Revenue For Retailers

Revenue for
retailers
The new standards
effective date
is coming.
US GAAP
September 2017
kpmg.com/us/frv
b | Revenue for retailers 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Revenue viewed
through a new lens
Again and again, we are asked whats changed pattern of revenue recognition; this is a change
under the new standard: what do I need to from the existing risks and rewards model. As
tweak in my existing accounting policies for a result, there will be circumstances in which
revenue? Its just not that simple. there will be a change in the amount, timing
and presentation of revenue recognition.
The new standard introduces a core principle
that requires companies to evaluate their Less has been said about disclosures,
transactions in a new way. It requires more but the new standard requires extensive
judgment and estimation than todays newdisclosures.
accounting and provides new guidance to Read this to understand some of the most
determine the units of account in a customer significant issues for retailers the issues that
contract. The transfer of control of the goods or you should be consideringnow.
services to the customer drives the amount and
Whats inside
Sales incentives Nonrefundable up-front fee
Coupons and other sales discounts
Franchise arrangements
Customer loyalty programs
Applicable to all industries
Payments to customers
Expanded disclosures
Rights of return Transition
Timing of revenue Effective dates
Principal vs. agent Some basic reminders
Gift cards The impact on your organization
Credit card arrangements KPMG Financial Reporting View
Customer financing Contacts
Sales taxes
1 | Revenue for retailers 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
Sales incentives
Sales incentives that provide the customer with an option that is a material right
result in revenue deferral until the option is exercised or expires.
Sales incentives offered by retailers can take different forms. provide the customer with an option that is a material right,
Retailers very often provide free or discounted products which would be accounted for as a performance obligation.
through coupons, rebates or loyalty programs to customers However, not all customer options are material rights. Rather,
to encourage the future sale of their products. Under current some options are simply marketing or promotional offers,
USGAAP, some retailers account for these incentives as which are accounted for separately from the contract with the
expenses while others defer revenue. Under the new standard, customer e.g. coupon drops that are available to all retail
these sales incentives are evaluated to determine whether they customers and not dependent on a prior sales transaction.
Does the entity grant the

customer an option to acquire No material right analysis
additional goods or services? No
Yes
Could the customer obtain the

right to acquire the additional Yes
goods or services without
entering into the sale agreement?
No The option does not give rise to a

performance obligation
Does the option give the customer
the right to acquire additional goods
or services at a price that reflects
Yes
the stand-alone selling price for
those goods or services?
No
The option may be a material

right, and if so, it gives rise
to a performance obligation
The option is a performance obligation (the unit of account update processes and internal controls for determining stand-
for revenue recognition) under the contract if it provides a alone selling prices for material rights used in allocating the
material right that the customer would not receive without transaction price to performance obligations.
entering into that contract. Retailers will need to evaluate and
Coupons and other sales discounts
Coupons and other sales discounts earned from current transactions may result
in revenue deferral.
Applying the framework for sales incentives, a material right acquire additional goods or services. If that price is not directly
exists if: observable then the retailer needs to estimate it. This estimate
the coupon or other sales discount provides the customer reflects the discount that the customer would obtain when
with an option to purchase additional goods or services exercising the option, adjusted for:
at a price that does not reflect their stand-alone selling any discount the customer would receive without exercising
prices;and the option; and
those incentives are only earned as a result of the customer the likelihood that the option will be exercised.
entering into the arrangement.
The assessment of whether a retailer has granted its customer
If a material right exists, it is accounted for as a separate a material right requires significant judgment. A material right
performance obligation; this results in revenue being allocated does not exist if similar discounts are provided to customers in
to the option and deferred until the option is exercised or the same class regardless of whether they had qualifying prior
expires. The amount of revenue deferred is based on the purchases. However, a material right may exist even if it is not
relative stand-alone selling price of the customers option to quantitatively material.
Example Option that provides the customer with a material right
Retailer sells a computer to Customer for $2,000. As part of this arrangement, Retailer gives Customer a voucher. The voucher
entitles Customer to a 25% discount on any purchase up to $1,000 in Retailers store during the next 60days. Retailer intends
to offer a 10% discount on all sales to other customers during the next 60 days as its seasonal promotion. Retailer regularly
sells this model of computer for $2,000 without the voucher.
Retailer concludes that the discount voucher provides a material right that Customer would not receive without entering into
the original sales transaction. This is because Customer receives a 15% incremental discount compared with the discount
expected to be offered to other customers (25% discount voucher - 10% discount for all customers). Therefore, the discount
voucher is a separate performance obligation.
Retailer estimates that there is an 80% likelihood that Customer will redeem the voucher and will purchase additional products
with an undiscounted price of $500.
Retailer allocates the transaction price between the computer and the voucher on a relative stand-alone selling price basis
asfollows.
Stand-alone
Performance obligation Selling price ratio Price allocation Calculation
selling price
Computer $2,000 97.1% $1,942 $2,000 97.1%
Voucher 60 1
2.9% 58 $2,000 2.9%
Total $2,060 100% $2,000
Note:
1. Stand-alone selling price for the voucher: $500 estimated purchase of products 15% incremental discount 80% likelihood of exercise.
Customer purchases $200 of additional products (pre-discount) 30 days after the original purchase for $150 cash payment.
Customer makes no additional purchases before the expiration of the voucher. Therefore, at the expiration date Retailer
recognizes the remaining amount allocated to the voucher as revenue.
Retailer records the following journal entries.
Debit Credit
Cash $2,000
Revenue $1,942
Contract liability $58
To record initial sale of computer and voucher.
Cash $1501
Revenue $173
To record subsequent purchases by Customer.

Revenue $35
To record additional revenue on expiration of voucher.
Notes:
1. Discounted sales prices of additional products purchased: $200 - ($200 25%).
2. Partial satisfaction of performance obligation: $58 ($200 purchases / $500 total expected purchases).
3. Settlement of performance obligation on expiration: $58 - $23.
If a tiered pricing structure provides for discounts on future

purchases only after volume thresholds are met, it is likely that Example Buy four, get one free program
a material right has been conveyed to the customer. The retailer
evaluates the arrangement to determine whether a material Retailer offers a program in which customers who have
rightexists. purchased four drinks over a given period may receive
a fifth drink free. Based on its historical data, Retailer
determines that it is likely that many of its customers will
receive a free drink.
Customer purchases his first drink for $10. The first
purchase provides Customer with the right to purchase
three more drinks and receive the fifth for free.
Retailer concludes that the option in the current transaction
represents a material right. In making this determination,
Retailer considers both current and future transactions,
and concludes that Customer has in substance paid for
one-fourth of a free drink in the current transaction (a 20%
discount on five purchases).
This material right is accounted for as a separate
performance obligation. This results in a portion of revenue
from the sale of four beverages being allocated to the
option to get a free beverage based on the stand-alone
selling prices and deferred until the option is exercised
orexpires.
If a material right does not exist, there is no accounting for the
future discount when recognizing revenue on the transactions Therefore, the option to purchase the video game system
completed. In that case, purchases after the threshold has at a 5% discount offered to Customer A does not provide
been met are accounted for at the discountedprice. When a material right; it is not incremental to discounts offered
an option is independent of the current contract, the option to customers that did not make a previous purchase and
is a marketing offer and not a material right. The fact that the Customer A could have received the discount without
retailer does not require customers in a similar class to earn the the purchase of the television. Therefore, the offer is
discount indicates that the discounted price does not represent independent of the purchase of the television and is a
a material right. marketing offer.
Retailers often print coupons at the register after a purchase

