" some of the reclaim materials for $2000 and then charging 3000 for the product, then this is still wrong (contractually the sale price is $1000). This falls under a net sale treatment and only the $1000 should be reflected as revenue. I dont see how they can arbitrarily change the sale price from the contract price of $1000.

For item 2, this sounds like a consignment situation where you use the services of a third party to service the item and charge a markup. Again, this should be accounted for on a net basis and not gross. There is also no expense in this situation and revenue is again overstated. I would add that shipping and handling costs are reported as revenue (see ASC-605-45-45 paragraph 19 thru 21).

I will warn you that this is a tricky topic in accounting and usually industry specific which is why the whole area of revenue recognition is being rethought and will change in the near future. These are my opinions but curious if anyone has anything to add.
 

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