Accounting for Third-Party Delivery Isn’t as Simple as It Seems

As consumer demand for third-party delivery services increases, restaurants are realizing these services not only provide another stream of revenue, but also additional expenses. In previous posts, we discussed the operating side for restaurants utilizing delivery services. Now, we hope to share guidance on the proper accounting and presentation of fees paid to third-party delivery services such as UberEats and GrubHub. How a restaurant records delivery costs differs depending on how the contract was written and who is considered the end customer. 
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under generally accepted accounting principles (GAAP). The FASB has since amended the ASU with several updates, including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net). Under Topic 606, the concept of principal versus agent requires additional analysis which restaurants might find less straightforward. The focus of this analysis has changed a bit, whereby the focus is control versus what the risk and rewards are over the contract. There are several questions that need to be considered to determine the answer:

• Who is responsible for food and pricing?

• Who is truly the “consumer” of the delivery?

 
The answers to these questions could determine if the restaurant would record revenues at a gross amount, which includes the delivery fees, along with an expense for the delivery costs, or net of delivery costs. The answer to these questions will determine who has the control of the food while being delivered to the customer, thus determining who the principal is and who is the agent.
 
Example 1– ABC Restaurant enters into a contract with a third-party delivery service, XYZ Company, to deliver menu items to its customers. XYZ Company provides a web-based program that allows customers to order food from ABC’s menu. The agreement stipulates that ABC many not charge more than the menu prices and will pay XYZ 30% of each meal sold to customers using the program. The agreement further notes that ABC is responsible for the quality of the food until the meals are delivered to the customer. ABC is also responsible for any costs associated with unsatisfactory meals. Any refunds or credits given to the customer are deducted from remittances due to ABC from XYZ. If a customer orders a meal for the menu price of $10, ABC receives a remittance from XYZ for $7.
 
In terms of Topic 606, is ABC the principal or the agent? How are delivery costs recorded?
 
Since ABC is responsible for the quality (if the meal was cold, damaged or lost) of the food and pricing until the meal is delivered to the customer, ABC is considered the principal in these transactions. ABC would record revenue of $10, which is the gross revenue amount, and $3 of delivery charge, which is recorded in cost of sales. If the delivery charge is recorded on another line on the income statement, ABC must disclose where it is recorded.
 
Example 2 – For this example, let’s replicate the same terms as above with exception of which company has control over the food during delivery. In this case, XYZ delivery service is responsible for quality of the food during delivery to the customer and would ultimately be required to pay for any replacement meals. In addition, XYZ determines which of ABC restaurant’s menu items are included on XYZ’s website and thus available for delivery, and XYZ determines the price to the end consumer, while paying ABC its normal menu price less 30%. 
 
In this example, XYZ is considered the principal in the transaction with the end consumer because XYZ controls the food and the transaction with the end customer. In this scenario, ABC’s customer is XYZ.  Therefore, ABC would recognize revenue of $7 (net of the $3 discount), and no delivery expense would be recorded.
 

What Restaurants Can Do Now

Restaurants that work with third-party delivery services will need to carefully evaluate whether revenue should be presented at gross or net under Topic 606. The underlying concept is control. If the restaurant controls the food prior to it being received by the end customer, it will be deemed the principal in the arrangement with the end customer and will record revenue at a gross amount. If not, the delivery entity will be deemed the principal, and the restaurant will record revenue net of the delivery costs. The key is to carefully read and analyze contracts with third-party delivery services.
 
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