Example Option that does not provide the customer is completed sometimes referred to as Catalina coupons
with a material right or bounce-back coupons that can be redeemed for a short
period. The coupons are handed to customers at the point of
Retailer includes a coupon for 5% off purchases of a video sale, or packaged with goods that customerspurchased.
game system within a sales circular that is available to all
customers who walk through the door of the store. The Customers can often access similar discounts without making
coupon is valid for two weeks. a purchase e.g. if coupons are printed in a newspaper or are
freely available in-store or online. This type of general marketing
Customer A purchases a television and receives a 5%- offer would indicate that the coupon does not provide a
off coupon generated by the register that can be used material right because the discount is available to the customer
to purchase a video game system within two weeks. independent of a prior purchase.
To evaluate whether this coupon provides Customer A
with an option that is a material right, Retailer compares If there is no general marketing offer, the entity assesses
it to other discounts on a video game system offered to whether the coupon conveys a material right. This assessment
similarcustomers. includes consideration of the likelihood of redemption. A low
redemption rate, which is typical for point-of-sale coupons, is a
Customer B received the coupon from the sales factor that suggests the coupon does not convey a material right
circular when entering the store. Customer B then or that the stand-alone selling price of the right is immaterial.
used the coupon to purchase a video game system at a
5%discount. When the coupons are not deemed to convey a material right
to the customer, they are recognized as a reduction in revenue
Customer C purchased a television and also received a on redemption. However, when there is no general marketing
similar register-generated coupon to purchase a video offer and the value of the coupon and likelihood of exercise
game system at a 5% discount. is more significant, a material right could be conveyed. The
The fact that Customer C receives the same discount as fact that the discount is offered at a point of sale, though, is
Customer A with its television purchase does not affect the notdeterminative.
analysis of whether a material right exists. Retailers will need to evaluate and update their processes and
Retailer compares the coupon offered to Customer A to the internal controls for distinguishing coupons and other sales
discount offered to Customer B and notes that CustomerB discounts that provide material rights from those that are
received the same discount without a prior purchase. marketing offers or that give rise to variable consideration (see
Payments to customers).
Customer loyalty programs
Loyalty points represent a separate performanceobligation, resulting in revenue

being deferred until the awards are either redeemed or expire.
Retailers often use customer loyalty programs to build brand can be accumulated and redeemed for free or discounted
loyalty and increase sales volume by providing customers goods or services. Customer loyalty programs usually
with incentives to buy their products. Each time a customer provide a customer with a material right that is a separate
buys a good or service, a retailer provides award points that performanceobligation.
Example Customer loyalty points program
Retailer offers a customer loyalty program at its store. Under the program, customers are awarded one point for every $10 they
spend on goods. Each point is redeemable for a cash discount of $1 on future purchases. Retailer expects 97% of customers
points to be redeemed. This estimate is based on Retailers historical experience, which Retailer determines is predictive of
the amount of consideration to which it will be entitled.
During Year 1, customers purchase products for $100,000 and earn 10,000 points. The stand-alone selling price of the products
to customers without points is $100,000.
The customer loyalty program provides the customers with a material right because the customers would not receive the
discount on future purchases without making the original purchase. Additionally, the price that they will pay on exercise of the
points on future purchases is not the stand-alone selling price of thoseitems.
Because the points provide a material right to customers, Retailer concludes that the points are a performance obligation in
each sales contract e.g. the customers paid for the points when purchasing products. Retailer determines the stand-alone
selling price of the loyalty points based on the likelihood of redemption.
Retailer allocates the transaction price between the products and the points on a relative stand-alone selling price basis
asfollows.
Stand-alone selling
Performance obligation Selling price ratio Price allocation Calculation
price
Products $100,0001 91% $91,000 $100,000 91%
Points 9,7002 9% 9,000 $100,000 9%
Total $109,700 100% $100,000
Notes:
1. Stand-alone selling price for the products.
2. Stand-alone selling price for the points: 10,000 points $1 97%.
Retailer recognizes a contract liability of $9,000 for the amount allocated to the material right (points).
The following occurs in Years 2 and 3.
During Year 2, 4,500 points are redeemed, and Retailer continues to expect that 9,700 points will be redeemed in total.
During Year 3, a further 4,000 points are redeemed. Retailer updates its estimate because it now expects 9,900 rather than
9,700 points to be redeemed in total.
In Years 2 and 3, Retailer determines the revenue to be recognized as follows.
Calculation of cumulative revenue

Revenue already Revenue to
(Redeemed points / Total expected to be redeemed) Cumulative revenue
recognized recognize this year
x Allocation of revenue
Year 2: (4,500 / 9,700) x $9,000 $4,175 0 $4,175
Year 3: (8,500 / 9,900) x $9,000 $7,727 $4,175 $3,552
Revenue increases in Year 3 as a result of the redemption of an additional 4,000 points. However, revenue is also reduced
because of the change in estimate of the total expected points to be redeemed. The change in estimate results in a cumulative
adjustment to revenue regardless of whether points are redeemed.
Payments to customers e.g. rebates, price protection and price matching
programs
Retailers may reduce revenue for certain payments to customers earlier under the
new standard.
Sales incentives offered in the form of rebates, price protection, payable to a customer. If yes, then the incentive is accounted for
price matching programs or allowances very often represent as variable consideration. If no, then the incentive is accounted
consideration payable to a customer. Under current US GAAP, for using the later of guidance, which may be rare for retailers
consideration payable to a customer is recognized as a reduction with a history of providing concessions or rebates. The retailer
to revenue at the later of when revenue is recognized or when updates its estimate and adjusts revenue each reporting period.
an offer is made to a customer which some have interpreted to
be when an explicit offer is made to the customer.
Example Price protection
Under the new standard, the payment to a customer is
accounted for as a reduction in the transaction price, unless Retailer sells a smart television to Customer for $2,500 and
the payment is made for a distinct good or service (highly also offers Customer a best price guarantee wherein it
unusual in consumer retail transactions). The new standard agrees to reimburse Customer for the difference between
includes guidance similar to current US GAAP that accounts for the price Customer paid and the price offered by Retailer or
consideration payable to a customer at the later of when the any of its competitors for two months following the sale.
related revenue is recognized or the retailer promises to pay
such consideration. Retailer estimates the transaction price and concludes
based on its prior experience with similar promotions
However, under the new standard, retailers will more often and products that it will reimburse Customer $50.
account for these payments as variable consideration. This will Consideration expected to be repaid to Customer is
require the retailer to estimate the consideration it expects variable consideration; it reduces the transaction price and
to pay at contract inception, and to recognize the reduction of revenue, and is recorded as a liability at the time of sale.
revenue as control of the goods or services are transferred.
If Retailer did not explicitly make the guarantee to
This is because retailers typically have a past practice of Customer (e.g. no explicitly stated policy or stated on the
providing these payments that, under the new standard, would customers receipt), but often provides similar guarantees,
not follow the later of guidance. For example, the retailer that past practice would cause Retailer to account for
evaluates whether it intends to provide an incentive or if the the guarantee in the same manner as if it had been
customer has a reasonable expectation that an incentive will explicitlypromised.
be provided even though it may be in the form of consideration
Rights of return
The balance sheet will be grossed up to present a refund liability and an
assetfor recovery, and return estimates and their balance sheet presentation
may change.
Under current US GAAP, revenue is recognized on product adjustments to previously constrained product or services
sales with a right of return when certain conditions are met, revenue generally are only upward (increases to revenue).
including the ability to reasonably estimate future returns. Because current US GAAP only requires future returns to
On rare occasions when the retailer is unable to reasonably be reasonably estimable, entities often record upward or
estimate returns (e.g. on entering a new market with no downward adjustments to revenue as a result of the right
previous sales history), it may be required to defer revenue of return guidance. Retailers with a history of significant
under current US GAAP. Exchanges by customers of one downward adjustments to revenue may defer more revenue for
product for another of the same type, quality, condition and estimated returns under the new standard.
price are not considered returns under current US GAAP (or
the new standard). When reasonable estimates cannot be made
Under the new standard, most entities will have sufficient
The new standard requires an entity to estimate returns and
information to recognize consideration for an amount greater
evaluate the constraint on variable consideration in determining
thanzero, even when they lack historical experience on which
the amount of revenue to recognize. This approach of adjusting
to base their returns estimate. Applying the constraint on
revenue for the expected level of returns and recognizing
variable consideration does not result in defaulting to zero
a refund liability is broadly similar to current guidance, but
revenue recognition (as happens under current US GAAP when
some aspects of the new standard may result in changes to
a reasonable estimate cannot be made).
currentpractice.
This means that retailers will estimate some minimum
Estimation methodology amount of revenue that is probable of not resulting in a
Under the new standard, an entity estimates sales returns significant reversal, resulting in revenue being recognized
using either the expected-value method (e.g. probability- before the return period lapses. Estimates are updated each
weighted estimates) or the most-likely-amount method. The reportingperiod.
method selected depends on which is the better predictor;
the expected-value method is generally more predictive for Presentation
salesreturns. Under the new standard, the return is presented gross as
a refund liability and an asset for recovery. This will be a
Estimated returns could result in amounts similar to
change in practice for many retailers that currently present
current practice in many cases, but the estimation method
reserves or allowances for returns on a net basis. The asset
could be different if an entity currently uses a single
for recovery is reported separately from inventory and, when
best estimate approach rather than an expected-value
impaired, reduced to the merchandise value the retailer
method like a probability-weighted assessment or more
expects to recover through subsequent sales or a return
sophisticatedmodeling.
to the consumer products vendor. Retailers will record any
After estimating returns, an entity applies the constraint on expected diminished merchandise value as cost of sales
variable consideration, which limits revenue recognition to an each reporting period. The refund liability and right-to-recover
amount that is probable of not having a significant reversal in asset are also adjusted at each reporting period for changes in
the future. The constraint guidance is intended to ensure that estimatedreturns.
Example Sales with a right of return
Retailer sells 100 pairs of shoes at a price of $100 each and receives payments of $10,000. The terms presented on the sales
receipts allow customers to return any undamaged merchandise within 30 days and receive a full refund in cash or store credit.
The cost of each product is $60. Retailer estimates that three pairs of shoes will be returned and a subsequent change in the
estimate will not result in a significant revenue reversal.
Retailer estimates that the costs of recovering the merchandise will not be significant and expects that the shoes can be
resold at a profit or returned to the shoe vendor for full credit. Within 30 days, two pairs of shoes arereturned.
Debit Credit
Cash $10,000
Refund liability $3001
Revenue $9,700
To record sale excluding revenue on products expected to be returned.
Asset (right to recover) $1802

