Revenue for

retailers
The new standard’s
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.

member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).Revenue viewed through a new lens Again and again. a Delaware limited liability partnership and the U. a Swiss entity. 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. services to the customer drives the amount and What’s 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. The new standard introduces a core principle that requires companies to evaluate their Less has been said about disclosures. . The transfer of control of the goods or you should be considering now. timing and presentation of revenue recognition. we are asked what’s changed pattern of revenue recognition. All rights reserved.S. It requires more but the new standard requires extensive judgment and estimation than today’s new disclosures. there will be circumstances in which revenue? It’s just not that simple. 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. transactions in a new way. there will be a change in the amount. 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.

entering into that contract. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Under current some options are simply marketing or promotional offers. 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. Rather. and if so. Sales incentives offered by retailers can take different forms. 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. Under the new standard.g. All rights reserved. provide the customer with an option that is a material right.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. rebates or loyalty programs to customers However. Retailers will need to evaluate and 2 | Revenue for retailers © 2017 KPMG LLP. customer – e. a Swiss entity. Retailers very often provide free or discounted products which would be accounted for as a performance obligation. to encourage the future sale of their products. 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. US GAAP. . some retailers account for these incentives as which are accounted for separately from the contract with the expenses while others defer revenue.S. a Delaware limited liability partnership and the U. through coupons. not all customer options are material rights.

All rights reserved. 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. and —— those incentives are only earned as a result of the customer —— the likelihood that the option will be exercised. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Stand-alone Performance obligation Selling price ratio Price allocation Calculation selling price Computer $2. Applying the framework for sales incentives.10% discount for all customers). and the option. it is accounted for as a separate a material right requires significant judgment. Example – Option that provides the customer with a material right Retailer sells a computer to Customer for $2. The assessment of whether a retailer has granted its customer If a material right exists. at the expiration date Retailer recognizes the remaining amount allocated to the voucher as revenue. adjusted for: at a price that does not reflect their stand-alone selling —— any discount the customer would receive without exercising prices.000 × 97.000 without the voucher. entering into the arrangement. the discount voucher is a separate performance obligation. Retailer gives Customer a voucher. a material right acquire additional goods or services. The voucher entitles Customer to a 25% discount on any purchase up to $1.1% $1.9% Total $2. 3 | Revenue for retailers © 2017 KPMG LLP. Retailer concludes that the discount voucher provides a material right that Customer would not receive without entering into the original sales transaction.942 $2. Retailer allocates the transaction price between the computer and the voucher on a relative stand-alone selling price basis as follows. Therefore. a Swiss entity. Retailer intends to offer a 10% discount on all sales to other customers during the next 60 days as its seasonal promotion. This is because Customer receives a 15% incremental discount compared with the discount expected to be offered to other customers (25% discount voucher . A material right performance obligation. If that price is not directly exists if: observable then the retailer needs to estimate it. Coupons and other sales discounts Coupons and other sales discounts earned from current transactions may result in revenue deferral. Customer makes no additional purchases before the expiration of the voucher. The amount of revenue deferred is based on the purchases.000.000 in Retailer’s store during the next 60 days. a material right may exist even if it is not relative stand-alone selling price of the customer’s option to quantitatively material. Stand-alone selling price for the voucher: $500 estimated purchase of products × 15% incremental discount × 80% likelihood of exercise. Retailer estimates that there is an 80% likelihood that Customer will redeem the voucher and will purchase additional products with an undiscounted price of $500.000 Note: 1. Therefore. 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.060 100% $2.000 97. a Delaware limited liability partnership and the U. As part of this arrangement.1% Voucher 60 1 2. However. Retailer regularly sells this model of computer for $2. Customer purchases $200 of additional products (pre-discount) 30 days after the original purchase for $150 cash payment.000 × 2. .9% 58 $2.S.

Retailer concludes that the option in the current transaction represents a material right. This material right is accounted for as a separate performance obligation. The retailer evaluates the arrangement to determine whether a material Retailer offers a program in which customers who have right exists.942 Contract liability $58 To record initial sale of computer and voucher.S. Retailer considers both current and future transactions. If a tiered pricing structure provides for discounts on future purchases only after volume thresholds are met. 2. Based on its historical data. 3.($200 × 25%). Contract liability $353 Revenue $35 To record additional revenue on expiration of voucher. a Swiss entity. Customer purchases his first drink for $10. 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). . Partial satisfaction of performance obligation: $58 × ($200 purchases / $500 total expected purchases). get one free program a material right has been conveyed to the customer. Cash $1501 Contract liability $232 Revenue $173 To record subsequent purchases by Customer. Retailer determines that it is likely that many of its customers will receive a free drink. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Discounted sales prices of additional products purchased: $200 . Debit Credit Cash $2. Notes: 1. All rights reserved. purchased four drinks over a given period may receive a fifth drink free. The first purchase provides Customer with the right to purchase three more drinks and receive the fifth for free. In making this determination. a Delaware limited liability partnership and the U. 4 | Revenue for retailers © 2017 KPMG LLP. 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 or expires.$23. Retailer records the following journal entries.000 Revenue $1. Settlement of performance obligation on expiration: $58 . it is likely that Example – Buy four.

