What Restaurants Should Watch Out for with the New Revenue Recognition Standard

While the required adoption date for ASC 606 draws nearer for private companies, now is the time for restaurants to prepare for proper implementation and to understand the standard’s potential impacts on reporting and disclosure. Specifically, non-public companies with fiscal years beginning after December 15, 2018 should start considering how to comply with the new revenue recognition guidelines.

While franchisors are expected to bear the brunt of the new standard’s impact, restaurant owners and operators are not exempt from change. Franchisors are most focused on how the current guidance on accounting for upfront franchise fees will be superseded by the new standard. For more considerations for franchisors, see the recent post “Revenue Recognition Changes Coming For Franchisors”.

At the same time, all revenue streams, including delivery, gift cards, online sales and normal over-the-counter transactions, are governed by the new standard. Restaurant owners and operators will need to have a firm grasp of how their business handles these revenue streams before shifting processes per the new guidelines. In most cases, accounting for these transactions is not expected to change significantly, yet management will need to document its accounting conclusions through internal memos that include management’s considerations and conclusions.

In addition, the new standard will result in changes to:

• accounting for gift card breakage and

• loyalty programs. 

The new revenue standard includes specific guidance on both types of arrangements. In particular, gift card breakage (for gift cards not subject to escheatment) will likely be recognized earlier under the new standard, while loyalty programs will result in deferral of revenue until the points are redeemed or are subject to the same breakage guidance governing gift cards.

Restaurant management will also need to also address any internal control considerations, including any changes in accounting, reporting, and disclosure of revenue that may impact internal control processes. Those might include changes to monthly, quarterly, or annual period close processes in order to support the new accounting, reporting and disclosures.

Speaking of required disclosures – the new standard includes a myriad of additional disclosures related to revenue recognition. Luckily, the FASB relieved non-public entities of certain quantitative and qualitative disclosure requirements, but others remain. Many of the new disclosures may be relatively straight-forward for most owner/operators in the restaurant industry, as most revenues are earned at the point in time at which the food or other goods or services are provided to the end customer, with no extended payment terms. However, companies will need to assess each requirement, and take a fresh approach to their footnote disclosures as it relates to revenue recognition. 

One excellent source of information about the impact of adopting the new standard and examples of the relevant disclosures are the financial statements of public restaurant companies, as they were required to adopt the new standard for fiscal years beginning after December 15, 2017.  One of the things that we have learned from public companies’ experiences is that all areas of the organization need to understand the impact of ASC 606 including IT, legal, sales, etc.  Another learning is that the income tax department should be made aware of the upcoming changes as the timing of revenue recognition may affect taxable income.

While the adoption of ASC 606 may not significantly impact the timing of when revenue is recognized for most revenue streams of owner/operators, it will significantly impact the disclosure of revenue, so it is imperative for businesses to consider all aspects of the impact of ASC 606.

For more information on ASC 606, visit BDO’s Revenue Recognition News & Resources hub.
 
To keep up with the latest thoughts from BDO’s Restaurant practice, please subscribe to the Selections Blog on the Selections homepage here, and following us on Twitter at @BDORestaurant.