Cost of goods sold $5,820
Inventory $6,000
To record COGS and right to recover products from customers.
Two products returned

Cash $200
To record refund for product returned.
Inventory $1204
To record product returned as inventory.
Right of return expires

Revenue $100
To record revenue on expiration of right of return.
Cost of goods sold $60

To record COGS on expiration of right to recover products from customers.
Notes:
1. $100 3 (price of the products expected to be returned).
2. $60 3 (cost of the products expected to be returned).
3. $100 2 (price of the products returned).
4. $60 2 (cost of the products returned).
Restocking fees reduce) the estimated refund liability when the product is
Retailers sometimes charge a customer a restocking fee sold. The refund liability is based on estimated returns less the
when a product is returned. The restocking fee is intended to restocking fee. Any costs related to restocking are reflected as
compensate the retailer for costs associated with a product a reduction in the carrying amount of the asset recorded for the
return or the reduced selling price a retailer may charge when right to recover those products.
reselling the product to another customer. There is mixed practice in accounting for restocking fees under
A right of return with a restocking fee is similar to a right current US GAAP with some retailers recognizing restocking
of return for a partial refund. Therefore, restocking fees for fees when they are collected. Therefore, this may represent a
products expected to be returned are included in (and therefore change for some retailers.
Example Restocking fees
Retailer sells 20 pieces of furniture for $300 each and the cost of each piece of furniture is $160. Customers have the right to
return the furniture, but they are charged a 10% restocking fee. Retailer expects to incur restocking costs of $20 per piece of
furniture returned, and estimates returns to be 5%. The furniture is expected to be in saleable condition upon return.
When control of the furniture transfers to a customer, Retailer recognizes thefollowing.
Item What to include Amount Calculation
Revenue Furniture estimated not to be returned plus restocking fee $5,730 (191 $300) + (1 $302)
Refund liability Furniture expected to be returned less restocking fee 270 (1 $300) - $302
Asset for recovery Cost of furniture expected to be returned less restocking cost 140 (1 $160) - $20
Notes:
1. Furniture not expected to be returned: 20 pieces of furniture sold less one (20 5%) expected to be returned.
2. Restocking fee: $300 10%.
Debit Credit
Cash $6,000
Revenue $5,730
To record sale excluding revenue on products expected to be returned.

