The New Revenue Recognition Standard
On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance—FASB ASC 606 or IFRS 15, the IASB’s comparable standard—replaces substantially all existing U.S. Generally Accepted Accounting Principles (GAAP) on this topic.
While the compliance deadline for public organizations has passed, nonpublic organizations must apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2018.
Privately-held retailers must carefully consider the differences between legacy U.S. GAAP and ASC 606, particularly as it relates to sale with a right of return, online orders, gift cards and related breakage, customer incentives and coupons, loyalty programs and service agreements.
Many retailers will find that they may apply similar right of return approaches under the new guidance in order to estimate variable consideration associated with return rights, but this may be challenging for newly-launched product lines where a company may not have the historical context to estimate returns.
When it comes to the recognition of revenue for online orders, there is diversity in practice with respect to the timing in which the customer receives the product. ASC 606 is based on the principle that revenue should be recognized when a vendor transfers control to the customer.
Accounting for the initial sale and redemption of gift cards under the new standard remains similar to prior standards. The primary difference is how gift card breakage is recognized in proportion to the pattern of customer rights exercised.
The new standard also represents minimal change in the existing requirements for recognition of coupons and other customer incentives. However, the updated requirements could potentially result in complex revenue deferrals when incentives are considered “material rights” that must be accounted for as separate performance obligations.
Under the new guidance, retailers that utilize the incremental cost method to account for loyalty or reward programs will have to modify accounting processes, and retailers that offer service agreements must now differentiate between assurance and service warranties.
To view a further breakdown of special considerations for retailers and a five-step implementation checklist, read our full insight, Revenue Recognition Readiness Guide for Privately Held Retail Companies.
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