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. which is typical for point-of-sale coupons. if coupons are printed in a newspaper or are freely available in-store or online. 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. used the coupon to purchase a video game system at a 5% discount. or packaged with goods that customers purchased. 5 | Revenue for retailers © 2017 KPMG LLP. purchases after the threshold has at a 5% discount offered to Customer A does not provide been met are accounted for at the discounted price. In that case. the entity assesses it to other discounts on a video game system offered to whether the coupon conveys a material right. a Delaware limited liability partnership and the U. the option to customers that did not make a previous purchase and is a marketing offer and not a material right. a Swiss entity. marketing offers or that give rise to variable consideration (see Payments to customers). analysis of whether a material right exists. 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. 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. The Customers can often access similar discounts without making coupon is valid for two weeks. resulting in revenue being deferred until the awards are either redeemed or expire. 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 Customer B discounts that provide material rights from those that are received the same discount without a prior purchase. A low redemption rate. independent of a prior purchase. All rights reserved. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 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. is more significant. game system within a sales circular that is available to all customers who walk through the door of the store. This type of general marketing Customer A purchases a television and receives a 5%. includes consideration of the likelihood of redemption.S. the option to purchase the video game system completed. However. Customer loyalty programs usually with incentives to buy their products. it is not incremental to discounts offered an option is independent of the current contract. . 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. is Customer A with its television purchase does not affect the not determinative. a material right could be conveyed. a purchase – e. 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. Each time a customer provide a customer with a material right that is a separate buys a good or service. When a material right.If a material right does not exist. marketing offer. Customer loyalty programs Loyalty points represent a separate performance obligation. though. The coupons are handed to customers at the point of Retailer includes a coupon for 5% off purchases of a video sale. a retailer provides award points that performance obligation.g. 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. Customer B then or that the stand-alone selling price of the right is immaterial. The The fact that Customer C receives the same discount as fact that the discount is offered at a point of sale. there is no accounting for the future discount when recognizing revenue on the transactions Therefore. This assessment similar customers. 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.

000 $7.175 Year 3: (8. the price that they will pay on exercise of the points on future purchases is not the stand-alone selling price of those items. a further 4. The stand-alone selling price of the products to customers without points is $100. 4. Each point is redeemable for a cash discount of $1 on future purchases. Retailer determines the stand-alone selling price of the loyalty points based on the likelihood of redemption.000 for the amount allocated to the material right (points). Stand-alone selling price for the products. customers purchase products for $100. Stand-alone selling Performance obligation Selling price ratio Price allocation Calculation price Products $100.S.500 / 9.000 points are redeemed. The change in estimate results in a cumulative adjustment to revenue regardless of whether points are redeemed. —— During Year 2. which Retailer determines is predictive of the amount of consideration to which it will be entitled. revenue is also reduced because of the change in estimate of the total expected points to be redeemed. a Swiss entity. Retailer determines the revenue to be recognized as follows.g.000 points. 6 | Revenue for retailers © 2017 KPMG LLP.000 $100.000 points × $1 × 97%. . a Delaware limited liability partnership and the U. 2.700 points to be redeemed in total.552 Revenue increases in Year 3 as a result of the redemption of an additional 4.000.0001 91% $  91. customers are awarded one point for every $10 they spend on goods.175 $3. —— During Year 3. Example – Customer loyalty points program Retailer offers a customer loyalty program at its store.500 / 9. However.000 × 9% Total $109.000 × 91% Points 9. Retailer allocates the transaction price between the products and the points on a relative stand-alone selling price basis as follows. Stand-alone selling price for the points: 10. Because the points provide a material right to customers.000 and earn 10. Under the program. 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.700) x $9. This estimate is based on Retailer’s historical experience. Retailer updates its estimate because it now expects 9.000 points.7002 9% 9.175 0 $4. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Retailer recognizes a contract liability of $9. and Retailer continues to expect that 9.700 points will be redeemed in total.000 Notes: 1. The following occurs in Years 2 and 3. 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. In Years 2 and 3.500 points are redeemed.000 $100.727 $4. Retailer expects 97% of customers’ points to be redeemed.700 100% $100.900) x $9. Additionally. the customers paid for the points when purchasing products. Retailer concludes that the points are a performance obligation in each sales contract – e. All rights reserved.000 $4.900 rather than 9. During Year 1.

under the new standard. then the incentive is accounted for price matching programs or allowances very often represent as variable consideration. be provided even though it may be in the form of consideration 7 | Revenue for retailers © 2017 KPMG LLP. a Delaware limited liability partnership and the U. If yes. for using the ‘later of’ guidance. and is recorded as a liability at the time of sale. an offer is made to a customer – which some have interpreted to be when an explicit offer is made to the customer. price protection. under the new standard. All rights reserved. but often provides similar guarantees. a Swiss entity.g. retailers will more often and products that it will reimburse Customer $50. 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 explicitly promised. and to recognize the reduction of revenue. . no explicitly stated policy or stated on the providing these payments that.g. The retailer to revenue at the later of when revenue is recognized or when updates its estimate and adjusts revenue each reporting period. the payment to a customer is accounted for as a reduction in the transaction price. For example. revenue as control of the goods or services are transferred. account for these payments as variable consideration. 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. Payments to customers – e. If Retailer did not explicitly make the guarantee to This is because retailers typically have a past practice of Customer (e. not follow the ‘later of’ guidance. payable to a customer. rebates. Example – Price protection Under the new standard. Retailer estimates the transaction price and concludes based on its prior experience with similar promotions However. then the incentive is accounted consideration payable to a customer. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).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). it reduces the transaction price and to pay at contract inception. price protection and price matching programs Retailers may reduce revenue for certain payments to customers earlier under the new standard. If no. would customer’s receipt). Sales incentives offered in the form of rebates. related revenue is recognized or the retailer promises to pay such consideration. This will Consideration expected to be repaid to Customer is require the retailer to estimate the consideration it expects variable consideration. unless Retailer sells a smart television to Customer for $2.S. which may be rare for retailers consideration payable to a customer is recognized as a reduction with a history of providing concessions or rebates. 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. Exchanges by customers of one downward adjustments to revenue may defer more revenue for product for another of the same type. quality. Retailers will record any After estimating returns. Under the new standard. When reasonable estimates cannot be made Under the new standard. it may be required to defer revenue of return guidance. on entering a new market with no downward adjustments to revenue as a result of the right previous sales history). the expected-value method is generally more predictive for Presentation sales returns. 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. method selected depends on which is the better predictor. including the ability to reasonably estimate future returns. Retailers with a history of significant under current US GAAP. Because current US GAAP only requires future returns to On rare occasions when the retailer is unable to reasonably be reasonably estimable. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). The reporting period. price are not considered returns under current US GAAP (or the new standard). before the return period lapses. entities often record upward or estimate returns (e. an entity applies the constraint on expected diminished merchandise value as cost of sales variable consideration.g. 8 | Revenue for retailers © 2017 KPMG LLP. revenue generally are only upward (increases to revenue). 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. which limits revenue recognition to an each reporting period. All rights reserved. This approach of adjusting to base their returns estimate. 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 than zero. The constraint guidance is intended to ensure that estimated returns. probability. even when they lack historical experience on which the amount of revenue to recognize. an entity estimates sales returns significant reversal. the return is presented gross as a refund liability and an asset for recovery. Under current US GAAP. 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. a Delaware limited liability partnership and the U. current practice.Rights of return The balance sheet will be grossed up to present a refund liability and an asset for recovery. The asset could be different if an entity currently uses a single for recovery is reported separately from inventory and. reduced to the merchandise value the retailer method like a probability-weighted assessment or more expects to recover through subsequent sales or a return sophisticated modeling. 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). when best estimate approach rather than an expected-value impaired. but the estimation method reserves or allowances for returns on a net basis. . condition and estimated returns under the new standard. resulting in revenue being recognized using either the expected-value method (e. 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.g. a Swiss entity. to the consumer products vendor.S. Estimates are updated each weighted estimates) or the most-likely-amount method. and return estimates and their balance sheet presentation may change.