Cost of goods sold $3,060
Inventory $3,200
To record COGS and right to recover products from customers.
Timing of revenue
Retailers may experience a change in the timing of revenue recognition for certain
types of arrangements.
Under current US GAAP, retailers recognize revenue when If the shipping and handling occur before the customer
the risks and rewards have transferred to the customer, which obtains control of the goods, they are fulfillment activities.
is generally at the point in time that goods are delivered to If the shipping and handling occur after a customer obtains
the customer. Most in-store transactions will continue to be control of the goods, an entity makes a policy election (and
recognized at point-of-sale under the new standard. However, discloses its election) to treat these activities as:
in certain fact patterns (e.g. customer online purchases),
fulfillment activities, in which case the entity accrues
revenue satisfied at a point in time could be recognized at a
the costs of these activities and recognizes revenue
different point than under current US GAAP.
and costs at the point in time that control of the goods
The new standard is a control-based model that takes an transfers to the customer thereby achieving matching of
approach to revenue recognition that is conceptually different the expense and revenue; or
from current US GAAP. Under the new standard, revenue is a performance obligation, in which case the entity
recognized when the customer obtains control of the good or allocates a portion of the transaction price to the
service. Control refers to the ability to direct the use of, and shipping and handling. Revenue allocated to the goods
obtain substantially all of the remaining benefits from, the good is recognized when control of the goods transfers to the
or service. customer, and revenue for the shipping is recognized
The notion of risks and rewards is only one of the indicators of as the shipping and handling performance obligation
control. Other indicators such as legal title, physical possession, is satisfied. The related costs are generally expensed
right to payment and customer acceptance also need to be asincurred.
evaluated for each arrangement. It is important for retailers to Regardless of which policy a retailer uses, when it concludes
consider whether it or the customer controls the goods during that control transfers to the customer (e.g. at shipping point)
shipment, and that consideration is affected by the rights and before all of the significant risks and rewards of ownership have
obligations during shipping. been transferred, it may experience a change in practice if it
Retailers may have arrangements in which the goods are currently applies synthetic FOB destination accounting.
shipped to the customer FOB shipping point. Under current Current US GAAP allows for diversity in the income statement
US GAAP, these terms may be treated as FOB destination presentation of shipping and handling services. Entities
arrangements (revenue is deferred until goods are received by may record these activities in costs of goods sold or another
the customer) because the retailer assumes the risk of loss financial statement line item (e.g. SG&A). If these costs are
during transit and has determined that the risks and rewards of significant and not recorded in costs of goods sold, current
the goods do not pass to the customer at the shipping point. USGAAP requires them to be disclosed.
This is often referred to as synthetic FOBdestination.
The new revenue standard does not explicitly address the
Because the transfer of the risks and rewards of the asset is presentation of these costs. Classifying these activities as cost
only one of the indicators for determining when the customer of goods sold because they are considered fulfillment activities
obtains control of the goods, there will likely be many cases would be an acceptable presentation.
under the new standard in which retailers determine that
control of the goods in these types of arrangements transfers Based on discussions with the SEC, it would also be acceptable
when the goods are shipped despite the retailers practice of for an entity to continue its current presentation or to change
assuming the risk of loss during transit. its classification to cost of goods sold. However, it would not
be appropriate to change from a current presentation of cost of
Shipping and handling services goods sold to another financial statement line item.
The accounting for shipping and handling activities under the In addition, entities are encouraged to continue to provide
new standard depends on whether the activities are performed disclosure about these costs and where they are presented in
before or after the customer obtains control of the goods. the income statement.
Principal vs. agent
Certain retailer arrangements like flash title and drop shipments require significant
judgment to determine whether the retailer is the principal or agent.
Under the new standard when other parties are involved in Because an entity evaluates whether it is a principal or an
providing goods or services to an entitys customer, the entity agent for each specified good or service to be transferred to
determines whether the nature of its promise is a performance the customer, it is possible for the entity to be a principal for
obligation to provide the specified goods or services one or more goods or services and an agent for others in the
themselves, or to arrange for them to be provided by another same contract. This could affect the allocation of revenue to the
party e.g. whether it is a principal or anagent. distinct goods or services within the contract.
This determination is made by identifying each good or As a result of the changes to the principal versus agent
service promised to the customer in the contract and guidance introduced by the new standard, retailers need to
evaluating whether the entity obtains control of the specified reconsider their conclusions, which could result in changes to
good or service before it is transferred to the customer, current accounting.
considering the new overarching control principle. Control is
Retailers enter into a variety of arrangements where
the ability to direct the use of, and obtain substantially all of
assessment of control of a specified good or service may be
the remaining benefits from, the goods or services (or prevent
challenging. For example, significant judgment is required in
others from doing so). An entity cannot provide a specified
the principal-agent assessment for flash title, drop shipping and
good or service if it does not first have control of that good
vendor-managed inventory arrangements.
orservice.
In addition to the new overarching principle of control, the Flash title
new standard provides indicators to assist with the evaluation Flash title arrangements are those in which the retailer does
of whether the entity controls the good or service before not take title to the goods or services until the point of sale to a
it is transferred to the customer and is therefore a principal customer, and the end customer immediately takes control after
in the transaction: (1) the entity is primarily responsible for that. Although taking title may indicate that the retailer can direct
fulfilling the promise to provide the specified good or service; the use of and obtain substantially all of the remaining benefits
(2) the entity has inventory risk before the specified good or of the good, it is not determinative that control has transferred.
service has been transferred to the customer or after transfer For example, taking title to a good only momentarily at check-
of control to the customer; and (3) the entity has discretion in out scanning before transferring title to the customer does not
establishing the price for the specified good or service. These in and of itself mean a retailer controls the specified good or
indicators may provide relevant evidence in the evaluation of service before it is transferred to the customer. In contrast, a
the control principle i.e. whether the entity has the ability to retailer could control a good before obtaining title.
direct the use of, and obtain substantially all of the remaining
When a retailer obtains only flash title to the specified good, we
benefits from, the good or service. Both the control principle
believe the principal-agent evaluation should focus on whether
as well as relevant information provided by the control
it obtains controls of the specified good or service before
indicators are considered when evaluating the substance of
obtaining flash title, and a consideration of the retailers and
the transaction.
suppliers rights before transfer of the good to the end customer.
Because the principal versus agent evaluation in the new
The following are likely key factors to consider in
standard is based on the concept of control of the specified
manycircumstances:
good or service, some of the indicators used in current
USGAAP for assessing whether a party is a principal or an Whether the retailer has physical possession of the goods
agent are not included in the new standard i.e. exposure to (one of the point-in-time indicators providing relevant
physical loss inventory risk, whether the entitys fee is fixed evidence) and could direct the use of the products in the
or in the form of a commission, and exposure to customer same way it could direct the use of the products for which
credit risk. Also, the new standard does not specify any of it had title before a customer purchasing the product at the
the indicators as being more important than others, whereas register. For example, the retailer could decide in which
current USGAAP specifies that being the primary obligor and store or in which part of its store the products are placed
having general inventory risk are stronger indicators that the and what price is charged, or it could control access to the
intermediary is aprincipal. products through its operation of the store.
Whether the retailer has the ability to obtain substantially and then engages a subcontractor to fulfill its performance
all of the benefits from the products in the form of the cash obligation. The following indicators may, depending on the
flows from the sale to the customer. facts and circumstances, suggest that the third-party vendor
Whether the supplier can constrain the retailers ability in a drop ship arrangement is acting on behalf of the retailer;
through call rights or other provisions to direct the use of these factors are not exhaustive, and no one factor should be
and obtain substantially all of the remaining benefits from considered necessarily determinative.
the products. The third-party vendor is invisible to the customer i.e. the
customer is unaware of who the supplier of the specified
Drop shipment arrangements good is before it obtains control of the good.
In drop shipment arrangements, the retailer often does not take The vendor packages the specified good as coming from
physical possession of the specified good before control of that the retailer e.g. in the retailers box and other packaging.
good is transferred to the customer. However, because control
The vendor is obligated to maintain an inventory of the
refers to the ability to direct the use of, and obtain substantially
specified good that it is not permitted to sell, use or
all of the remaining benefits from, a good or service (including
otherwise direct for a purpose other than shipment to the
the ability to prevent others from doing so), physical possession
retailers customers (when ordered) i.e. in this case, the
is not always required to have control; similarly, momentary
vendor may essentially be holding inventory for the retailer.
physical possession does not necessarily convey control.
The lack of physical control makes the principal versus agent The retailer has the right and ability to source the specified
analysis more challenging in drop shipment scenarios. good from more than one supplier after the customer places
its order with the retailer.
Control of a tangible good frequently goes hand-in-hand with
having front-end inventory risk with respect to the good. This A retailer should also consider the indicators of control that are
would occur when, for example, the retailer: provided in the new standard when assessing whether the
maintains an inventory of the good that is being drop vendor in a drop shipment arrangement is effectively acting on
shipped in the contract; the retailers behalf. The following indicators generally provide
more relevant evidence.
has the right to sell (or use, lease, etc.) and an obligation
to formally purchase (or make payment for, etc.) the good Primary responsibility for fulfillment. Is the retailer or
before the customer places its order with the retailer; and/or the third-party vendor primarily responsible for fulfillment
of the customer order? What is the retailers responsibility
has an enforceable purchase commitment for the good with
for fulfillment and product acceptability as compared to
the supplier before the customers order.
thevendors?
Many retailers may not have the front-end inventory risk Inventory risk. Does the retailer have front-end inventory
evidenced by the above indicators. Also, obtaining title (e.g. risk with respect to the third-party goods? Does the retailer
during a short period of transit), or where that title is limited in have back-end inventory risk (i.e. does it bear the risk of loss
terms of not conveying the right to redirect or resell the good or damage and/or return risk)? If so, how significant is the
to another customer, would not alone convey control. Similarly, back-end inventory risk? Are any of those risks mitigated by
obtaining title only after a customer returns the good does the third-party vendor arrangements e.g. ability to return
not necessarily mean the retailer controls the specified good items to the vendor and/or return terms with customers
before it is transferred to the customer. Despite the absence that permit the retailer to refuse returns that will not in turn
of frontend inventory risk, control of the specified good may be accepted by the vendor?
reside with the retailer when the retailer has the ability to direct
Pricing discretion. What is the degree of the retailers
(e.g. sell, use or lease) the specified good as it sees fit and the
discretion in establishing the price to the customer?
right to obtain substantially all of its remaining benefits (e.g. in
the form of cash from sale, or consumption of the good in use) The new standard notes that pricing discretion may also
and can, as a result, effectively prevent the third-party vendor be present when an entity is an agent and therefore may
from exercising similar rights. have a more limited effect on the assessment of control in
thesearrangements.
The new standard also suggests that an entity may be a
principal i.e. deemed to control a specified good or service An evaluation of the specific rights and obligations in each
if another party (e.g. a third-party vendor) is, in its role, customer and vendor relationship may be required because
effectively acting on behalf of the entity. This may be the case, these arrangements can vary by customer, third-party vendor
for example, when an entity obtains a contract with a customer and specified good.
Gift cards Breakage revenue is recognized in proportion to the pattern of redemption by the
customer when the retailer expects to be entitled to breakage.
Gift cards (or certificates) sold by retailers are often not redemption or expiration; (2) at the point at which redemption
redeemed for their full value by the customer. The portion of a becomes remote; or (3) in proportion to actual gift card
customers rights that are unexercised (i.e. the unredeemed redemptions. In addition, there is current diversity in practice
value) is referred to as breakage. For example, if a retailer in how breakage is presented in the income statement
expects a customer will redeem only 90% of the value of a as revenue, other income, or in some cases as an offset
gift card, 10% of the amount paid for the giftcard is breakage. toexpense.
In this instance, the customer is expected to let its right to
Under the new standard, the timing of breakage revenue
obtain goods or services for 10% of its prepayment expire or
recognition depends on whether the entity expects to be
remainunexercised.
entitled to a breakage amount e.g. if it is probable that
There is diversity in the current accounting for breakage with recognizing breakage will not result in a significant reversal of
three acceptable methods to recognize breakage revenue: the cumulative revenue recognized.
(1) as the entity is legally released from its obligation (e.g. at
No
Recognize when the likelihood
Expect to be entitled to
of the customer exercising its
a breakage amount
remaining rights becomes remote
Yes
When the expectation

