Why record reimbursed expenses as revenue?
/What are Reimbursed Expenses?
Reimbursed expenses are amounts paid by an employee or client, which a business then repays to them. Examples of reimbursed expenses are travel expenses paid by an employee while on company business, as well as a lunch with a client that is paid for by a company salesperson.
When to Record Reimbursed Expenses as Revenue
If a customer agrees to reimburse you for certain expenses, then you can record the reimbursed expenses as revenue. The underlying GAAP standard that addresses this issue is the Emerging Issues Task Force (EITF) issue number 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred.” The EITF stated that you report the payments as revenue. The main reason they gave for doing this was that customer payments for shipping and handling costs are already treated as revenue, and this is basically the same situation. The EITF also stated that this makes sense, because the buyer is benefiting from the expenditures, rather than the seller. Also, the seller has credit risk, because it receives reimbursement from the buyer after it paid for the expenditures.
And to be fair to the EITF, they made one of those “on the other hand” points, which was that the company is earning no profit on these expenses, and that tends to point toward treating them as an expense reduction rather than as revenue.
There are some holes in this argument. First, it tends to overstate revenue. This may be an inconsequential amount for a company that sells products, but it can be quite a large item for a professional services firm that routinely charges out-of-pocket expenses through to its customers.
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My second point is theoretical, which is that revenue should reflect the revenue-generating activities of the company, like providing consulting services or shipping a product. Being reimbursed for out-of-pocket expenses is not a revenue generating activity. It simply means that either entity could have paid for the expense up front, and it happens to have been more convenient for the seller to do so.
So, consider a situation where the buyer gives its corporate credit card to the seller, and it tells the seller to use the card to pay for all of those out-of-pocket expenses. Now the expenditure path goes completely around the seller, and the buyer pays. The seller records no expense, and no revenue.
This may seem like arguing over nothing, since the seller records no change in profit no matter how you handle out-of-pocket reimbursements – only the revenue and offsetting expense figures are impacted. Nonetheless, it can give the impression of a business being larger than it really is.