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Case 01-6 Worldwide Wires Worldwide Wires (“WW”) provides computer network and communications services to multinational corporations. The company can connect a customer’s networks to deliver Internet, Intranet, voice, data, and fax services in countries throughout the world. WW’s services also include globally consolidated billing, management, and technical support systems that can provide a complete customer network solution .WW offers its services either directly or through a network of Partners. To avoid theexpense of maintaining separate sales and technical support personnel in each country, WWhas agreements with Partners all over the world. The Partners sell WW’s services, execute contracts with the customers, install necessary network hardware and software, and serve as local technical support .Example of ServicesThe following example illustrates services provided by WW and the Partners. A customer inGermany wants to connect its computer networks at plants located in Germany, Mexico, andJapan. The German Partner would generally sell the services to the customer, execute thecontract with the customer, determine the customer’s requirements, and devise a solutionusing standard WW products. In this example, the customer would connect its Germancomputers to WW’s German network node through a local telephone line and WW wouldconfigure the network to accommodate the German customer. Once connected to WW’sGerman network node, the customer’s data would travel over WW’s network to reach WW’snodes in Japan and Mexico, which would be connected to the customer’s Japanese andMexican computers by local telephone lines. The German, Japanese, and Mexican Partnerswould provide installation services and technical support to the customer’s plants in theirrespective countries.Partner AgreementsWW has five-year Service Agreements with all of its Partners. The agreements provide thePartner with the following rights and responsibilities :• The right to market and sell WW’s services, including the use of WW’s trademarks .• The right to be paid for installation and technical support services provided by the Partnerto the customer .• The responsibility to pay WW for access to its network.Copyright 2000 Deloitte & Touche FoundationAll rights reserved. Case 01-6: Worldwide Wires Page 2• The responsibility to execute the legal contract with the customer, which also means thePartner has the responsibility of collecting revenue from the customer. The Partnerretains the risk of customer bad debt; however, bad debts are rare because of the size andfinancial strength of the customers.• The responsibility to pay amounts due to Partners in other countries (e.g., the German Partner must pay the Mexican Partner for services provided in Mexico) .• The responsibility to lease local telephone lines, install equipment on customer premises,and provide in-country support of WW services, such as a local help desk.The agreements give WW the following rights and responsibilities: • The right to approve customers, the price the customer pays, and deviations from standard pricing or products. WW also must approve any subsequent price changes .• The right to jointly set revenue targets with the Partners. WW has the unilateral right toterminate the agreement if the Partner fails to meet revenue targets. (WW has exercised this right in the past. )• The right to jointly determine staffing levels at the Partner’s local office .• The right to invoice Partners for the gross amounts billed to customers. However, the Service Agreements give WW the contractual right to offset the gross amount due from the Partner against the amount WW owes the Partner for installation and support .• The responsibility to approve and participate in WW’s proportionate share of all credits issued to customers for service failures, network unavailability, etc. The responsibility to clear all payments collected from Partners in one country for services provided by a Partner in another country.Billing and Collection ProcessUnder the terms of the Service Agreements with the Partners, WW acts as a “clearinghouse”for all revenue generated on the WW network. The Service Agreement provides WW with acontractual right of set-off when clearing and settling amounts due Partners. As such, eachmonth WW settles revenue amounts on a net basis for transactions between WW and thePartners and for amounts involving multiple Partners. The clearinghouse function istypically done at the end of each month and, as a result, net cash settlements are made asopposed to gross cash debits and credits between WW and the Partners. Using the examplecited previously, the following illustrates the flow of funds and the accounting treatment inan inter-Partner transaction:Copyright 2000 Deloitte & Touche FoundationAll rights reserved. Case 01-6: Worldwide Wires Page 3A German customer connects its computer networks in Germany, Japan, and Mexico. TheGerman Partner executes the contract with the customer and bills the customer $1,000, whichrepresents the standard price for all services provided in Germany, over the WW network,and in Japan and Mexico. The Japanese Partner provides $250 of connection and supportservices, and the Mexican Partner provides $100 of connection and support services. The netprice WW charges the German Partner for its services is $500.WW will record the transaction as follows: DR. Receivable from German Partner $500 CR. Revenue $500(WW records revenue for services provided to customer) DR. Cost of sales $500 CR. Revenue $500(WW grosses up revenue to equal the amount charged to the end-user customer) DR. Receivable from German Partner $350 CR. Payable to Japanese Partner $250 CR. Payable to Mexican Partner $100(“Clearinghouse” transaction to account for amounts due to Japan and Mexico from GermanPartner)As a result, WW will record revenue of $1,000 and expense of $500, although WW onlycollects $850 from the German Partner. The German Partner will record revenue of $1,000and expenses of $850 ($500 to WW, $250 to Japanese Partner, and $100 to MexicanPartner).Required• Should WW recognize revenue for gross billings to customers and correspondingly recognize cost of services for the services provided by the Partners, or should WW recognize revenue based on the net invoice amount billed to the Partners?Copyright 2000 Deloitte & Touche Foundation All rights reserved.