Retailer records the following journal entries. 2. Notes: 1. Debit Credit Cash $10.700 To record sale excluding revenue on products expected to be returned. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Asset (right to recover) $1802 Cost of goods sold $5. $100 × 3 (price of the products expected to be returned). 4.S.820 Inventory $6. Right of return expires Refund liability $100 Revenue $100 To record revenue on expiration of right of return. Two products returned Refund liability $2003 Cash $200 To record refund for product returned. 9 | Revenue for retailers © 2017 KPMG LLP. a Swiss entity. The cost of each product is $60. Inventory $1204 Asset (right to recover) $120 To record product returned as inventory. $60 × 3 (cost of the products expected to be returned). $100 × 2 (price of the products returned). two pairs of shoes are returned.000 To record COGS and right to recover products from customers. Cost of goods sold $60 Asset (right to recover) $60 To record COGS on expiration of right to recover products from customers. 3. 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. Within 30 days. Example – Sales with a right of return Retailer sells 100 pairs of shoes at a price of $100 each and receives payments of $10. All rights reserved.000. .000 Refund liability $3001 Revenue $9. a Delaware limited liability partnership and the U. $60 × 2 (cost of the products returned). 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. 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.

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. Customers have the right to return the furniture. .Restocking fees reduce) the estimated refund liability when the product is Retailers sometimes charge a customer a restocking fee sold. 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. but they are charged a 10% restocking fee.$20 Notes: 1. a Delaware limited liability partnership and the U. Therefore. All rights reserved.730 To record sale excluding revenue on products expected to be returned. The furniture is expected to be in saleable condition upon return. Therefore. Example – Restocking fees Retailer sells 20 pieces of furniture for $300 each and the cost of each piece of furniture is $160. Retailer expects to incur restocking costs of $20 per piece of furniture returned. reselling the product to another customer. Retailer records the following journal entries.000 Refund liability $270 Revenue $5.$302 Asset for recovery Cost of furniture expected to be returned less restocking cost 140 (1 × $160) .200 To record COGS and right to recover products from customers. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Restocking fee: $300 × 10%. Retailer recognizes the following.060 Inventory $3. a Swiss entity. The restocking fee is intended to restocking fee.730 (191 × $300) + (1 × $302) Refund liability Furniture expected to be returned less restocking fee 270 (1 × $300) . 10 | Revenue for retailers © 2017 KPMG LLP. this may represent a products expected to be returned are included in (and therefore change for some retailers. The refund liability is based on estimated returns less the when a product is returned. 2. and estimates returns to be 5%. restocking fees for fees when they are collected. Asset (right to recover) $140 Cost of goods sold $3. Debit Credit Cash $6. Item What to include Amount Calculation Revenue Furniture estimated not to be returned plus restocking fee $5. Furniture not expected to be returned: 20 pieces of furniture sold less one (20 × 5%) expected to be returned.S. When control of the furniture transfers to a customer.

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. its classification to cost of goods sold.Timing of revenue Retailers may experience a change in the timing of revenue recognition for certain types of arrangements. 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. it may experience a change in practice if it Retailers may have arrangements in which the goods are currently applies synthetic FOB destination accounting. The accounting for shipping and handling activities under the In addition. . there will likely be many cases would be an acceptable presentation. a Delaware limited liability partnership and the U. 11 | Revenue for retailers © 2017 KPMG LLP. – fulfillment activities. or from current US GAAP. when it concludes consider whether it or the customer controls the goods during that control transfers to the customer (e. been transferred. 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. the good is recognized when control of the goods transfers to the or service. customer online purchases). and shipping and handling. is generally at the point in time that goods are delivered to —— If the shipping and handling occur after a customer obtains the customer. these terms may be treated as FOB destination presentation of shipping and handling services. a Swiss entity. is satisfied.g. 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. current the goods do not pass to the customer at the shipping point. at shipping point) shipment. US GAAP requires them to be disclosed. 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.S. Revenue allocated to the goods obtain substantially all of the remaining benefits from. Other indicators such as legal title.g. SG&A). Under current Current US GAAP allows for diversity in the income statement 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. discloses its election) to treat these activities as: in certain fact patterns (e. evaluated for each arrangement. 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. The related costs are generally expensed right to payment and customer acceptance also need to be as incurred. If these costs are during transit and has determined that the risks and rewards of significant and not recorded in costs of goods sold. shipped to the customer FOB shipping point. customer. This is often referred to as ‘synthetic FOB destination’. 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. an entity makes a policy election (and recognized at point-of-sale under the new standard.g. All rights reserved. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 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. Control refers to the ability to direct the use of. 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. 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. physical possession. and that consideration is affected by the rights and before all of the significant risks and rewards of ownership have obligations during shipping. However. Under current US GAAP. the income statement. Most in-store transactions will continue to be control of the goods. revenue is – a performance obligation. Under the new standard. they are fulfillment activities. It is important for retailers to Regardless of which policy a retailer uses. it would also be acceptable when the goods are shipped despite the retailer’s practice of for an entity to continue its current presentation or to change assuming the risk of loss during transit.

