Revenue recognition issues related to barter transactions became particularly important as e-commerce developed. As an example, if Company A exchanges advertising space for computer equipment from Company B but no cash changes hands, can Company A and B both report revenue? Such an exchange is referred to as a “barter transaction.”
An even more challenging revenue recognition issue evolved from a specific type of barter transaction, a round-trip transaction. As an example, if Company A sells advertising services (or energy contracts, or commodities) to Company B and almost simultaneously buys an almost identical product from Company B, can Company A report revenue at the fair value of the product sold? Because the company’s revenue would be approximately equal to its expense, the net effect of the transaction would have no impact on net income or cash flow. However, the amount of revenue reported would be higher, and the amount of revenue can be important to a company’s valuation. In the earlier stages of e-commerce, for example, some equity valuations were based on sales (because many early internet companies reported no net income).
Under IFRS, revenue from barter transactions must be measured based on the fair value of revenue from similar non-barter transactions with unrelated parties (parties other than the barter partner).21 USGAAP state that revenue can be recognized at fair value only if a company has historically received cash payments for such services and can thus use this historical experience as a basis for determining fair value; otherwise, the revenue from the barter transaction is recorded at the carrying amount of the asset surrendered.