Recognize in proportion to changes
the pattern of rights
exercised by the customer
A retailer considers the variable consideration guidance to their current accounting policy election. Additionally, under the
determine whether and to what extent it expects to be new standard retailers will present breakage as revenue in the
entitled to a breakage amount. Under these principles, a retailer incomestatement.
assesses whether it is probable that recognizing revenue on a
If a retailer does not have a basis for estimating breakage, it will
proportionate basis for the unexercised rights (the recognition
likely conclude that any estimate is fully constrained because
model required if a breakage estimate can be made) will not
it is unable to conclude that breakage is expected. In that case,
result in a significant revenue reversal in the future. Retailers
revenue is recognized when the likelihood of the customer
with established gift card programs will consider historical
redeeming the balance becomes remote (remote method).
customer redemption data and likely conclude there is an
expectation of being entitled to some amount of revenue that A retailer updates its analysis of estimated breakage each
isnot probable of significant reversal. reporting period, including whether the expectation of
breakage has changed and the appropriateness of its use of
A gift card that is issued by an entity and gives the customer
the remote method. If changes in the estimate arise, the entity
rights to its goods and services is in the scope of the new
adjusts the contract liability to reflect the remaining pattern of
standard. The standard requires an entity to determine
redemptionexpected.
whether it expects to be entitled to a breakage amount and,
if so, to recognize the breakage amount in proportion to If the retailer is required to remit to a government entity the
customer redemptions of the gift cards. Because the methods amount that is attributable to customers unexercised rights
used in current GAAP are accounting policies, rather than e.g. under applicable unclaimed property or escheatment
an analysis of the entitys specific facts and circumstances, laws then it recognizes a financial liability until the rights are
some retailers using either of the first two methods may be extinguished, rather than recognizing the breakage amount
required to recognize breakage revenue sooner than under asrevenue.
Example Sale of a gift card Retailer expects to be Example Sale of a gift card Retailer does not expect
entitled to breakage to be entitled to breakage
Retailer sells a nonrefundable gift card to Customer Retailer implements a new gift card program in a new
for$100. market. Retailer sells Customer a nonrefundable gift card for
$50. Retailer does not have an obligation to remit the value
On the basis of historical experience with similar gift of unredeemed cards to any government authority or other
cards, Retailer estimates that 10% of the gift card balance entity. The gift card expires five years from the date of issue.
will remain unredeemed, and that unredeemed amount
will not be subject to escheatment (i.e. unclaimed Because this is a new program, Retailer has very little
propertylaws). historical information about customer redemption patterns
and breakage. Specifically, Retailer does not have sufficient
Because Retailer can reasonably estimate the amount entity-specific information, nor does it have knowledge of
of breakage expected, and it is probable a significant the experience of other retailers in the market to estimate
revenue reversal will not occur if it recognizes breakage breakage. Therefore, Retailer concludes that it does not
on a proportional basis, Retailer recognizes the breakage have a basis to conclude that it is expected to be entitled
revenue of $10 in proportion to the pattern of exercise of to breakage in an amount that if recognized would be
Customers rights. probable of not resulting in a significant revenue reversal.
Specifically, when it sells the gift card, Retailer recognizes Retailer therefore recognizes the breakage when the
a contract liability of $100 because Customer prepaid for a likelihood of Customer exercising its remaining rights
nonrefundable card. No breakage revenue is recognized at becomes remote. This may occur on expiration of the
this time. gift card, or earlier if there is evidence to indicate that the
probability hasbecome remote that Customer will redeem
If Customer redeems $45 of the gift card amount in any remaining amount on the gift card.
30days, then half of the expected redemption has occurred
([$45 / ($100 - $10)] = 50%). Therefore, half of the breakage However, Retailer will continue to evaluate its information
i.e. $5 ($10 50%) is also recognized. about breakage prior to Customers exercise becoming
remote. If it subsequently obtains sufficient evidence to
Accordingly, on this initial gift card redemption, Retailer support an estimate of breakage, it will begin recognizing
recognizes revenue of $50: $45 from transferring goods or breakage on a proportional basis. Retailer will also make a
services, plus breakage of $5. cumulative catch-up adjustment to revenue in the period that
it concludes it has sufficient information aboutbreakage.
Credit card arrangements
Retailers credit card arrangements may be complex and require significant judgment
and analysis to determine the appropriate accounting.
Some retailers enter into co-branded credit card arrangements Licenses for brand names and customer relationships are
with a credit card issuer (typically a financial institution). Credit considered symbolic intellectual property (IP) under the new
card issuers enter into these arrangements with retailers standard because the utility of the license largely depends on
principally to increase the number of cardholders and drive the entity continuing to support or maintain that IP. Therefore, a
additional credit card revenue (e.g. interest income, interchange license to symbolic IP grants the customer a right to access the
fees) by incentivizing card spend with retailer loyalty points and/ entitys IP, which is satisfied over time.
or free or discounted goods and services.
Marketing-related activities are evaluated to determine if they
Under these arrangements, the retailer may receive a variety are promises distinct from the licensed IP. Many marketing
of payments from the card issuer: up-front, nonrefundable activities may support or maintain the licensed IP and therefore
payment, card acquisition bounties for each new card, card are not distinct, while others may transfer a separate promise
portfolio revenue or profit share, and payments for marketing to the card issuer. Retailers may also provide card acquisition
activities, loyalty points or other customer services (e.g. free services to the card issuer whereby they assist in the referral
shipping or delivery to cardholders). and credit card application process. Retailers may receive
bounties (contingent payments) based on the number of cards
Retailers determine whether these arrangements are in the
that are signed up.
scope of the new standard by evaluating whether the services
being provided are part of the retailers ordinary activities. The Loyalty program points that are purchased by the card issuing
new standard does not define ordinary activities, but refers to bank based on cardholder spend will generally be recognized
the definition of revenue in the FASB Concepts Statements. following the accounting for loyalty points for retail customers
The definition of revenue is based on how the entity attempts (see Customer loyalty programs). However, there may be
to fulfill its basic function in the economy of producing and arrangements where the card issuer purchases points from
distributing goods or services at prices that enable it to pay the retailer up-front or in bulk purchases, often to be used in
for the goods and services it uses and to provide a return to promotional activities to attract or reward cardholders. In these
its owners. Although the payments in these arrangements are scenarios, the retailer evaluates when control of the right
received from card issuers rather than the retail customer, the transfers to the card issuer and whether a significant financing
arrangements are common in the industry and are used by component exists that could result in the recognition of interest
retailers as a vehicle to increase customer spend in their stores expense (see Customer financing).
and expand brand loyalty or recognition. Therefore, co-brand
Retailers evaluate the various benefits and services provided to
cards are typically part of the underlying retail business to help
retail customers on behalf of the card issuer (card issuer funds
the retailer drive sales within their core business and generally
the services for their cardholders) to determine whether these
these arrangements are in the scope of the new revenue
benefits are optional purchases (and follow the material rights
standard for the retailer.
guidance) or represent variable consideration for a promise to
Performance obligations stand ready to provide those services.
A typical credit card arrangement may include the Allocating the transaction price
followingelements:
Under the new standard, the transaction price (both fixed
license to use retailers brand name; and variable consideration) is allocated to the performance
license to use retailers customer relationship/list; obligations in a contract based on their relative stand-alone
marketing activities; selling prices. Variable consideration is generally required to be
estimated (see Step 3) but certain exceptions exist. Given the
card acquisition services;
various fixed and variable revenue streams in these contracts,
retailers customer loyalty program points; and/or applying the allocation guidance may be challenging.
other services provided to cardholders e.g. extended
maintenance, free shipping/delivery. Direct allocation of variable consideration
One exception to estimating variable consideration is for
The promises in the contract are evaluated to determine if they
variable consideration that is attributable to one or more, but
are distinct and therefore represent performance obligations
not all, performance obligations because (1) the terms of the
that are separate units of account.
variable payment relate specifically to the entitys efforts to
satisfy the performance obligation or transfer the distinct goods item to which the royalty relates, the retailer is required to
or services, and (2) allocation of the variable payment entirely allocate revenue to those underlying services.
to one or more, but not all, of the performance obligations
The retailer evaluates the timing of when the underlying
results in allocation that is consistent with the overall allocation
services are provided to determine when it is appropriate to
objective of the standard.
recognize that allocated portion of the royalty. For example,
This analysis requires significant judgment and an evaluation of if the retailer transfers up-front goods or services distinct
all of the performance obligations and payment streams (fixed from the license of IP, the amount of revenue allocated to the
and variable) in the contract. If this guidance is met, the variable up-front performance obligations is initially limited until the
payment is recognized when control of the related good or subsequent sales (card swipes) occur. However, if the retailer
service is transferred to the customer. transfers goods or services distinct from the license later in
the contract, those performance obligations may be satisfied
Sales- or usage-based royalty exception after the sales-based royalty being earned. This situation may
Another exception to estimating variable consideration is for require that a portion of the sales-based royalty be deferred and
sales-based royalties related to licenses of IP. A card revenue recognized when control of the distinct performance obligation
share or payments based on card spend (e.g. certain loyalty is transferred.
point purchases) that are provided in these arrangements
Conversely, if the royalty exception does not apply, the retailer
may serve as a sales- and usage-based royalty related to the
may need to estimate the variable consideration and include
symbolic IP (brand name and customer relationship).
it in the initial determination of the transaction price to be
The sales-based royalty exception applies either when the allocated to all the performance obligations unless the variable
royalties relate only to a distinct license of IP or when the payments can be accounted for using the direct allocation
license is the predominant item to which the royalty relates. guidance (see Direct allocation of variable consideration).
When the license is not the only good or service in the
Revenue share reporting on a lag is not permissible
arrangement (which is typically the case), the retailer evaluates
whether the license(s) is the predominant item to which the Under current US GAAP, some retailers recognize the revenue
royalty relates. The royalty to be evaluated could be a revenue share on a lag basis i.e. they recognize revenue in the period
share or it could be payments that are based on card spend subsequent to that in which the card purchases occur. This is
(e.g. certain loyalty point purchases) when those payments because they do not receive reporting about the revenue share
relate to more than points purchases. The license would be the that the card issuing bank owes until the subsequent period.
predominant item if the card issuer would ascribe significantly Under the new standard, recognition based on lag reporting is
more value to the brand and customer relationship licenses not permitted. If the underlying card spend is not known at the
than to the loyalty points or other goods or services to which reporting period close, the spend needs to be estimated using
the revenue share or payments relate. In this case, the a most-likely-amount or expected-value method; that amount
exception would still apply to the entire sales-based royalty. is recognized as revenue for the period. The retailer trues up
For sales-based royalties, a retailer recognizes revenue at the the difference between the estimate and actual revenue share
later of: earned in the subsequent period.
when the subsequent sales occur; or
Credit card processing
on the satisfaction or partial satisfaction of the performance
Retailers enter into arrangements with banks and card
obligation to which the royalty relates.
processors to facilitate credit and debit card transactions
To the extent that the royalty exception applies, the revenue within their stores. These are generally entered into with
share is recognized as the underlying card swipe occurs. different entities and/or separately from any co-brand credit
However, exceptions may arise if the revenue share is also card arrangement. However, in some cases the co-brand credit
promised in exchange for other goods or services, or if the card arrangement may also include pricing related to these
royalty does not reflect performance (e.g. certain tiered processing fees, which may require additional transaction
royalties). In addition, any guaranteed royalties (e.g. a fixed price allocation considerations. Currently there is diversity in
minimum amount) are accounted for as fixed consideration. the presentation of card processing fees, with some retailers
recording these fees net against the retail sale.
When the revenue share or the loyalty point purchase covers
both the license and the loyalty point, the retailer determines Under the new standard, transaction price excludes amounts
the relative stand-alone selling price of the point and the collected on behalf of third parties. When these card
license. The value of the points purchased by the card issuer processing fees are not charged to the customer or paid on
would generally be included in the retailers loyalty point behalf of the customer, the retailer bears the cost associated
deferral accounting. If the revenue share or loyalty point with the card processing. In these cases, these costs would
purchase also compensates the retailer for other services not represent a reduction in transaction price (i.e. retail sale).
(e.g.extended return policies, free shipping, discounts, This may result in more retailers recording card processing
marketing services) but the license remains the predominant fees as an expense.
Customer financing
The amount of revenue recognized by retailers may be affected by financing
offered to customers.
Retailers sometimes offer promotional incentives that allow is to recognize revenue at an amount that reflects what the
customers to buy items such as furniture and pay the cash selling price of the promised good or service would have been if
selling price after delivery in installments or in a deferred lump- the customer had paid cash at the same time as control of that
sum payment. Under current US GAAP, extended payment good or service transferred to the customer.
terms may result in a conclusion that revenue is not fixed or
However, a significant financing component may still exist
determinable, which precludes revenue recognition. In those
when the consideration to be received for a good or service
cases, retailers may default to a due-and-payable revenue
with extended payment terms is the same as the cash selling
model and not account for a financing element.
price and the interest rate is zero. Judgment is required to
Under the new standard, when the retailer concludes that it evaluate whether in these circumstances an entity is offering a
is probable it will collect the amount to which it expects to be discount or other promotional incentive (variable consideration)
entitled, it evaluates whether its contractual arrangement with for customers who pay the cash selling price at the end of
the customer contains a significant financing component. If the the promotional period equal to the financing charge that
period between performance and the related payment is more would otherwise have been charged in exchange for financing
than one year, a significant financing component may exist in thepurchase.
the arrangement.
If the retailer concludes that significant financing has been
As a result, the accounting for financing in arrangements provided to the customer, then the transaction price is
where the customer pays in arrears will likely arise more reduced by the implicit financing amount and interest income
frequently. This accounting results in a decrease in revenue is accreted. Even when an interest rate is charged to the
and an increase in interest income as compared to similar customer, it may not always be appropriate to use an interest
arrangements under current USGAAP. Although not as rate that is explicitly specified in the contract, because the
common for retailers, advance payments from customers may entity might offer cheap financing as a marketing incentive.
also result in accounting for a significant financing component, The implicit financing amount is calculated using the rate that
increasing revenue and increasing interest expense. However, would be used in a separate financing transaction between the
the new standard provides a practical expedient, whereby an retailer and its customer.
entity is not required to account for the significant financing
Consequently, a retailer applies the rate that would be used in
component if it expects that the period between when it
a separate financing transaction between it and its customer
transfers a promised good or service to the customer and when
that does not involve the provision of goods or services.
the customer pays for that good or service will be one year
This can lead to practical difficulties for retailers with large
orless.
volumes of customer contracts and/or multinational operations,
A financing component may be explicitly identified in the because they have to determine an appropriate discount rate
contract or may be implied by the contracts payment terms. for each customer, class of customer or geographical region
Generally, the objective of a significant financing component ofcustomer.
Sales taxes
Retailers can elect to present sales taxes on a net basis or they can perform a jurisdictional
analysis, which may result in some taxes being presented gross and others net.
Under current US GAAP, an entity makes an accounting policy entitys total gross receipts are not included in the scope of
election to present sales taxes and other similar taxes on a this election.
gross or net basis in the income statement.
When the practical expedient is not elected, an entity evaluates
Under the new standard, entities are permitted to elect whether the taxes are collected on behalf of a third party (e.g.
a practical expedient to present those taxes on a net government) on a case-by-case basis in each jurisdiction in
basis. The election applies to all taxes assessed by a which it has sales. This entails an assessment of whether
governmentalauthority that are both imposed on and each tax is imposed by the specific governmental entity on
concurrent with the specific revenue-producing transaction the customer or theretailer. This may result in some taxes
and collected by an entity from a customer e.g. sales, use, being presented on a net basis and others on a gross basis for
value-added and some excise taxes. Taxes assessed on the retailers not electing the practicalexpedient.
Nonrefundable up-front fee