. a the control principle – i. we benefits from. whereas register. and exposure to customer same way it could direct the use of the products for which credit risk. 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 entity’s customer. Although taking title may indicate that the retailer can direct fulfilling the promise to provide 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. This could affect the allocation of revenue to the party – e. 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. For example. whether the entity has the ability to retailer could control a good before obtaining title. In contrast.Principal vs. taking title to a good only momentarily at check- of control to the customer. retailers need to evaluating whether the entity obtains control of the specified reconsider their conclusions. service has been transferred to the customer or after transfer For example. 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. whether it is a principal or an agent. and a consideration of the retailer’s and the transaction. 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 many circumstances: good or service. distinct goods or services within the contract. whether the entity’s fee is fixed evidence) and could direct the use of the products in the or in the form of a commission. the goods or services (or prevent challenging. current accounting. 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. the good or service. or to arrange for them to be provided by another same contract. drop shipping and good or service if it does not first have control of that good vendor-managed inventory arrangements. agent Certain retailer arrangements like flash title and drop shipments require significant judgment to determine whether the retailer is the principal or agent. exposure to (one of the point-in-time indicators providing relevant physical loss inventory risk.e.e. it is not determinative that control has transferred. 12 | Revenue for retailers © 2017 KPMG LLP.g. or it could control access to the intermediary is a principal. 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. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). ‘Control’ is Retailers enter into a variety of arrangements where the ability to direct the use of. direct the use of. or service. and obtain substantially all of the remaining When a retailer obtains only flash title to the specified good. significant judgment is required in others from doing so). 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. An entity cannot provide a specified the principal-agent assessment for flash title. 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. products through its operation of the store. and the end customer immediately takes control after in the transaction: (1) the entity is primarily responsible for that. considering the new overarching control principle. In addition to the new overarching principle of control. a Swiss entity. 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. and obtain substantially all of assessment of control of a specified good or service may be the remaining benefits from. Also. which could result in changes to good or service before it is transferred to the customer.S. supplier’s rights before transfer of the good to the end customer. All rights reserved. a Delaware limited liability partnership and the U. some of the indicators used in current US GAAP 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. 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. the retailer could decide in which current US GAAP 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. For example.

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. physical possession does not necessarily convey control. lease. in this case. and obtain substantially specified good that it is not permitted to sell. suggest that the third-party vendor —— Whether the supplier can constrain the retailer’s ability in a drop ship arrangement is acting on behalf of the retailer.) the good —— Primary responsibility for fulfillment. or where that title is ‘limited’ in have back-end inventory risk (i. Similarly. or consumption of the good in use) The new standard notes that pricing discretion may also and can. the vendor’s? Many retailers may not have the front-end inventory risk —— Inventory risk.e. use or all of the remaining benefits from. physical possession retailer’s customers (when ordered) – i. The new standard also suggests that an entity may be a principal – i. a Delaware limited liability partnership and the U. momentary vendor may essentially be holding inventory for the retailer. Also. —— The third-party vendor is ‘invisible’ to the customer – i.g.—— 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. and/or the third-party vendor primarily responsible for fulfillment of the customer order? What is the retailer’s responsibility —— has an enforceable purchase commitment for the good with for fulfillment and product acceptability as compared to the supplier before the customer’s order.e. Does the retailer have front-end inventory evidenced by the above indicators. 13 | Revenue for retailers © 2017 KPMG LLP. would not alone convey control. the retailer’s behalf. for example. the customer is unaware of who the supplier of the specified Drop shipment arrangements good is before it obtains control of the good. 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. 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.g. a good or service (including otherwise direct for a purpose other than shipment to the the ability to prevent others from doing so). member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). in the form of cash from sale. how significant is the to another customer. facts and circumstances.S. Despite the absence that permit the retailer to refuse returns that will not in turn of front‑end inventory risk.g. Control of a tangible good frequently goes hand-in-hand with having front-end inventory risk with respect to the good. similarly. What is the degree of the retailer’s (e. as a result. have a more limited effect on the assessment of control in these arrangements.) and an obligation to formally purchase (or make payment for. obtaining title (e. 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. and no one factor should be and obtain substantially all of the remaining benefits from considered necessarily determinative.g. etc. 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.g. effectively prevent the third-party vendor be present when an entity is an agent and therefore may from exercising similar rights. these arrangements can vary by customer. the products. In drop shipment arrangements. 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.e. Is the retailer or before the customer places its order with the retailer. . customer and vendor relationship may be required because effectively acting on behalf of the entity. when an entity obtains a contract with a customer and specified good. in its role. The following indicators generally provide more relevant evidence. good from more than one supplier after the customer places its order with the retailer. risk with respect to the third-party goods? Does the retailer during a short period of transit). the is not always required to have control. in the retailer’s box and other packaging. a third-party vendor) is. However. third-party vendor for example.e. good is transferred to the customer. —— has the right to sell (or use. sell. This A retailer should also consider the indicators of control that are would occur when. because ‘control’ —— The vendor is obligated to maintain an inventory of the refers to the ability to direct the use of. 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. The following indicators may. etc. 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. through call rights or other provisions to direct the use of these factors are not exhaustive. All rights reserved. depending on the flows from the sale to the customer. This may be the case. deemed to control a specified good or service An evaluation of the specific rights and obligations in each – if another party (e. a Swiss entity.

there is current diversity in practice value) is referred to as breakage. . whether it expects to be entitled to a breakage amount and. 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. 14 | Revenue for retailers © 2017 KPMG LLP. rather than – e. or in some cases as an offset gift card. 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. 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. 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. a retailer income statement. The standard requires an entity to determine redemption expected. 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 remain unexercised.e. under applicable unclaimed property or escheatment an analysis of the entity’s 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. For example. (2) at the point at which redemption redeemed for their full value by the customer. 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. Under these principles.g.g. (1) as the entity is legally released from its obligation (e.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.g. a Delaware limited liability partnership and the U.S. if so. Gift cards (or certificates) sold by retailers are often not redemption or expiration. or (3) in proportion to actual gift card customer’s rights that are unexercised (i. assesses whether it is probable that recognizing revenue on a If a retailer does not have a basis for estimating breakage. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). result in a significant revenue reversal in the future. entitled to a breakage amount – e. other income. All rights reserved. a Swiss entity. the unredeemed redemptions. 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 is not probable of significant reversal. reporting period. 10% of the amount paid for the gift card is breakage. to expense. In that case. 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. rather than recognizing the breakage amount required to recognize breakage revenue sooner than under as revenue. In addition. the customer is expected to let its right to Under the new standard. Additionally. The portion of a becomes remote. If changes in the estimate arise. In this instance. Because the methods amount that is attributable to customers’ unexercised rights used in current GAAP are accounting policies. 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. 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.

