The Retail and Consumer Industry and Revenue Recognition

Written on August 9, 2018

Retail and Consumer Revenue Recognition Warren Averett Image

Below are a few points concerning potential impacts of the new revenue recognition standard (ASC 606) on the retail and consumer 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.

RETAIL AND CONSUMER (CONSUMER BUSINESS AND RESTAURANTS[1]) REVENUE RECOGNITION

Issue: Reseller and distributor arrangements

Steps within Five-Step Model: 1, 5

Description and Examples: Arrangements to sell goods through resellers or distributors will need to be evaluated to determine when control transfers to the customer (i.e., reseller/distributor); revenue should be recognized at that point. The “sell through” method under prior GAAP may only be appropriate in consignment arrangements under Topic 606.

Also, consider contract combination and modification guidance (e.g., multiple contracts entered with different regions of a national retailer at or near the same time may need to be combined).

Issue: Brand licensing and franchise arrangements

Steps within Five-Step Model: 2, 4 ,5

Description and Examples: Entities need to consider the nature of promises and fees in a franchise license arrangement to determine how many separate promises (performance obligations) exist within the contract. Revenue for some performance obligations may be recognized over time, while others may be at a point in time. For example, initial franchise fees will be recognized over time under Topic 606, which is a change compared to prior GAAP.

Issue: Customer options for additional goods or services

Steps within Five-Step Model: 2, 4, 5

Description and Examples: These options could result in ‘material rights’ which must be accounted for as separate performance obligations (i.e., promises to the customer), potentially resulting in complex price allocation of and deferral of revenue. Examples include incentives including retailer issued coupons, manufacturer issued coupons, free product rebate, promotional or trial products, price protection and price matching. This also applies to customer loyalty or reward programs in which customers are awarded for quantities they buy.

Issue: Rights of return, volume rebates, cash-back offers

Steps within Five-Step Model: 3, 5

Description and Examples: These provisions affect the determination of the transaction price. Companies will need to assess variable consideration and the constraint on variable consideration at contract inception and at each reporting period.

GAMING, HOSPITALITY AND LEISURE REVENUE RECOGNITION

 Issue: Contract combinations and modifications; identify performance obligations

Steps within Five-Step Model: 1, 2

Description and Examples: An entity may enter into multiple contracts with the same customer to provide services at different locations (e.g., manage hotels) or to provide different services (e.g., leasing services, management services, event planning, promotional services, security, etc.). The entity would need to consider the guidance on contract combination and modification and the resulting impact on identification of performance obligations. Additional factors to consider include price interdependency among multiple contracts, contract modifications, renewal options and timing of new contracts for additional services.

Issue: Brand licensing and franchise arrangements

Steps within Five-Step Model: 2, 4, 5

Description and Examples: Entities need to consider the nature of promises and fees in a franchise license arrangement to determine how many separate promises (i.e., performance obligations) exist within the contract. Revenue for some performance obligations may be recognized over time, while others may be at a point in time. Examples include royalty fees, initial fees, system assessment fees, application fees, termination fees, audit fees and training fees.

Issue: Loyalty programs and player points

Steps within Five-Step Model: 1, 2, 4, 5

Description and Examples: Loyalty programs may involve two or more parties. Arrangements need to be carefully evaluated to determine who the customer is, whether there is a principal and/or agent and what the distinct promises (performance obligations) are. Certain programs could result in ‘material rights’ which must be accounted for as separate performance obligations (i.e., promises to the customer), potentially resulting in complex price allocation of and deferral of revenue.

Issue: Principal/agent analysis

Steps 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 and arrangements, including but not limited to: managing properties for third parties; fees paid in participation (and similar) arrangements; loyalty redemptions with third parties; racetrack and related fees.

Links to Relevant AICPA Task Force:

Gaming

Hospitality

Timeshare

Retail and consumer 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 revenue recognition and your business.

 

[1] These industries have been combined due to the similarity of issues.

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