Retailers need to evaluate the nature of up-front fees to determine the timing of
revenue recognition.
Some contracts include nonrefundable up-front fees (e.g. the in the future and is recognized as revenue when those future
annual membership offered by some retailers) that are paid at goods or services are provided, which may include future
or near contract inception. Under the new standard, an entity contractperiods.
assesses whether the fee relates to the transfer of a promised
If the up-front fee is an advance payment for future goods or
good or service to the customer.
services, an entity must also evaluate whether the fee gives the
If the activity does not result in the transfer of a promised customer a material right. If the fee gives rise to a material right,
good or service to the customer, the up-front fee is an then it is recognized over the period for which the payment
advance payment for performance obligations to be satisfied provides the customer with a material right.
Franchise arrangements
Retailers that franchise their operations may have a change in the accounting for
these arrangements under the new standard.
Some retailers may franchise their operations in addition to evaluation of the accounting for franchise rights, performance
operating their own stores. Current US GAAP provides specific obligations, pre-opening activities and costs, advertising funds,
guidance for the accounting for these arrangements. The end customer sales incentives, and contract modifications.
new standard eliminates this specific guidance and requires KPMGs Revenue for franchisors provides discussion on the
the general revenue model to be applied. This requires a new accounting for franchise arrangements.
Applicable to all industries
Expanded disclosures Transition
The new standard contains both qualitative and quantitative An entity can elect to adopt the new standard in a variety
disclosure requirements for annual and interim periods. The of ways, including retrospectively with or without optional
objective of the disclosures is to provide sufficient information practical expedients, or from the beginning of the year of
to enable users of the financial statements to understand the initial application with no restatement of comparative periods
nature, amount, timing and uncertainty of revenue and cash (cumulative effect method).
flows arising from contracts with customers. Entities that elect the cumulative effect method are required
Specifically, the new standard includes disclosure requirements for: to disclose the changes between the reported results of the
new standard and those that would have been reported under
disaggregation of revenue;
current US GAAP in the period of adoption.
contract balances, including changes during the period;
For transition purposes, the new standard introduces a new
performance obligations; term completed contract. A completed contract is a contract
significant judgments; and for which an entity has recognized all or substantially all of the
assets recognized to obtain or fulfill a contract, including revenue under current US GAAP as of the date of adoption of
changes during the period. the new standard. The concept of a completed contract is used
when applying:
An entity should review these new disclosure requirements to
certain practical expedients available during transition under
evaluate whether data necessary to comply with the disclosure
the retrospective method; and
requirements are currently being captured and whether system
modifications are needed to accumulate the data. the cumulative effect method coupled with the election to
initially apply the guidance only to those contracts that are
Internal controls necessary to ensure the completeness not complete.
and accuracy of the new disclosures should be considered
especially if the required data was not previously collected, or This will require careful analysis particularly where there is trailing
was collected for purposes other than financial reporting. revenue after delivery has occurred (e.g. revenue was not fixed
or determinable, collectibility was not reasonably assured, royalty
Also, SEC guidance requires registrants to disclose the arrangements). In those circumstances, the contract would not
potential effects that recently issued accounting standards be considered complete if substantially all of the revenue had not
will have on their financial statements when adopted1. The been recognized before adoption. Applying the standard to these
SEC expects the level and specificity of these transition types of contracts at transition may result in revenue being pulled
disclosures to increase as registrants progress in their into the opening retained earnings adjustment.
implementation plans. The SEC has also stated, when the
Entities should consider the potential complexities involved
effect is not known or reasonably estimated, that a registrant
with calculating the opening retained earnings adjustment
should describe its progress in implementing the new
and the recast of comparative periods (if any) when planning
standard and the significant implementation matters that it
their implementation. It may be prudent for entities to perform
still needs to address.
transition calculations before the adoption date to ensure all
potential complexities are identified.
Effective dates
Type of entity Annual reporting periods after
Public business entities and December 15, 2017 including interim reporting periods within that reporting period.
not-for-profit entities that Early adoption permitted for annual reporting periods beginning after December 15, 2016,
are conduit bond obligors including interim reporting periods within that reporting period.
December 15, 2018 and interim reporting periods within annual reporting periods
All other US GAAP entities,
beginning after December 15, 2019.
including SEC registrants
Early adoption permitted for annual reporting periods beginning after December 15, 2016,
that are Emerging Growth
including interim reporting periods within that reporting period or interim reporting periods
Companies
within the annual period subsequent to the initial application.
1. Staff Accounting Bulletin Topic 11.M.
Some basic reminders
Scope
The guidance applies to all The new standard applies to contracts to deliver goods or services to a customer. A
contracts with customers customer is a party that has contracted with an entity to obtain goods or services that are
unless the customer contract an output of the entitys ordinary activities in exchange for consideration.
is specifically within the
The new standard will be applied to part of a contract when only some elements are in the
scope of other guidance
scope of other guidance.
e.g. Topic 944 (insurance),
Topic 460 (guarantees).
Step 1: Identify the contract
Contracts can be written, A contract with a customer is in the scope of the new standard when the contract is legally
oral or implied by an entitys enforceable and all of the following criteria are met:
customary business
practices, but must be the contract has commercial substance;
enforceable by law. This rights to goods or services can be identified;
may require legal analysis payment terms can be identified;
on a jurisdictional level to the consideration the entity expects to be entitled to is probable of collection; and
determine when a contract
exists and the terms of that the contract is approved and the parties are committed to their obligations.
contracts enforceability. If the criteria are not met, any consideration received from the customer is generally
recognized as a deposit (liability).
Step 2: Identify the performance obligations
Performance obligations Performance obligations are the unit of account under the new standard and generally
do not have to be legally represent the distinct goods or services that are promised to the customer.
enforceable; they exist
if the customer has a Promises to the customer are separated into performance obligations, and are accounted
reasonable expectation that for separately if they are both (1) capable of being distinct and (2) distinct in the context of
the good or service will be the contract.
provided. A promise can An exception exists if the performance obligations represent a series of distinct goods or
be implied by customary services that are substantially the same and that have the same pattern of transfer to the
business practices, policies customer over time. A series is accounted for as a single performance obligation.
orstatements.
Step 3: Determine the transaction price
Estimating variable The transaction price is the amount of consideration to which an entity expects to be
consideration will represent entitled in exchange for transferring goods or services to a customer, excluding amounts
a significant departure collected on behalf of third parties e.g. some sales taxes. This consideration can include
from current accounting for fixed and variable amounts, and is determined at inception of the contract and updated
manyentities. each reporting period for any changes in circumstances.
When determining the The transaction price determination also considers:
transaction price, an entity
uses the legally enforceable Variable consideration, which is estimated at contract inception and is updated
contract term. It does not at each reporting date for any changes in circumstances. The amount of estimated
take into consideration the variable consideration included in the transaction price is constrained to the amount
possibility of a contract for which it is probable that a significant reversal in the amount of cumulative revenue
being cancelled, renewed recognized will not occur when the uncertainty is resolved.
ormodified. Noncash consideration received from a customer is measured at fair value at
contractinception.
Consideration payable to a customer represents a reduction of the transaction price
unless it is a payment for distinct goods or services it receives from the customer.
Significant financing components may exist in a contract when payment is received
significantly before or after the transfer of goods or services. This could result in an
adjustment to the transaction price to impute interest income/expense.
Step 4: Allocate the transaction price
A contractually stated price The transaction price is allocated at contract inception to each performance obligation to
or list price is not presumed depict the amount of consideration to which an entity expects to be entitled in exchange for
to be the stand-alone selling transferring the promised goods or services to the customer.
price of that good or service.
An entity generally allocates the transaction price to each performance obligation
in proportion to its stand-alone selling price. However, when specified criteria are
met, a discount or variable consideration is allocated to one or more, but not all,
performanceobligations.
The stand-alone selling price is the price at which an entity would sell a promised good or
service separately to a customer. Observable stand-alone prices are used when they are
available. If not available, an entity is required to estimate the price using other techniques
even if the entity never sells the performance obligation separately.
Step 5: Recognize revenue
An entity must first An entity recognizes revenue when it satisfies its obligation by transferring control of the
determine whether a good or service to the customer.
performance obligation
A performance obligation is satisfied over time if one of the following criteria are met:
meets the criteria to
recognize revenue over time. the customer simultaneously receives and consumes the benefits as the entityperforms;
the entitys performance creates or enhances an asset that the customer controls as
If none of the over-time
the asset is created or enhanced; or
criteria are met, revenue for
the performance obligation the entitys performance does not create an asset with an alternative use to the entity,
is recognized at the point and the entity has an enforceable right to payment for performance completed to date.
in time that the customer If control transfers over time, an entity selects a method to measure progress that is
obtains control of the goods consistent with the objective of depicting its performance.
or services.
If control transfers at a point in time, the following are some indicators that an entity
Control is the ability to considers to determine when control has passed. The customer has:
direct the use of, and
a present obligation to pay;
obtain substantially all of
the remaining benefits physical possession;
from the goods or services legal title;
or prevent others from risks and rewards or ownership; and
doingso.
accepted the asset.
Customer options
Customer options may Revenue is allocated to a customer option to acquire additional goods or services, and is
be accounted for as deferred until (1) those future goods or services are transferred or (2) the option expires
performance obligations, when it represents a material right. A material right exists if the customer is only able
resulting in more revenue to obtain the option by entering into the sale agreement and the option provides the
deferral than under customer with the ability to obtain the additional goods or services at a price below stand-
currentGAAP. alone selling prices.
Licensing of intellectual property
The new standard includes How an entity recognizes license revenue depends on the nature of the license. There are
a framework for determining two categories of licenses of IP.
whether there is a license Functional IP. IP is functional if the customer derives a substantial portion of the
of IP, and the category into overall benefit from the IPs stand-alone functionality e.g. software, biological
which it falls. compounds, films and television shows. Revenue is generally recognized at the point in
As a result, the pattern of time that control of the license transfers to the customer.
revenue recognition for Symbolic IP. IP is symbolic if it does not have significant stand-alone functionality,
licenses could differ from and substantially all of the customers benefit is derived from its association with the
legacy US GAAP. licensors ongoing activities e.g. brands, trade names and franchise rights. Revenue is
generally recognized over the license period using a measure of progress that reflects
the licensors progress toward completion of its performance obligation.
There is an exception to the general revenue model on variable consideration for sales- or
usage-based royalties related to licenses of IP. Such a sales- or usage-based royalty is
recognized as revenue at the later of:
when the sales or usage occurs; or
on the satisfaction or partial satisfaction of the performance obligation to which the
royalty has been allocated.
Warranties
Warranties do not have Assurance-type warranties will generally continue to be accounted for under existing
to be separately priced guidance i.e. Topic 450 (contingencies). However, a warranty is accounted for as a
to be accounted for as performance obligation if it includes a service beyond assuring that the good complies with
performance obligations. agreed-upon specifications. This could require some warranties to be separated between
a service element (deferral of revenue, which is then recognized as the services are
provided) and an assurance element (cost accrual at the time the good is transferred).
Principal vs. agent
The new standard changes An entity identifies each specified good or service to be transferred to the customer, and
the guidance used to determines whether it is acting as a principal or agent for each one. In a contract to transfer
evaluate whether an entity is multiple goods or services, an entity may be a principal for some goods and services and
a principal or an agent. an agent for others.
Credit risk is no longer an An entity is a principal if it controls the specified good or service that is promised to the
indicator that an entity is customer before it is transferred to the customer.
aprincipal.
Indicators that an entity has obtained control of a good or service before it is transferred
to the customer are having primary responsibility to provide specified goods or services,
assuming inventory risk, and having discretion to establish prices for the specified goods
orservices.
Contract modifications
A general accounting The new standard requires an entity to account for modifications either on a cumulative
framework provides most catch-up basis (when the additional goods or services are not distinct) or a prospective
entities with more guidance in basis (when the additional goods or services are distinct).
the new standard than under
If any additional distinct goods or services are not priced at their stand-alone selling prices,
current GAAP.
the remaining transaction price is required to be reallocated to all unsatisfied performance
obligations, including those from the original contract.
Contract costs
More costs are expectedto The new standard provides guidance on the following costs related to a contract with a
be capitalized under the customer that are in the scope of the new standard:
newstandard. incremental costs to obtain a contract; and
An entity cannot elect costs incurred in fulfilling a contract that are not in the scope of other guidance.
to expense or capitalize.
Incremental costs to obtain a contract with a customer (e.g. sales commissions) are required
Capitalization is required
to be capitalized if an entity expects to recover those costs unless the amortization period,
when the criteria are met.
which may include anticipated contracts or renewals, is less than 12months.
Fulfillment costs that are not in the scope of other guidance e.g. inventory, intangibles, or
property, plant, and equipment are capitalized if the fulfillment costs:
relate directly to an existing contract or specific anticipated contract;
generate or enhance resources that will be used to satisfy performance obligations in
the future; and
are expected to be recovered.
An entity amortizes the assets recognized for the costs to obtain and fulfill a contract on
a systematic basis, consistent with the pattern of transfer of the good or service to which
the asset relates.
The impact on your
organization
Implementation of the new standard is not just an accounting exercise.
New revenue recognition standard