All rights reserved. Retailer will continue to evaluate its information – i.e. on this initial gift card redemption. This may occur on expiration of the this time. about breakage prior to Customer’s exercise becoming remote. gift card. Therefore. 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. Retailer will also make a services. . will remain unredeemed.e. No breakage revenue is recognized at becomes remote. 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 Customer’s rights. 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. Specifically. Retailer does not have sufficient Because Retailer can reasonably estimate the amount entity-specific information. a Swiss entity. The gift card expires five years from the date of issue. and that unredeemed amount will not be subject to escheatment (i. If it subsequently obtains sufficient evidence to Accordingly. cumulative catch-up adjustment to revenue in the period that it concludes it has sufficient information about breakage. nor does it have knowledge of of breakage expected. unclaimed Because this is a new program. 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. half of the breakage However. then half of the expected redemption has occurred ([$45 / ($100 . when it sells the gift card. Retailer has very little property laws).$10)] = 50%). Retailer estimates that 10% of the gift card balance entity. or earlier if there is evidence to indicate that the probability has become remote that Customer will redeem If Customer redeems $45 of the gift card amount in any remaining amount on the gift card. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 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. Retailer support an estimate of breakage. 15 | Revenue for retailers © 2017 KPMG LLP. Retailer concludes that it does not on a proportional basis. a Delaware limited liability partnership and the U. market. Retailer sells Customer a nonrefundable gift card for $50. plus breakage of $5.S. probable of not resulting in a significant revenue reversal. 30 days. Specifically. Therefore. historical information about customer redemption patterns and breakage. $5 ($10 × 50%) – is also recognized. it will begin recognizing recognizes revenue of $50: $45 from transferring goods or breakage on a proportional basis.

Variable consideration is generally required to be estimated (see Step 3) but certain exceptions exist. following the accounting for loyalty points for retail customers The definition of revenue is based on how the entity attempts (see Customer loyalty programs). A typical credit card arrangement may include the Allocating the transaction price following elements: Under the new standard. the retailer evaluates when control of the right received from card issuers rather than the retail customer.g. . or free or discounted goods and services.g. extended maintenance. a Delaware limited liability partnership and the U. Given the —— card acquisition services. which is satisfied over time. —— retailer’s customer loyalty program points. the transaction price (both fixed —— license to use retailer’s brand name. a additional credit card revenue (e. Retailers may also provide card acquisition activities. Therefore. 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). All rights reserved. interest income. Therefore. However. performance obligations because (1) the terms of the that are separate units of account. card acquisition bounties for each new card. selling prices. obligations in a contract based on their relative stand-alone —— marketing activities. Many marketing of payments from the card issuer: up-front. but are distinct and therefore represent performance obligations not all.Credit card arrangements Retailers’ credit card arrangements may be complex and require significant judgment and analysis to determine the appropriate accounting. interchange license to symbolic IP grants the customer a right to access the fees) by incentivizing card spend with retailer loyalty points and/ entity’s IP. but refers to bank based on cardholder spend will generally be recognized the definition of revenue in the FASB Concepts Statements. free services to the card issuer whereby they assist in the referral shipping or delivery to cardholders). Retailers may receive ‘bounties’ (contingent payments) based on the number of cards Retailers determine whether these arrangements are in the that are signed up. guidance) or represent variable consideration for a promise to Performance obligations stand ready to provide those services. card are not distinct. while others may transfer a separate promise portfolio revenue or profit share. 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. nonrefundable activities may support or maintain the licensed IP and therefore payment. scope of the new standard by evaluating whether the services being provided are part of the retailer’s ordinary activities. 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. and expand brand loyalty or recognition. The Loyalty program points that are purchased by the card issuing new standard does not define ordinary activities.g. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). the retailer may receive a variety are promises distinct from the licensed IP. 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. 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. variable payment relate specifically to the entity’s efforts to 16 | Revenue for retailers © 2017 KPMG LLP. 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/or applying the allocation guidance may be challenging. Although the payments in these arrangements are scenarios. free shipping/delivery.S. 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. a Swiss entity. loyalty points or other customer services (e. and credit card application process. Marketing-related activities are evaluated to determine if they Under these arrangements. and payments for marketing to the card issuer. various fixed and variable revenue streams in these contracts. —— other services provided to cardholders – e. In these its owners. and variable consideration) is allocated to the performance —— license to use retailer’s customer relationship/list.

