Pick Four sources of Spartan's revenue and explain how these revenue-generating activities should be treated under the current accounting standard (e.g., the amount and timing of revenue recognition). The following is the article

File Tools View Document1 - Word O Spartan Race Inc lengths and emphasized the fun aspect of their events. Tough Mudder had the repu- tation as the most extreme race with obstacles that could only be completed with Over the seven years since its founding in 2010, Spartan Race grew to be the world's the help of others. Spartan offered races of varying lengths and focused on competi- most popular obstacle course race provider. In 2012 and 2016, the company raised a tion by timing all participants, creating obstacles that rewarded individual athleti- total of $15 million through two separate private equity investments. 1 In 2017, cism, and imposing a 30 burpee penalty for any failed obstacle. however, Spartan Founder and CEO Joe De Sena was contemplating the possibility of Company Background an initial public offering. One question that he had was what impact, if any, the new Headquartered in Boston, Massachusetts, Spartan was founded in 2010 by Joe De accounting standard on revenue recognition would have on Spartan's financial state- Sena. After having competed in dozens of Ironman triathlons and ultra-events (100+ ments. 2 Well aware of the importance of demonstrating robust prospects for reve- miles), De Sena, along with some friends, decided to create a 24-hour race called nue growth to investors, De Sena scheduled a meeting with Spartan's Director of Fi- "The Death Race."6 Since the idea of a 24-hour race appealed to only a limited cus- nancial Planning Andy Boudreau and Controller Zac Biesiada to discuss the matter tomer base, De Sena envisioned a more accessible but still difficult race for the further. masses, and Spartan was born. By offering races ranging from three to 26+ miles, Obstacle Course Racing Industry Spartan's purpose was to get people off their couches and challenge them both physically and mentally. "Spartan gives people that opportunity to go up against the Unlike other extreme fitness activities such as marathons or triathlons, obstacle odds, push to the brink, get dirty and define themselves," commented De Sena on course racing (OCR) requires participants to navigate a series of obstacles such as the company's philosophy. 7 In 2016, Spartan claimed one million global participants rope climbs, log carries, monkey bars, mud crawls, and fire jumps. Experiencing a at roughly 130 events across 25+ countries. 8 Although race fees continued to make boom in popularity beginning around 2010, OCR has been called the fastest growing up the majority of revenues, the company had begun to enter into sponsorship sport in history. In 2015, an estimated 4.5 million people in the United States fin- agreements to diversify its revenue base. Most notably, in 2013, Reebok and Spartan ished an obstacle course race.3 This participation level, however, represented much entered into a multi-year partnership in which the sportswear giant would become smaller yearDlover-year growth than just a few years earlier, and some race organiz- Spartan's title sponsor and official apparel, footwear, and accessories supplier.9 In a ers discontinued operations due to lack of demand.As of 2017, in addition to Spar- 2014 broadcasting agreement, NBC Sports Group agreed to air some of Spartan's tan, Warrior Dash, Rugged Maniac, and Tough Mudder were popular obstacle course races on television. 10 This alliance also resulted in the "Spartan: Ultimate Team race organizers. Rugged Maniac and Warrior Dash offered beginner-friendly 5K race Challenge" TV show, first aired in 2016 and produced by the same production [ Focus 100 Screens 1-2 of 7 6:39 PM OLOV W 3/26/2022 FO:+ F7 F8 F9 F10 FA FS F6 EscView Document1 - Word company that created the "American Ninja Warrior" TV show.11 In 2017, pushing to evolve beyond just a race into a lifestyle brand, Spartan partnered with Daily Burn, a 4. Allocate the transaction price across multiple performance obligations (if applica- ble). leading streaming fitness service, to offer the six-week Daily Burn Spartan program, allowing people to train like a Spartan anytime or anywhere. De Sena's ultimate 5. Recognize revenue when performance obligation(s) is/are satisfied. dream for Spartan and OCR would be to see the sport in the Olympics. "The sport is Determine whether there is a contract. The new accounting standard does not re- growing at an exponential pace, and I believe there isn't another sport out there that quire Spartan to use written contracts when selling products and services, but it captures the true spirit and appreciation of athleticism of the Olympic Games in the does require the transacting parties to have committed to a transaction. To qualify same way obstacle racing does. Every day we hear and experience stories of resili- as a contract, there must be agreement between both parties regarding what is be- ence at obstacle races around the world - reminiscent of stories we see during each ing exchanged, and there must be specific, but not necessarily fixed, payment terms. Olympic Games when international heroes emerge on the largest stage of all," ex- The contract must also have commercial substance, meaning that the risk, timing, or plained De Sena. amount of the seller's future cash flows is expected to change as a result of the con- New Revenue Recognition Standard tract. Payment in cash is not required. For example, it could be the case that pay- ment comes in the form of products and services from one of Spartan's strategic One of the important determinants of a