1. Business environment
The online retail superpower Amazon, beginning as an online bookseller in 1995, quickly grew into one of the biggest e-commerce businesses of today.
Amazon’s main revenue producing activities can be summarised as follows.
Retail sales – Amazon sells products through online and physical stores.
Third-party seller services – Amazon provides platforms for sellers to sell products and fulfil orders, from which it earns commissions and relevant fulfilment and shipping fees.
Subscription services – It includes fees from Prime Membership (providing members with an evolving suite of benefits) and access to content, such as e-books, digital video, and non-AWS subscription services.
Amazon Web Services (AWS) – AWS arrangements contain worldwide sales of compute, database, storage, and other services.
Other Revenue – It mainly contains sales of advertising services.
Retail sales, especially online sales, dominant among these activities. It accounted for more than 60% of total revenue over last two years while each of other activities only contributed to less than 20% (See Table 1).
Amazon’s strategy focuses on being the most customer-centric company on Earth and there are four principles in Amazon: customer obsession focus, passion for invention, commitment to operational excellence, and long-term thinking (Amazon 2018, p.11). It also divided its operations into three segments including AWS, North America, and International, reflecting that it expands not only the retail market but also the web services based on cloud computing (Amazon 2018, p.11).
Porter's Five Forces are applied to analyse competitive environment. As the Internet facilitates competitive entry and comparison shopping, Amazon has many competitors in different industries including physical, e-commerce, and omnichannel retail. Meanwhile, customers have more bargain power. Some of their current and potential competitors may have greater resources, longer history, more customers or greater brand recognition. They may secure better terms from suppliers, adopt more aggressive pricing and devote more resources to technology, infrastructure, fulfillment and marketing. In addition, new and enhanced technologies may increase competition. It seems that Amazon’s businesses are rapidly evolving and intensively competitive.
2. Impact on revenue recognition and characteristics of financial information
2.1 Impact on revenue recognition
The new revenue recognition principle can be regarded as an improvement on the old one, because it makes the nature, amount, timing, and uncertainty of revenue clearer to information users based on the contracts with customers (IFRS 15). The effect of new standard on timing and amount of revenue will be reflected in the process of revenue recognition and measurement.
Accounting Standards Update (“ASU”) amending revenue recognition guidance primarily influence the unredeemed part of Amazon’s gift cards. In the past, Amazon cannot recognise the unredeemed part until gift card expires or likelihood of redemption is rare (Deloitte 2018, p.131). While, Amazon can currently recognize this part over the expected customer usage period based on customer usage pattern according to the new revenue standard (Amazon 2018, p.48). The expected customer usage period is substantially around 9 months based on the estimates by Amazon, comparing to timing of recognising unredeemed part of gift cards under old standard that was generally 2 years later after the card issuance (Amazon 2017, p.49). So the revenue recognition is accelerated under new standard. As for amount, the related revenue in the first year after adopting the new standard should increase by that was transferred from the accrued expense account (Garcia, 2017). Also, in the long run, recognising unredeemed part of gift cards over the time instead of at one time point will smooth the revenue among different financial years, avoiding the gift card revenue increase sharply in the card expiration year, which reflect the customer usage pattern more appropriately and further enhance the relevance.
The devices like kindle sold through retailers are also influenced by the new revenue standard. Under the old standard, Amazon recognized the revenue of devices sold through retailers at the time they are sold to end customers. While, under new standard, the related revenue is recognised earlier than before when the devices delivered to retailers, because no obligation remaining for Amazon after the delivery.
According