transaction price excludes amounts the relative stand-alone selling price of the point and the collected on behalf of third parties. recognize that allocated portion of the royalty. the retailer evaluates whether the license(s) is the predominant item to which the Under current US GAAP. 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. transfers goods or services distinct from the license later in the contract. . Currently there is diversity in minimum amount) are accounted for as fixed consideration. —— when the subsequent sales occur. a retailer recognizes revenue at the the difference between the estimate and actual revenue share later of: earned in the subsequent period. 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 retailer’s loyalty point behalf of the customer. For example. The license would be the that the card issuing bank owes until the subsequent period. However. point purchases) that are provided in these arrangements Conversely.satisfy the performance obligation or transfer the distinct goods item to which the royalty relates. 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).g. This is (e. If this guidance is met. certain loyalty point purchases) when those payments because they do not receive reporting about the revenue share relate to more than points purchases. A card revenue recognized when control of the distinct performance obligation share or payments based on card spend (e. In these cases. processors to facilitate credit and debit card transactions To the extent that the royalty exception applies. those performance obligations may be satisfied Sales. but not all. the retailer is required to or services. recognition based on lag reporting is more value to the brand and customer relationship licenses not permitted. retail sale). guidance (see Direct allocation of variable consideration). extended return policies. This may result in more retailers recording card processing marketing services) but the license remains the predominant fees as an expense. 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. In this case. 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.g. a fixed price allocation considerations. exceptions may arise if the revenue share is also card arrangement.g. the amount of revenue allocated to the and variable) in the contract. the retailer determines Under the new standard.g. However. to one or more. 17 | Revenue for retailers © 2017 KPMG LLP. with some retailers recording these fees net against the retail sale. (e. is recognized as revenue for the period. The royalty to be evaluated could be a revenue share on a lag basis – i. if the retailer service is transferred to the customer. any guaranteed royalties (e. free shipping. The retailer trues up For sales-based royalties.g. in some cases the co-brand credit promised in exchange for other goods or services. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). these costs would purchase also compensates the retailer for other services not represent a reduction in transaction price (i. All rights reserved. These are generally entered into with share is recognized as the underlying card swipe occurs. predominant item if the card issuer would ascribe significantly Under the new standard. the presentation of card processing fees. 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. which may require additional transaction royalties). that amount exception would still apply to the entire sales-based royalty.S. a Delaware limited liability partnership and the U. If the revenue share or loyalty point with the card processing. In addition. some retailers recognize the revenue royalty relates. certain loyalty is transferred. the spend needs to be estimated using the revenue share or payments relate.and usage-based royalty related to the may need to estimate the variable consideration and include symbolic IP (brand name and customer relationship). or if the card arrangement may also include pricing related to these royalty does not reflect performance (e. 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. When the revenue share or the loyalty point purchase covers both the license and the loyalty point. When these card license. different entities and/or separately from any co-brand credit However. if the royalty exception does not apply. the retailer bears the cost associated deferral accounting.e.or usage-based royalty exception after the sales-based royalty being earned. the a most-likely-amount or expected-value method. certain tiered processing fees. the revenue within their stores. discounts.e. 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. a Swiss entity. 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. 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. and (2) allocation of the variable payment entirely allocate revenue to those underlying services. the retailer may serve as a sales.

Under current US GAAP. 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. terms may result in a conclusion that revenue is not fixed or However. 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. the accounting for financing in arrangements provided to the customer. In those when the consideration to be received for a good or service cases. whereby an retailer and its customer. extended payment good or service transferred to the customer. 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. a significant financing component may exist in the purchase. If the retailer concludes that significant financing has been As a result. Although not as rate that is explicitly specified in the contract. 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. All rights reserved. However. price and the interest rate is zero. 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. volumes of customer contracts and/or multinational operations. a Swiss entity. would be used in a separate financing transaction between the the new standard provides a practical expedient. 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. which precludes revenue recognition. the objective of a significant financing component of customer. 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 contract’s payment terms. for each customer. a significant financing component may still exist determinable. 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. This accounting results in a decrease in revenue is accreted. a Delaware limited liability partnership and the U. the customer had paid cash at the same time as control of that sum payment. also result in accounting for a significant financing component. the customer pays for that good or service will be one year This can lead to practical difficulties for retailers with large or less. because the common for retailers. Even when an interest rate is charged to the and an increase in interest income as compared to similar customer. 18 | Revenue for retailers © 2017 KPMG LLP. advance payments from customers may entity might offer ‘cheap’ financing as a marketing incentive.Customer financing The amount of revenue recognized by retailers may be affected by financing offered to customers. The implicit financing amount is calculated using the rate that increasing revenue and increasing interest expense. the arrangement. it may not always be appropriate to use an interest arrangements under current US GAAP. . member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). class of customer or geographical region Generally.S. Judgment is required to Under the new standard.

an entity contract periods. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”).g. a Delaware limited liability partnership and the U. an entity makes an accounting policy entity’s total gross receipts are not included in the scope of election to present sales taxes and other similar taxes on a this election. 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. When the practical expedient is not elected. which may include future or near contract inception. entities are permitted to elect whether the taxes are collected on behalf of a third party (e. This may result in some taxes and collected by an entity from a customer – e. This requires a new accounting for franchise arrangements. Taxes assessed on the retailers not electing the practical expedient. 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. . 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. and contract modifications.S. All rights reserved. use. gross or net basis in the income statement. a practical expedient to present those taxes on a net government) on a case-by-case basis in each jurisdiction in basis.g. Some contracts include nonrefundable up-front fees (e. services. Nonrefundable up-front fee Retailers need to evaluate the nature of up-front fees to determine the timing of revenue recognition.g. Some retailers may franchise their operations in addition to evaluation of the accounting for franchise rights. performance operating their own stores. 19 | Revenue for retailers © 2017 KPMG LLP. which may result in some taxes being presented gross and others net. new standard eliminates this specific guidance and requires KPMG’s Revenue for franchisors provides discussion on the the general revenue model to be applied. The end customer sales incentives. Franchise arrangements Retailers that franchise their operations may have a change in the accounting for these arrangements under the new standard. advertising funds. This entails an assessment of whether governmental authority 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 the retailer. Under current US GAAP. a Swiss entity. being presented on a net basis and others on a gross basis for value-added and some excise taxes. Under the new standard. 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. If the fee gives rise to a material right. an entity evaluates Under the new standard. Current US GAAP provides specific obligations.Sales taxes Retailers can elect to present sales taxes on a net basis or they can perform a jurisdictional analysis. sales. guidance for the accounting for these arrangements. pre-opening activities and costs. The election applies to all taxes assessed by a which it has sales. good or service to the customer.

