Burke, Qing L. & Eaton, Tim V. (Nov 4, 2016). Alibaba Group Initial Public Offering: A Case Study of Financial Reporting Issues. American Accounting Association.

^Case Study

Questions:

1. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, now part of ASC 606 (FASB2014a). One of the most significant revenue sources for Alibaba Group is revenue from pay-per-click advertising services. Apply the five steps in the revenue recognition model of ASC 606 to account for revenue from pay-per-click advertising services. Prepare the necessary journal entries. (Ignore any transaction amounts in the journal entries.)
2. Non-U.S. companies, such as Alibaba Group, generally use American depository receipts to establish a trading presence on U.S. stock exchanges.
   1. The terms American depository receipt (ADR) and American depository share (ADS) are often used interchangeably. What is an ADR and what is an ADS?
   2. Explain why U.S. stock exchanges have attracted non-U.S. companies share listings. Provide at least two reasons.
3. As a U.S.-listed foreign company, which must file financial reports with the SEC, Alibaba Group had the choice between U.S. GAAP and IFRS. Although its subsidiaries previously prepared financial statements under IFRS, Alibaba Group decided to prepare its financial statements under U.S. GAAP.
   1. What are the pros and cons for Alibaba Group preparing its financial statements in accordance with U.S. GAAP instead of IFRS?
   2. Does the adoption of high-quality accounting standards such as U.S. GAAP or IFRS ensure high-quality financial reporting by companies on a global scale? Why or why not?
4. Using the information from Alibaba Groups Consolidated Income Statements in its IPO Prospectus, calculate its gross profit margin ratio and net profit margin ratio for the year ended March 31, 2014.
5. Compare Alibaba Group's gross profit margin ratio and net profit margin ratio that you calculated in Question 4 with the following ratios from Amazon and eBay for the year ended December 31, 2013.

	Gross Profit Margin Ratio	Net Profit Margin Ratio
Amazon	27.23%	0.37%
eBay	68.62%	17.80%

6. 1. From the perspective of their business models, provide explanations for the differences in gross profit margin ratios among Alibaba Group, Amazon, and eBay.
   2. Based on the net profit margin ratios of Alibaba Group, Amazon, and eBay, determine which company is the most profitable and which is the least profitable. Provide possible explanations for these differences in profitability.
7. Alibaba Groups Consolidated Balance Sheets in its IPO Prospectus report that its retained earnings went from a positive balance in the year ended March 31, 2012 to a large negative balance in the year ended March 31, 2013.
   1. Generally speaking, what are the factors that impact a companys retained earnings?
   2. Using the information from Alibaba Groups Consolidated Financial Statements in its IPO Prospectus, provide possible explanations for factors that contributed to the wild fluctuations in retained earnings and whether this should cause an investor concern.
8. Answer the following questions related to the Statement of Cash Flows:
   1. Interpret Alibaba Groups performance and financial activities for the fiscal year ended March 31, 2014 using cash flows from operating, investing, and financing activities from its Consolidated Statements of Cash Flows presented in its IPO Prospectus.
   2. Generally speaking, how would a companys IPO directly or indirectly impact its cash flows from operating, investing, and financing activities?
9. Just for fun: Research the FASB ASC Topic 810 regarding variable interest entities (VIEs). Under this standard, a primary beneficiary must consolidate its VIE.
   1. In accordance with ASC 810, what is a VIE?
   2. How does Alibaba Group apply ASC 810 to consolidate its VIEs? Cite the specific provisions in the ASC to support your argument.