Peer Response

Responding to Person 1

Hello,

Thank you for sharing your discussion post. The analysis of revenue recognition by Freshpet reflects a high standard of structuring and evaluating financial reporting aspects. I am glad to learn how the company has maintained consistency in sales growth over the years. Notably, this affirms that the company’s business model is effective: Peer Response.

Since the company recognizes revenue at the point of sale, some factors should be considered crucial, such as customer satisfaction (Wahlen et al., 2013). I share your concern regarding customer retention for the company, as this could mean significant long-term success. Your post was even more effective when the analysis for Bark Inc. was done.

The two companies apply the same revenue recognition methods even though Bark Inc. applies a subscription-based business model. However, I wonder about the impact of this business model on the revenue recognition process. Notably, this is so because I think the model makes revenue recognition complex, which might make it difficult to align with standard reporting requirements.

Reference

Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2013). Intermediate accounting: Reporting and

Analysis. https://www.cengage.uk/c/intermediate-accounting-reporting-and-analysis-4e-

wahlen-jones-pagach/9780357905708/?filterBy=Higher-Education

Responding to Person 2

Hello,

Thank you for sharing your discussion post on Under Armour and Nike’s revenue recognition approaches. Under Armour’s revenue structure regarding product lines makes it easier to understand how revenue is raised and recognized from various channels. I agree that the company’s return and allowance provisions could influence the financial outlook. Notably, this is so because many organizations rely on historical data to make estimations into the future, which is not always correct (Wahlen et al., 2013).

Considering the mentioned revenue recognition controversy for the company in the 2015-2016 fiscal period makes it interesting. It is important to ensure that investors’ interests are safeguarded, which was not the case. However, no such issues are identified with Nike Inc. I wonder whether this can be taken to conclude that Nike has a better revenue recognition strategy. It would be interesting if insight into this were provided.

Reference

Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2013). Intermediate accounting: Reporting and

Analysis. https://www.cengage.uk/c/intermediate-accounting-reporting-and-analysis-4e-

wahlen-jones-pagach/9780357905708/?filterBy=Higher-Education

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Person 1

1. Freshpet, Inc. most recent 10-k reports revenue recognition in the Notes to the Consolidated Financial Statement. They state that it does not have any contract assets as of December 31, 2024 and 2023. According to the notes, revenue is recognized when performance obligations under the terms of the contract with the customer are satisfied, which occurs once control is transferred upon delivery to the customer.
   Revenue is reported net of applicable trade incentives and allowances, and amounts billed to customers are classified as receivables, requiring short-term payment. As a result, Freshpet does not have any significant financing components in its revenue transactions. This means they follow a point-in-sale revenue recognition method, recognizing revenue at the time of sale.

• Income statement has revenue reported on a line called Net Sales.
• Balance Sheets has a line item called Accounts Receivable, representing, amounts owed by customers.
• Statement of Stockholders’ Equity the revenue affects the retained earnings through net income.

1. Companies must report unearned revenue, accounts receivable, and contract assets on the balance sheet. The notes to the financial statements should provide qualitative and quantitative details about customer contracts and significate judgments related to revenue recognition. They must include:
   • FASB requires companies to present contract assets and liabilities on the balance sheet.
   • Receivables and contract assets should be separately presented; if a contract asset becomes unconditional, it must be reclassified as a receivable.
   • Contract liabilities must be shown on the seller’s balance sheet.
   • Revenue from customer contracts must be disclosed separately from other revenue sources.
2. What stands out to me on Freshpet’s 10-K is the steady growth in their net sales . In 2024, net sales were $975,177, which is a 27% increase from 2023. In 2023, net sales were $766,895, reflecting a 28% increase from 2022, which had net sales of $595,344. This consistent growth suggests that they are successfully attracting more customers each year, likely driven by effective marketing strategies.
   This increase in sales I would think indicates that customers are satisfied with their products, as Freshpet recognizes revenue once the product is delivered, which forms an implied contract with customers. I am wondering what Freshpet’s customer retention rates are. What factors may have contributed to the steady increase in net sales each year? Do they have contract terms that they disclose before the customer hits submit to the order?
3. Freshpet’s revenue recognition looks standard for company that uses the point-in-sale revenue recognition method. Bark, Inc. also does not appear to have anything unusual for revenue recognition. They are subscription-based and product sales based, with revenue recognized once delivered.
   They also have food and toys that use the point-in-sale method again. Nothing seems unusual, and I would expect this from both of my companies.
   

   Peer Response

 Person 2

Company: Under Armour

1. In Under Armour’s most recent 10-K, they report items related to revenue in their income statement and their notes to financial statements. On the income statement, revenue has its own line-item. For reporting purposes, there are examples for both types of reporting. For required reporting, Under Armour is required to report their net revenues in their income statement and notes on their revenue forms/practices in their notes to financial statements.
   For reporting under specific circumstances, Under Armour is to disclose on things such as changes in revenue recognition policies (and their impacts) and if the company were to get involved in some unusual transactions such as licensing revenue, contracts with outside parties, or even pulling future sales into current quarters. Much of this should be reported in their notes to financial statements.
2. What stands out to me in Under Armour’s reporting is that they provide a very detailed breakdown on their different components of revenue. Distinguishing between net sales of apparel, footwear, and accessories, from advertising, subscriptions, and licensing revenues, Under Armour specifically breaks down and reports on each of these aspects of their net revenues. One of the elements of their reporting that I have a question on involves around their estimation of returns and allowances.
   I question how accurate these estimations really are and how they come to these estimations. I would assume they pull numbers from past years as a reference and then estimate numbers for the new year based on what they are planning to do for the year. I just wonder how accurate these estimations really are and what impact could be made if the estimate numbers are far off from the actual numbers.
3. After doing some research, Under Armour has been involved in some interesting or unusual revenue recognition practices or transactions. Between the 3rd quarter of 2015 and the 4th quarter of 2016, Under Armour was accused of “pulling forward” $408 million of future sales to help meet their revenue targets. While doing this, they did not disclose this type of practice to their investors.
   This is an important matter because in doing this, it gives off a false impression of the company’s financial situation and potential for growth. At the end of the scandal, Under Armour agreed to a $9 million settlement with the SEC. For my other company of Nike, it seems that they tend to follow standard practices as I have not found anything that suggests any type of interesting or unusual revenue recognition practices or transactions.

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