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.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 been recognized before adoption. the new standard. 20 | Revenue for retailers © 2017 KPMG LLP. 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. a Delaware limited liability partnership and the U. collectibility was not reasonably assured. and for which an entity has recognized all or substantially all of the —— assets recognized to obtain or fulfill a contract. . All rights reserved. and accuracy of the new disclosures should be considered – especially if the required data was not previously collected. It may be prudent for entities to perform still needs to address. 2016. —— contract balances. not-for-profit entities that Early adoption permitted for annual reporting periods beginning after December 15. revenue after delivery has occurred (e. royalty Also. Entities that elect the cumulative effect method are required Specifically. 2019. 1. 2017 including interim reporting periods within that reporting period. and requirements are currently being captured and whether system modifications are needed to accumulate the data. The SEC has also stated. 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.M. —— 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. timing and uncertainty of revenue and cash (cumulative effect method). when the Entities should consider the potential complexities involved effect is not known or reasonably estimated. 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. including revenue under current US GAAP as of the date of adoption of changes during the period. December 15.   Staff Accounting Bulletin Topic 11. 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.S. SEC guidance requires registrants to disclose the arrangements). 2018 and interim reporting periods within annual reporting periods All other US GAAP entities. In those circumstances. are conduit bond obligors including interim reporting periods within that reporting period. 2016. 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. Effective dates Type of entity Annual reporting periods after Public business entities and December 15. flows arising from contracts with customers. beginning after December 15. the new standard introduces a new —— performance obligations. implementation plans. or This will require careful analysis particularly where there is trailing was collected for purposes other than financial reporting. including changes during the period. current US GAAP in the period of adoption. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). a Swiss entity. For transition purposes.g. transition calculations before the adoption date to ensure all potential complexities are identified. term – completed contract. including retrospectively with or without optional objective of the disclosures is to provide sufficient information practical expedients. A completed contract is a contract —— significant judgments. The of ways. amount. including SEC registrants Early adoption permitted for annual reporting periods beginning after December 15. revenue was not fixed or determinable. 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.

enforceable. 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. they exist if the customer has a Promises to the customer are separated into performance obligations. any consideration received from the customer is generally recognized as a deposit (liability). e. 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. or statements. . If the criteria are not met. may require legal analysis —— payment terms can be identified.S.Some basic reminders Scope The guidance applies to all The new standard applies to contracts to deliver goods or services to a customer. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). A series is accounted for as a single performance obligation. Topic 460 (guarantees). A contract with a customer is in the scope of the new standard when the contract is legally oral or implied by an entity’s enforceable and all of the following criteria are met: customary business practices. 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. on a jurisdictional level to —— the consideration the entity expects to be entitled to is probable of collection. enforceable by law. policies customer over time. provided. Step 1: Identify the contract Contracts can be written. but must be —— the contract has commercial substance.g. 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. a Swiss entity. Topic 944 (insurance). contract’s enforceability. 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 entity’s ordinary activities in exchange for consideration. All rights reserved. 21 | Revenue for retailers © 2017 KPMG LLP. a Delaware limited liability partnership and the U. This —— rights to goods or services can be identified. and determine when a contract exists and the terms of that —— the contract is approved and the parties are committed to their obligations.

—— 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.S. All rights reserved.g. an entity uses the legally enforceable —— Variable consideration. This could result in an adjustment to the transaction price to impute interest income/expense. When determining the The transaction price determination also considers: transaction price. renewed recognized will not occur when the uncertainty is resolved. but not all. excluding amounts a significant departure collected on behalf of third parties – e. price of that good or service. —— Noncash consideration received from a customer is measured at fair value at contract inception. which is estimated at contract inception and is updated contract term. a Swiss entity. and is determined at inception of the contract and updated many entities. 22 | Revenue for retailers © 2017 KPMG LLP. or modified. a discount or variable consideration is allocated to one or more. 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. —— Significant financing components may exist in a contract when payment is received significantly before or after the transfer of goods or services. 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. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 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. It does not at each reporting date for any changes in circumstances. performance obligations. The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. some sales taxes. Observable stand-alone prices are used when they are available. This consideration can include from current accounting for fixed and variable amounts. each reporting period for any changes in circumstances. An entity generally allocates the transaction price to each performance obligation in proportion to its stand-alone selling price. when specified criteria are met. . an entity is required to estimate the price using other techniques – even if the entity never sells the performance obligation separately. However. If not available. a Delaware limited liability partnership and the U.

obtain substantially all of the remaining benefits —— physical possession. 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. and —— a present obligation to pay. brands. 23 | Revenue for retailers © 2017 KPMG LLP. – or prevent others from —— risks and rewards or ownership. —— accepted the asset.or usage-based royalty is recognized as revenue at the later of: —— when the sales or usage occurs. Customer options Customer options may Revenue is allocated to a customer option to acquire additional goods or services. compounds. an entity selects a method to measure progress that is obtains control of the goods consistent with the objective of depicting its performance. is recognized at the point and the entity has an enforceable right to payment for performance completed to date. Such a sales. revenue recognition for —— Symbolic IP. biological which it falls. from the goods or services —— legal title. IP is symbolic if it does not have significant stand-alone functionality. licenses could differ from and substantially all of the customer’s benefit is derived from its association with the legacy US GAAP.g. trade names and franchise rights. There are a framework for determining two categories of licenses of IP.or usage-based royalties related to licenses of IP. when it represents a material right. revenue for the performance obligation —— the entity’s performance does not create an asset with an alternative use to the entity. All rights reserved. Licensing of intellectual property The new standard includes How an entity recognizes license revenue depends on the nature of the license. 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- current GAAP. or services. and doing so. a Swiss entity. 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. whether there is a license —— Functional IP. —— the customer simultaneously receives and consumes the benefits as the entity performs. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). the following are some indicators that an entity Control is the ability to considers to determine when control has passed. and the category into overall benefit from the IP’s stand-alone functionality – e. If control transfers at a point in time. in time that the customer If control transfers over time. a Delaware limited liability partnership and the U. IP is functional if the customer derives a substantial portion of the of IP.g. or criteria are met. and is be accounted for as deferred until (1) those future goods or services are transferred or (2) the option expires performance obligations. software. . licensor’s ongoing activities – e. or —— on the satisfaction or partial satisfaction of the performance obligation to which the royalty has been allocated. There is an exception to the general revenue model on variable consideration for sales. films and television shows. the pattern of time that control of the license transfers to the customer.S. Revenue is generally recognized over the license period using a measure of progress that reflects the licensor’s progress toward completion of its performance obligation. alone selling prices. The customer has: direct the use of. Revenue is generally recognized at the point in As a result. —— the entity’s performance creates or enhances an asset that the customer controls as If none of the over-time the asset is created or enhanced.