Revenue recognition automation
and corresponding accounting
and ERPupgrades
changes
Impact of new revenue Automation and customization of
recognition standard and mapping ERP environment
to new accounting requirements Impact on ERP systems
New accounting policies General ledger, sub-ledgers and
historical results and transition reporting packages
Reporting differences and Peripheral revenue systems and
disclosures interfaces
Tax reporting/planning
Revenue
Recognition
Financial and operational
Governance and change
process changes
Revenue process allocation and Governance organization and
management changes
Budget and management Impact on internal resources
reporting Project management
Communication with financial Training (accounting, sales, etc.)
markets
Revenue change management
Covenant compliance team
Opportunity to rethink business Multinational locations
practices
Coordination with other strategic
initiatives
As noted in the chart, the new standard could have far-reaching and disclosures. The implementation of the new standard will
effects. The standard may not only change the amount and involve a diverse group of parties (e.g. Tax, IT, Legal, Financial
timing of revenue, but potentially requires changes in the Planning, Investor Relations, etc.) and entities should have
core systems and processes used to account for revenue and a governance structure in place to identify and manage the
certain costs. Entities may need to design and implement new required change. For more information about implementation
internal controls or modify existing controls to address risk challenges and considerations, see chapter 14 of KPMGs
points resulting from new processes, judgments, estimates Revenue: Issues In-Depth.
KPMG Financial
Reporting View
Insights for financial reporting professionals FRV focuses on major new standards (including revenue
recognition, leases and financial instruments) and also covers
As you evaluate the implications of new financial reporting
existing US GAAP, IFRS, SEC matters, broad transactions
standards on yourcompany, KPMG Financial Reporting View is
andmore.
ready to inform your decisionmaking.
Visit kpmg.com/us/frv for news and analysis of significant
decisions, proposals, and final standards and regulations.
US news & Reference Newsletter

