ASC 606 implementation: Is your company prepared?

For most private companies, the deadline for implementing the ASC 606 revenue recognition standard is rapidly approaching. We’ve learned from public company implementations of the standard in 2018 that this can be more difficult and time-consuming than expected, even for companies in the consumer space that were not expected to be affected as significantly as some other industries. Delaying implementation until the deadline date could make it very difficult for some companies to properly implement the standard by the required date. For private companies, it could also create inconsistencies between year-end reporting and interim reporting to banks, investors and other stakeholders, and require restatement or reconciliation of interim results in the year of implementation to explain the differences.    

Below are certain key questions, by sector, that executives should ask to help to determine the impact the standard may have on their company. If the answer to any of these questions is yes, companies should evaluate how the new standard may affect their revenue recognition policies in these areas. It is important to note; these are just some of the more common questions. Every company will have its own nuances and must ensure all revenue streams are assessed. Answer the questions that apply to your sector:

RETAIL

• Do you allow a customer the right to return goods and receive a refund?  If so, do you charge restocking fees? Do you have a process to assess the salvage value of returned/damaged goods?
• Do you offer mail-in rebates or similar vouchers at point of sale?
• Do you utilize direct response advertising?
• Do you offer extended warranty programs?
• Do you allow customers to earn award credits (e.g., points, miles) through your customer loyalty program?
• Do you sell gift cards and have an expectation of gift card breakage?
• Do you enter agreements that provide options for additional goods and services, discounts, or otherwise change the substance of the standard arrangement?

FASHION, BEAUTY AND HOME

• Do you allow for volume discounts on future purchases based on a customer’s historical purchasing activity (i.e., prospective volume-discounting)?
• Do you provide early payment discounts, rebates, volume discounts or vendor allowances, including cooperative advertising allowances, markdown allowances or other similar allowances?
• Have you evaluated if the timing of transfer of control of goods aligns with the time at which the title of goods shipped to customers passes? Do other factors that may impact the timing of control transfer need to be considered?
• Do you sell goods on consignment?
• Do you allow a customer the right to return goods and receive a refund? If so, do you charge restocking fees? Do you have a process to assess the salvage value of returned items?
• Do you provide extended warranty services?
• Do you provide customers with a license to intellectual property (IP), such as a tradename?
• If you are a licensor, you should consider the following questions:
  • Do you have multiyear licensing agreements with licensees?
  • Are terms of your agreements different for each licensee?
  • Do you currently recognize revenue from sales-or-usage-based royalties on a lag basis or in the period a royalty report is received?
  • Do the licenses have escalating minimums?
• If you sell direct to consumers, do you sell gift cards and have an expectation of gift card breakage?
• If you sell direct to consumers, do you allow consumers to earn award credits (e.g., points) in customer loyalty programs?

FOOD AND BEVERAGE

• Are you involved in joint venture activities, co-manufacturing efforts, trading of products and/or outsourcing of sales functions?
• Do you manufacture customized products using customer-owned recipes?
• Are you involved in drop-ship arrangements?
• Do you recognize revenue on the original transfer of a product to a contract manufacturer?
• Do you allow for price protection?
• Do you provide customers with a license to intellectual property (IP), such as a product formula or recipe?
• Do you allow for price concessions when selling to distributors or other similar customers?
• Do you pay slotting fees or enter into other types of trade spend agreements with customers?
• Do you enter into arrangements with customers for co-op advertising or other marketing and promotion allowances?
• Do you provide early payment discounts, rebates or volume discounts (applied retrospectively)
• Do you sell goods on consignment or with a right of return?

RESTAURANT

• Are you a franchisor or licensor?  If so, you should consider the following questions:
  • Do you currently recognize revenue on area development agreements and/or franchise agreements as or soon after new units open?
  • Do royalty agreements require minimum guarantees?
  • Do you currently recognize sales-based royalties on a lag basis?
  • Do you promise to provide goods or services that are ancillary to the franchise right? If so, do you charge for them separately?
• Do you sell gift cards and have an expectation of gift card breakage?
• Do you allow customers to earn award credits (e.g., points) in customer loyalty programs?
• Do you engage in exclusivity contracts with vendors that provide rebates and/or volume discounts?