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The Manufacturing and Distribution Industry and Revenue Recognition

Written by Warren Averett on August 2, 2018

Below are a few points concerning potential impacts of the new revenue recognition standard (ASC 606) on the manufacturing and distribution industry. The information presented here does not represent a comprehensive assessment of the outcome of applying the new standard, but these points may help when considering how ASC 606 could impact you.

To access this information as a downloadable chart, click here.


Issue: Determining the unit of account

Step(s) within Five-Step Model: 1, 2, 4

Description and Examples: Complex manufacturing contracts require careful analysis in order to identify the contract with the customer and the number and nature of performance obligations. Entities must also consider the guidance on contract modifications and combining contracts.

Issue: Warranties

Step(s) within Five-Step Model: 2, 4, 5

Description and Examples: Warranties that the customer may purchase separately or that provide a distinct service must be treated as a separate performance obligation. Allocation of revenue to these promises could be challenging, and delayed recognition of some revenue may occur.

Issue: Estimating variable consideration

Step(s) within Five-Step Model: 3

Description and Examples: Entities must estimate variable consideration, apply the constraint on variable consideration and update estimates each reporting period. Examples include volume discounts, rebates, awards, incentives and claims.

Issue: Contract manufacturing – determining transfer of control (i.e., over time or point in time)

Step(s) within Five-Step Model: 5

Description and Examples: Entities need to evaluate at contract inception whether a performance obligation is satisfied over time or at a point in time. If a performance obligation does not satisfy one of the three criteria to be recognized over time, it must be recognized at a point in time. Revenue recognition under prior GAAP using the percentage-of-completion, completed contract or zero margin method is not necessarily indicative of which pattern (over time or point-in-time) will be required under the new standard.

Issue: Contract manufacturing – measuring transfer of control

Step(s) within Five-Step Model: 5

Description and Examples: When a performance obligation is recognized over time, an entity must select an appropriate measure of progress. When identifying an appropriate measure of performance in transferring control of goods or services, entities need to consider various factors, including but not limited to: nature of the good or service; ability to track and measure certain inputs and outputs; status of work-in-process; wasted or uninstalled materials; and changes in estimate.

Issue: Principal/agent analysis

Step(s) within Five-Step Model: Other

Description and Examples: Entities need to perform a principal/agent analysis to determine whether to present revenue and related expenses on a gross or net basis for certain transactions, including but not limited to reseller and distribution arrangements.

Manufacturing and distribution revenue recognition and the implications of the new standard can be complicated to navigate. Please consult your Warren Averett advisor for more information specific to your business and manufacturing and distribution revenue recognition.


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