IPO Approval Case: Revenue Recognition for Sales on Amazon Cross-Border E-commerce Platform

【Background】Revenue recognition compliance. According to the application documents and the reply documents to the follow-up questions: ① For products sold on Amazon and on the independent websites, customers may return the products within 30 days after (estimated) the delivery date, and Amazon’s settlement cycle is 14 days. ② The issuer has agreed with its major suppliers that “suppliers shall be responsible for repair, return, and replacement obligations for products with quality issues, and shall assume the repair-related expenses, transportation expenses, and liability for breach of contract to consumers arising therefrom” and “suppliers shall assume the obligation to undertake product liability claim coverage brought by consumers for agreement products purchased in the sales territories within the warranty period.”

【Question】: Explain the amount and proportion of returns and exchanges during the reporting period, whether the time and amount of revenue recognition take into account terms related to unconditional returns, and, in light of actual returns and revenue recognition, explain whether the issuer’s revenue recognition time is accurate, whether it complies with the requirements of the Accounting Standards for Business Enterprises, and whether it is consistent with the revenue recognition time points of comparable companies.

【Reply】

I. Revenue compliance

(I) Explain the amount and proportion of returns and exchanges during the reporting period; whether the time and amount of revenue recognition take into account terms related to unconditional returns; and, based on actual returns and revenue recognition, explain whether the issuer’s revenue recognition time is accurate, whether it complies with the requirements of the Accounting Standards for Business Enterprises, and whether it is consistent with the revenue recognition time points of comparable companies

1. The amounts and proportions of the company’s returns and exchanges during the reporting period are as follows:

During the reporting period, the company’s return rate showed a fluctuating downward trend, mainly because the company gradually improved its product quality management system. At the same time, the sales mix of art-creation-type products, which have relatively lower return rates, increased, which led to a decline in the overall return rate.

2. The company’s revenue recognition time complies with the requirements of the Accounting Standards for Business Enterprises

(1) Relevant provisions of the Accounting Standards for Business Enterprises

According to the Accounting Standards for Business Enterprises No. 14—Revenue, for sales that include quality guarantee clauses, an entity shall assess whether the quality guarantee provides a service separate from ensuring that the sold goods meet the specified standards. If the entity provides an additional service, it shall be accounted for as a separate performance obligation under the provisions of this Standard; otherwise, the quality guarantee obligations shall be accounted for in accordance with the Accounting Standards for Business Enterprises No. 13—Contingencies. When assessing whether the quality guarantee provides a service separate from ensuring that the sold goods meet the specified standards, the entity shall consider factors such as whether the quality guarantee is a statutory requirement, the guarantee period, and the nature of the entity’s commitment to perform the tasks, among others. If customers can choose to purchase the quality guarantee separately, such quality guarantee constitutes a separate performance obligation.

(2) The company’s specific revenue recognition method

The company’s specific revenue recognition method is as follows: ① For online sales, customers place orders through an online sales platform; the sales platform is responsible for delivering the goods to customers, or the company engages a logistics company to deliver to customers. Revenue is recognized when customers have obtained control of the goods, i.e., when the package is successfully delivered. ② For offline sales, both parties sign a contract. Customers place orders directly with the company. The company determines the point in time of control transfer based on the delivery method agreed in the contract and international trade rules, and recognizes revenue when conditions are met.

For sales with sales return clauses, the company estimates the return amounts of products sold in the current year that may occur in subsequent periods based on historical return rates and accrues a provision for expected liabilities. Since the refund distribution for orders on e-commerce platforms follows a certain pattern—most current orders are refunded in the same period and a small portion are refunded in the next period—the company accrues the expected liabilities for the current period based on the refund distribution of orders from the previous period.

In summary, the company’s revenue recognition time and amount have taken into account clauses related to unconditional returns.

3. Comparison of revenue recognition time points between the company and comparable companies

Based on publicly available information of comparable companies, the comparison of revenue recognition time points between the company and comparable companies is as follows:

The company and comparable companies both recognize revenue at the point when the goods are successfully delivered, and they estimate and accrue expected liabilities based on historical return circumstances, while offsetting (i.e., reducing) operating revenue.

In summary, the company’s revenue recognition time point is accurate, complies with the requirements of the Accounting Standards for Business Enterprises, and is consistent with the revenue recognition time points of comparable companies.

The course representative believes that enterprises should establish and disclose reliable estimation models based on historical data (such as return rates and return distribution) to accrue expected liabilities for sales activities that include a right of return and accordingly offset revenue, so as to ensure the prudence and compliance of revenue recognition.

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