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Velocity Cellular

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Velocity cellular
In the case “Velocity cellular” the company is planning to promote and market a prepaid phone service plan called “Power Startepack” in 2008. The “Power Starterpack” will provide each subscriber with a new activation card and a prepaid voucher for a total nonrefundable fee of 200$. The voucher gives the subscriber an airtime window of 360days to use 50$ worth of minutes. In addition, there are no general right of return held by the subscriber relative to the delivered items contained in the prepaid plan. In this case study, the issue is to understand which is the appropriate method for recognizing revenue for the “Power Starterpack”. Indeed, for the purpose of revenue recognition, it is important to understand whether the deliverables included in the agreement (i.e. the card and the voucher) must be considered two separate units of accounting or not. This point is particularly relevant because in accordance with GAAP 605-25-25-2: a) revenue arrangement with multiple deliverables shall be divided into separate unit of accounting if the deliverables in the arrangement meet the criteria in paragraph 605-25-25-5 b) arrangement consideration shall be allocated among the separate unit of accounting based on their relative selling prices… and c) applicable revenue recognition criteria shall be considered separately for separate units of accounting.

Based on GAAP 605-25-25-5 I believe that the card and the voucher should be considered as a separate unit of accounting. Indeed, the principles in this paragraph clearly state that in an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both the following criteria are met: a) the delivered item or items must have value to the customer on a standalone basis, and b) if the arrangement includes a general right of return relative to the…...

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