. a principal. agreed-upon specifications. 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.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). Principal vs. Warranties Warranties do not have Assurance-type warranties will generally continue to be accounted for under existing to be separately priced guidance – i. and —— are expected to be recovered. to expense or capitalize. and having discretion to establish prices for the specified goods or services. 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).g. Contract costs More costs are expected to 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: new standard. plant. Incremental costs to obtain a contract with a customer (e. which may include anticipated contracts or renewals. current GAAP. All rights reserved. including those from the original contract. 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. a Swiss entity. 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. sales commissions) are required Capitalization is required to be capitalized if an entity expects to recover those costs – unless the amortization period. This could require some warranties to be separated between a service element (deferral of revenue. is less than 12 months. which is then recognized as the services are provided) and an assurance element (cost accrual at the time the good is transferred). assuming inventory risk. consistent with the pattern of transfer of the good or service to which the asset relates. Topic 450 (contingencies). and An entity cannot elect —— costs incurred in fulfilling a contract that are not in the scope of other guidance. An entity amortizes the assets recognized for the costs to obtain and fulfill a contract on a systematic basis. when the criteria are met. —— generate or enhance resources that will be used to satisfy performance obligations in the future. 24 | Revenue for retailers © 2017 KPMG LLP. In a contract to transfer evaluate whether an entity is multiple goods or services. the new standard than under If any additional distinct goods or services are not priced at their stand-alone selling prices.e. intangibles. an agent for others. 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. and equipment – are capitalized if the fulfillment costs: —— relate directly to an existing contract or specific anticipated contract. or property. inventory. Fulfillment costs that are not in the scope of other guidance – e. the remaining transaction price is required to be reallocated to all unsatisfied performance obligations.g. an entity may be a principal for some goods and services and a principal or an agent. a Delaware limited liability partnership and the U. —— incremental costs to obtain a contract.

sales.) 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. The standard may not only change the amount and involve a diverse group of parties (e. The implementation of the new standard will effects.g. Legal.S. but potentially requires changes in the Planning. For more information about implementation internal controls or modify existing controls to address risk challenges and considerations. Tax. a Swiss entity. etc. Investor Relations.The impact on your organization Implementation of the new standard is not just an accounting exercise. etc. Financial timing of revenue. 25 | Revenue for retailers © 2017 KPMG LLP. All rights reserved. see chapter 14 of KPMG’s points resulting from new processes.) markets —— Revenue change management —— Covenant compliance team —— Opportunity to rethink business —— Multinational locations practices —— Coordination with other strategic initiatives As noted in the chart. Entities may need to design and implement new required change. a Delaware limited liability partnership and the U. judgments. the new standard could have far-reaching and disclosures. IT. estimates Revenue: Issues In-Depth. . New revenue recognition standard Revenue recognition automation and corresponding accounting and ERP upgrades 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. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 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.

26 | Revenue for retailers © 2017 KPMG LLP. We show how one fictitious company has navigated the complexities of the revenue Illustrative disclosures disclosure requirements. a Swiss entity. Transition options Assists you in identifying the optimal transition method. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). proposals. US news & Reference Newsletter CPE views library sign-up kpmg. Additionally. Visit kpmg. and final standards and regulations. broad transactions standards on your company.com/us/frv for news and analysis of significant decisions. .com/us/frv Insights for financial reporting professionals Here are some of our resources dealing with revenue recognition under the new standard.S. leases and financial instruments) – and also covers As you evaluate the implications of new financial reporting existing US GAAP. KPMG Financial Reporting View Insights for financial reporting professionals FRV focuses on major new standards (including revenue recognition. KPMG Financial Reporting View is and more. ready to inform your decision‑making. IFRS. Issues In‑Depth and highlights the key differences in application of the new standard. chapter 14 provides implementation considerations. All rights reserved. providing examples to explain key concepts and highlighting the changes from legacy US GAAP. Provides you with an in-depth analysis of the new standard under both US GAAP and IFRS. a Delaware limited liability partnership and the U. SEC matters. Assists you in gaining an in-depth understanding of the new five‑step revenue model by Handbook answering the questions that we are encountering in practice. Industry guidance See our other industry guidance.

Retail Audit Leader Department of Professional Practice 345 Park Avenue 345 Park Avenue New York.S. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.S. CA 94105 New York. The KPMG name and logo are registered trademarks or trademarks of KPMG International. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). NY 10154 New York.com kpmg. Revenue Topic Team Leader 55 Second Street. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”). NY 10154 Tel: 415-963-8657 Tel: 212-954-3621 pkalavacherla@kpmg. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.com Prabhakar Kalavacherla (“PK”) Brian K Allen Partner Partner Global Revenue Topic Team Leader U. Tax and Advisory services. Although we endeavor to provide accurate and timely information.com/socialmedia KPMG is a global network of professional services firms providing Audit. © 2017 KPMG LLP. Suite 1400 345 Park Avenue San Francisco. 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. a Swiss entity. . NY 10154 Tel: 212-954-3708 Tel: 212-909-5567 ecmiller@kpmg. We operate in 155 countries and have 174. NY 10154 New York.com smuir@kpmg.com Meredith L Canady Scott A Muir Partner Partner Department of Professional Practice Department of Professional Practice 345 Park Avenue 345 Park Avenue New York.com ballen@kpmg.Contacts KPMG is able to assist retailers as they navigate the adoption of the new standard. All rights reserved. Each KPMG firm is a legally distinct and separate entity and describes itself as such. Elizabeth C Miller Paul H Munter Partner Partner U.S.000 people working in member firms around the world. a Swiss entity. a Delaware limited liability partnership and the U.com pmunter@kpmg. NY 10154 Tel: 212-909-5858 Tel: 212-909-5073 mcanady@kpmg.