Case 01-6

Worldwide Wires Worldwide Wires (“WW”) provides computer network and communications services to multinational corporations. The company can connect a customer’s networks to deliver Internet, Intranet, voice, data, and fax services in countries throughout the world. WW’s
services also include globally consolidated billing, management, and technical support systems that can provide a complete customer network solution
.WW offers its services either directly or through a network of Partners. To avoid theexpense of maintaining separate sales and technical support personnel in each country, WWhas agreements with Partners all over the world. The Partners sell WW’s services, execute contracts with the customers, install necessary network hardware and software, and serve as local technical support
.Example of ServicesThe following example illustrates services provided by WW and the Partners. A customer inGermany wants to connect its computer networks at plants located in Germany, Mexico, andJapan. The German Partner would generally sell the services to the customer, execute thecontract with the customer, determine the customer’s requirements, and devise a solutionusing standard WW products. In this example, the customer would connect its Germancomputers to WW’s German network node through a local telephone line and WW wouldconfigure the network to accommodate the German customer. Once connected to WW’sGerman network node, the customer’s data would travel over WW’s network to reach WW’snodes in Japan and Mexico, which would be connected to the customer’s Japanese andMexican computers by local telephone lines. The German, Japanese, and Mexican Partnerswould provide installation services and technical support to the customer’s plants in theirrespective countries.Partner AgreementsWW has five-year Service Agreements with all of its Partners. The agreements provide thePartner with the following rights and responsibilities
:• The right to market and sell WW’s services, including the use of WW’s trademarks
.• The right to be paid for installation and technical support services provided by the Partnerto the customer
.• The responsibility to pay WW for access to its network.Copyright 2000 Deloitte & Touche FoundationAll rights reserved. Case 01-6: Worldwide Wires Page
2• The responsibility to execute the legal contract with the customer, which also means thePartner has the responsibility of collecting revenue from the customer. The Partnerretains the risk of customer bad debt; however, bad debts are rare because of the size andfinancial strength of the customers.• The responsibility to pay amounts due to Partners in other countries (e.g., the German Partner must pay the Mexican Partner for services provided in Mexico)
.• The responsibility to lease local telephone lines, install equipment on customer premises,and provide in-country support of WW services, such as a local help desk.The agreements give WW the following rights and responsibilities:
• The right to approve customers, the price the customer pays, and deviations from standard pricing or products. WW also must approve any subsequent price changes
.• The right to jointly set revenue targets with the Partners. WW has the unilateral right toterminate the agreement if the Partner fails to meet revenue targets. (WW has exercised this right in the past.
)• The right to jointly determine staffing levels at the Partner’s local office
.• The right to invoice Partners for the gross amounts billed to customers. However, the Service Agreements give WW the contractual right to offset the gross amount due from the Partner against the amount WW owes the Partner for installation and support
.• The responsibility to approve and participate in WW’s proportionate share of all credits issued to customers for service failures, network unavailability, etc.
The responsibility to clear all payments collected from Partners in one country for services provided by a Partner in another country.Billing and Collection ProcessUnder the terms of the Service Agreements with the Partners, WW acts as a “clearinghouse”for all revenue generated on the WW network. The Service Agreement provides WW with acontractual right of set-off when clearing and settling amounts due Partners. As such, eachmonth WW settles revenue amounts on a net basis for transactions between WW and thePartners and for amounts involving multiple Partners. The clearinghouse function istypically done at the end of each month and, as a result, net cash settlements are made asopposed to gross cash debits and credits between WW and the Partners. Using the examplecited previously, the following illustrates the flow of funds and the accounting treatment inan inter-Partner transaction:Copyright 2000 Deloitte & Touche FoundationAll rights reserved. Case 01-6: Worldwide Wires Page 3A German customer connects its computer networks in Germany, Japan, and Mexico. TheGerman Partner executes the contract with the customer and bills the customer $1,000, whichrepresents the standard price for all services provided in Germany, over the WW network,and in Japan and Mexico. The Japanese Partner provides $250 of connection and supportservices, and the Mexican Partner provides $100 of connection and support services. The netprice WW charges the German Partner for its services is $500.WW will record the transaction as follows: DR. Receivable from German Partner $500 CR. Revenue $500(WW records revenue for services provided to customer) DR. Cost of sales $500 CR. Revenue $500(WW grosses up revenue to equal the amount charged to the end-user customer) DR. Receivable from German Partner $350 CR. Payable to Japanese Partner $250 CR. Payable to Mexican Partner $100(“Clearinghouse” transaction to account for amounts due to Japan and Mexico from GermanPartner)As a result, WW will record revenue of $1,000 and expense of $500, although WW onlycollects $850 from the German Partner. The German Partner will record revenue of $1,000and expenses of $850 ($500 to WW, $250 to Japanese Partner, and $100 to MexicanPartner).Required• Should WW recognize revenue for gross billings to customers and correspondingly recognize cost of services for the services provided by the Partners, or should WW recognize revenue based on the net invoice amount billed to the Partners?Copyright 2000 Deloitte & Touche Foundation All rights reserved.

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