successful startup is to demonstrate to in- partners. Lastly, in order to recognize revenue, collection of the payment must be vestors that the company can sustain its revenue growth. As the new accounting probable. standard's adoption date approached, Boudreau and Biesiada questioned whether it Determine the performance obligation(s) under the contract. Spartan has to iden- would materially affect Spartan's revenue recognition. The new accounting standard tify whether a transaction is comprised of a single performance obligation or consti- provides for a five-step process to determine when revenue should be recognized. tutes a bundle of multiple performance obligations. A performance obligation is a These steps are as follows: promise provided by a company to its customers to deliver a product or service. If 1. Determine whether there is a contract. Spartan's customers can benefit from an individual product or service on its own or with readily available resources, the item is considered a performance obligation 2. Determine the performance obligation(s) under the contract. (e.g., a t-shirt). Otherwise, the item is bundled with other items to form a perfor- 3. Determine the transaction price. mance obligation (e.g., a drink in a cup). Show de [ Focus eens 3-4 of 7 6:3 ENG HOLD W 3/26/Document1 - Word Determine the transaction price. When determining the transaction price, Spartan has to consider whether any aspect of a transaction may affect the payment that it Different Ways Spartan Generates Revenue As he was about to meet with Bou- will ultimately collect (e.g., discounts, rebates, or refunds). If there are variable com- dreau and Biesiada, De Sena could not help but think that Spartan had developed ponents of the transaction, such as discounts, Spartan would need to use historical numerous revenue streams despite being a relatively young company. For example: data to estimate these effects at the time of the transaction. In addition, if there is a Walk-Up Single Race Entry Space permitting, Spartan sells single entries on race significant delay in receiving payment, Spartan would need to include a time value of days for prices generally ranging from $100 to $200 depending on race length. Any- money discount estimate in the transaction price. If a customer does not pay in cash, one who works a shift as a volunteer at a race venue receives a complimentary en- the products or services being received should be measured at fair value. try. Allocate the transaction price across multiple performance obligations (if applica- Advance Purchase Single Race Entry Approximately one year ahead of time, a race ble). If there are multiple performance obligations to a transaction, Spartan would goes on sale at www.spartan.com with prices generally ranging from $100 to $200 need to allocate the transaction price across these obligations. Variable components depending on race length. Prices for the race increase as the race date approaches. related to specific performance obligations should be applied against only those ob- There are no refunds, but participants can defer to a future race for a $25 transfer fee as long as they notify Spartan prior to race day. ligations' transaction prices. Alternatively, if a variable component is generic, it should be allocated proportionately across all performance obligations of the trans- Annual Race Pass Annual passes, which can cost upwards of $1,000, entitle the action. holder to run as many races as possible in the Continental United States and Hawaii during one calendar year. The passes are non-refundable and non-transferable Recognize revenue when performance obligation(s) is/are satisfied. Spartan can only recognize revenue once a performance obligation is satisfied. The key to deter- Merchandise Spartan sells merchandise, such as t-shirts, caps, and shorts, at races mining when a performance obligation has been satisfied for products is whether as well as online. Full refunds are allowed on clothing as long as the return is made the customer controls the good. The determining factor for services is whether the in good condition within 31 days with the original receipt. service has been completed. If the service occurs over a period of time, revenue is Sponsorship Agreements Spartan has many sponsors, including Clif bars, FitAID recognized over time. sport drinks, and Yokohama tires. While the details of sponsorship agreements vary, they generally involve payments to Spartan over a specified time period in exchange for recognition on the Spartan website as well as product placement at races. Show Focus $ 5-6 of 7 ENG 3 /2 HOLD-0-D WDocument1 - Word SGX Training Certification Spartan offers various live workshops and online pro- grams to certify individuals to teach Spartan group training classes. In addition to re- ceiving discounts on races and merchandise, SGX-certified trainers are listed on the Spartan website's "Spartan Coach Finder." Certification is subject to annual renewal for a nominal fee. Trainers must also submit evidence of eight continuing education credits from Spartan or elsewhere. International Races International races are organized by local licensees, which pay Spartan royalties based on a percentage of their revenues. In addition, licensees might also purchase obstacles, merchandise, or race day logistical services from Spartan as needed. Licenses tend to be multi-year contracts. De Sena was curious how Spartan's varied revenue generating activities would be treated under the new accounting standard, specifically how the amount and timing of revenue should be reported. He was eager to hear what Boudreau and Biesiada had to say on the sub- ject End of document Focus n 7 of 7 W