CPE
views library sign-up
kpmg.com/us/frv
Insights for financial reporting professionals
Here are some of our resources dealing with revenue recognition under the new standard.
Assists you in gaining an in-depth understanding of the new fivestep revenue model by
Handbook answering the questions that we are encountering in practice, providing examples to explain
key concepts and highlighting the changes from legacy USGAAP.
Provides you with an in-depth analysis of the new standard under both US GAAP and IFRS,
Issues InDepth and highlights the key differences in application of the new standard. Additionally, chapter14
provides implementation considerations.
We show how one fictitious company has navigated the complexities of the revenue
Illustrative disclosures
disclosurerequirements.
Transition options Assists you in identifying the optimal transition method.
Industry guidance See our other industry guidance.
Contacts
KPMG is able to assist retailers as they navigate the adoption of the new standard.
Elizabeth C Miller Paul H Munter

Partner Partner
U.S. Retail Audit Leader Department of Professional Practice
345 Park Avenue 345 Park Avenue
NewYork, NY 10154 NewYork, NY 10154
Tel: 212-954-3708 Tel: 212-909-5567
[email protected] [email protected]
Prabhakar Kalavacherla (PK) Brian K Allen

Partner Partner
Global RevenueTopicTeam Leader U.S. Revenue Topic Team Leader
55 Second Street, Suite 1400 345 Park Avenue
San Francisco, CA 94105 NewYork, NY 10154
Tel: 415-963-8657 Tel: 212-954-3621
Meredith L Canady Scott A Muir

Partner Partner
Department of Professional Practice Department of Professional Practice
345 Park Avenue 345 Park Avenue
NewYork, NY 10154 NewYork, NY 10154
Tel: 212-909-5858 Tel: 212-909-5073
kpmg.com/socialmedia
KPMG is a global network of professional services firms providing Audit, Tax and Advisory services. We operate in 155 countries and
have 174,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated
with KPMG International Cooperative (KPMG International), a Swiss entity. Each KPMG firm is a legally distinct and separate entity
and describes itself as such.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or
entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as
of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate
professional advice after a thorough examination of the particular situation.
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Revenue for

Principal vs. agent Some basic reminders

Gift cards The impact on your organization

Credit card arrangements KPMG Financial Reporting View

Customer financing Contacts

Does the entity grant the

Could the customer obtain the

No The option does not give rise to a

The option may be a material

Example Option that provides the customer with a material right

Computer $2,000 97.1% $1,942 $2,000 97.1%

Total $2,060 100% $2,000

Contract liability $353

If a tiered pricing structure provides for discounts on future

Retailers often print coupons at the register after a purchase

Customer loyalty programs

Loyalty points represent a separate performanceobligation, resulting in revenue

Products $100,0001 91% $91,000 $100,000 91%

Points 9,7002 9% 9,000 $100,000 9%

Total $109,700 100% $100,000

Calculation of cumulative revenue

Year 2: (4,500 / 9,700) x $9,000 $4,175 0 $4,175

Year 3: (8,500 / 9,900) x $9,000 $7,727 $4,175 $3,552

Asset (right to recover) $1802

Two products returned

Refund liability $2003

Right of return expires

Refund liability $100

Cost of goods sold $60

Example Restocking fees

Item What to include Amount Calculation

Retailer records the following journal entries.

Asset (right to recover) $140

When the expectation

Nonrefundable up-front fee

1. Staff Accounting Bulletin Topic 11.M.

Step 1: Identify the contract

Step 2: Identify the performance obligations

Step 4: Allocate the transaction price

Licensing of intellectual property

Principal vs. agent

New revenue recognition standard

US news & Reference Newsletter

Transition options Assists you in identifying the optimal transition method.

Industry guidance See our other industry guidance.

Elizabeth C Miller Paul H Munter

Prabhakar Kalavacherla (PK) Brian K Allen

Meredith L Canady Scott A Muir

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