June 2002

Accounting for Internet-Based Barter Transactions

By Eugene F. DeMark and Mario R. Dell’Aera

The Internet has rapidly revolutionized the way that companies conduct business. The relationship between suppliers, customers, distributors, partners, and competitors has undergone a radical transformation. The Internet has also wrought changes in the practice of barter transactions, the exchange of goods or services instead of cash between companies.

Barter transactions are not new. For many years, media companies have exchanged television airtime, radio spots, newspaper ads, and billboard space. Real estate companies exchange land and buildings, while pharmaceutical companies trade intellectual property. Often, companies engaging in these and similar barter transactions can draw upon well-established accounting standards for guidance in determining the valuation and timing of revenues and expenses.

That guidance, however, does not always hold when applied to Internet-based barter transactions. Internet companies have embraced web-based advertising, accounting for $8 to $10 billion of activity. Barter accounts for an estimated 5% of this total revenue. The exchange of advertising is especially appealing to start-ups, because the company receives the services without a cash outlay, and the barter arrangement may allow companies to utilize excess Internet capacity while receiving some benefit in return.

Consider the hypothetical case of a clothing retailer that receives advertising space on a shoe retailer’s website in exchange for hosting the shoe retailer’s advertisement. (Assume this is the first barter transaction for each company.) The arrangement could feature identical types of items, like a banner-for-banner exchange, or different types, like a banner-for-sponsorship exchange. The exchange agreement would typically specify the duration of the placement, based on length of time or number of impressions.

In this example, assume that the companies agree to exchange 10,000 impressions. In a separate cash transaction, the clothing retailer previously sold a total of 20,000 impressions in a similar cash deal at a cost per thousand (CPM) of $10. Given these assumptions, what value should the clothing retailer assign to this barter transaction?

The Accounting Principles Board (APB) and FASB’s Emerging Issues Task Force (EITF) have noted that barter transactions should generally be recorded at the fair value of the assets surrendered. The challenge lies in determining this fair value. Because advertising bartered between Internet companies is not always sold for cash, determining fair value is often difficult and can be highly subjective.

To address this situation, the EITF has placed limits on the amount of barter advertising a company may recognize as revenue. According to the EITF, the fair value of advertising space is determinable if a company has a historical practice of receiving cash (or similar consideration) for similar advertising from a third-party buyer in an arm’s-length transaction. Historical practice is limited to six months prior to the barter transaction. Cash transactions after the date of barter advertising cannot be used as evidence of fair value. Furthermore, a company can recognize advertising barter revenue only up to the dollar amount of similar past cash transactions and can only use cash-based advertising with similar characteristics (banner size, web page, time of day, positioning prominence, and duration) to establish fair value of barter advertising.

In the case of the clothing retailer, there is a similar cash transaction that establishes a maximum recognizable value of $200 ($10 CPM multiplied by 20,000 impressions). Based on this, for the barter transaction the clothing retailer would recognize $100 ($10 CPM multiplied by 10,000 impressions) in revenue and associated expense. Because a company can recognize advertising barter revenue only up to the dollar amount of similar past cash transactions, revenue recognition of future barter transactions will be limited to $100 (the original $200 cash transaction minus the subsequent $100 barter activity).

Assume the clothing retailer enters into a subsequent Internet advertising barter transaction with a book retailer, involving 15,000 impressions. Revenue and associated expense would be recognized at the $10 CPM for only the first 10,000 impressions ($100). The remaining impressions would be recorded at their carrying amount of zero. Revenues and expenses for additional Internet-barter sales would also be recorded at the carrying amount, zero, until the business records additional Internet advertising sales transactions that can be used as the basis for future barter transactions.

Because Internet barter is a relatively new field, each transaction should be considered individually, and the advice of an accountant should be sought. The advent of the Internet has brought about tremendous opportunities for businesses to operate more efficiently and at a lower cost. Nevertheless, as we have also seen, management should also be aware of accounting rules and regulations that come with the new territory.

Eugene F. DeMark is the northeast partner in charge of KPMG LLP’s information, communications, and entertainment (ICE) line of business.
Mario R. Dell’Aera is the partner in charge of KPMG LLP’s Internet/new media practice, a part of the ICE line of business. The views expressed above are the authors’ own and do not constitute professional advice.

Robert H. Colson, PhD, CPA
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