Revenue Recognition Case

Your client, Stitch Fix Inc. (www.stitchfix.com), sells clothing and personal accessories hand selected by a personal stylist, delivered to clients doors. In an effort to increase its sales and customer base, Stitch Fix implemented a customer referral marketing campaign whereby existing customers can refer friends to Stitch Fix and receive a $25 credit towards the purchase of future merchandise. The terms of the program are as follows:

Stitch Fix offers existing customers a $25 credit if the existing customer refers a friend to Stitch Fixs website and the new customer purchases merchandise from Stitch Fix.

After a purchase is made by the new customer, the existing customer receives a $25 credit to be applied to a future purchase from Stitch Fix.

The $25 referral credit represents the fair value of the cost Stitch Fix would pay to acquire a new customer from an unrelated third party or marketing firm who is not a purchaser of its products. The program is open to all of Stitch Fixs customers.

Required: Stitch Fix has contacted you for advice about the accounting for this new referral program under GAAP rules. Write a memo to Stitch Fix Co. answering the following questions:

How should the $25 referral credit be recorded in Stitch Fixs Income Statement as a reduction of revenue or as a marketing expense?

When would Stitch Fix record the $25 credit? What are the entries Stitch Fix would record when the $25 referral credit is earned by the existing customer? What are the entries Stitch Fix would record when the $25 credit is redeemed against a $100 purchase made by the existing customer?

Stitch Fix is planning to adopt IFRS in the near future. What is the relevant accounting guidance they would follow under IFRS and what are the similarities/differences from GAAP?

Stitch Fix is has heard about and is concerned about the upcoming implementation of the new revenue standard, and is hopeful implementation will continue to be delayed. Provide Stitch Fix with a summary of the major changes to the revenue standard and when Stitch Fix should plan to implement the new standard.

Using the database Orbis (available through the library website), what is: a) the number of current shareholders, b) the 2015 number of employees, c) the name of the CEO, and d) the estimated revenue for 2015 for Stitch Fix? Note that this is not part of the memo, but please go ahead and include it within the same document just put it at the end as a separate section.