Customers are defined as a party that has contracted with an entity to obtain goods or services in the ordinary course of business in exchange for consideration.
The following steps should be applied following a scope decision :. Transfer of a promised good or service to a customer in satisfaction of performance obligations results in revenue recognition. This occurs when the customer obtains control of the good or service. ASC defines a contract as an agreement between two or more parties that creates enforceable rights and obligations.
An entity should apply the requirements to each contract other than those included in the scope of other guidance such as leases that meets the following criteria:.
An entity may combine contracts and account for them as one contract, if the entity reasonably expects that such treatment would not result in a material difference from that obtained by accounting for each contract on an individual basis. In certain circumstances, the standards may require a series of contracts with a single customer to be accounted for as a single contract.
The new standard requires that contracts be combined if entered into at or near the same time with the same customer if any of the following conditions are met:. Additionally, ASC contains new guidance on the accounting for contract modifications. Contracts can be written, oral or implied, but must be legally enforceable. The accounting treatment depends on what was modified contract scope, price, or both.
Under the existing guidance prior to ASC , contract modifications, such as unpriced change orders, are accounted for when recovery is probable and revenue is recorded when claims are probable and the amount can be reasonably estimated. Under the new standard, claims or change orders are recorded when there is a change in legally enforceable rights and obligations.
This may be before the price of the change order is approved. Certain contract modifications are accounted for as a separate contract while others would result in treating the original contract and the modification on a blended basis. For the purposes of applying ASC , a contract would not exist if neither party has performed nor received consideration in exchange for promised goods or services, and each party can cancel without penalty.
Per ASC , a performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. The following example illustrates when use of the residual approach is appropriate:. An entity enters into a contract to sell products A, B, C as in the above example, but also agrees to supply product D. The entity determines that, because of this variability, it meets one of the conditions in the standard for using the residual approach.
Before applying the residual approach, it must apply any discounts to other performance obligations as required in the standard. Therefore, the entity would need to use another method to determine the standalone selling price for product D and properly allocate the consideration. If a contract calls for variable consideration, the entity shall allocate the variable consideration it has determined can be recognized, subject to the constraint. Any remaining transaction price will be allocated to other performance obligations in accordance with the methods noted above.
An entity sells a customer two licenses, X and Y. The entity determines that these are distinct performance obligations. The entity considers the requirements above.
The variable payment is related solely to Y, so criterion a has been met. It assesses criterion b and determines that this has been met, because the expected royalty payment approximates the standalone selling prices of X and Y. Therefore, none of the fixed consideration will be allocated to license Y. It recognizes no revenue when license Y is delivered, rather as the customer generates sales, it recognizes revenue at the 3 percent royalty rate.
ASC — Revenue Recognition
In this case, even though the variable component is attributable entirely to license Y, it would be inappropriate to allocate all of the variable consideration to license Y. This is because the amount allocated to licenses X and Y would not reflect a reasonable allocation based upon their standalone selling prices. However, this revenue cannot be recognized until the sales actually occur or the performance obligation is satisfied. License Y is transferred immediately and license X is transferred three months later.
The entity recognizes revenue as follows:.
The entity would then record the following revenue entry:. In the same ratio as above, the entity recognizes It also records a contract liability for the balance of It will continue to record the contract liability until delivery of license X. Thereafter, it will recognize revenue in the same ratios for both licenses as the royalties are earned.
If the transaction price changes because an uncertainty has been resolved such as one related to variable consideration, the entity will allocate those changes to the performance obligations based on the original allocation without regard to any changes in standalone selling prices which may have occurred. Restaurant Design. Online Store.
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Accounting for Sales Incentives Used in the Restaurant Industry By Bob Berti T he economic recession has had an overwhelming impact on many industries that vie for the consumer dollar - among them the restaurant segment of the hospitality industry. With corporate travel cut to a minimum and consumers cutting their discretionary spending on dining out, restaurants have reported reduced customer counts and lower average checks since the recession.
Per-meal spending has decreased 20 percent since Consumers have reduced their consumption of beverages, appetizers, and desserts and are looking for better values. Restaurants have benefited from offering various types of monetary incentives to customers, and no doubt they will continue to do so.
The accounting for these incentives, which can be confusing, differs according to the type of incentive that is used. While much of the discussion presented in the guidance refers to software, manufacturing, and retailer discounts and rebates, it also applies to some of the more common incentives used by the restaurant industry to induce sales, including: Coupons and rebates in a single purchase transaction; Rights to discounts on future purchases; Volume discounts resulting in a cash rebate; and Free products or services with the purchase of one or more products or services.
The general rule for accounting for incentives coupons and discounts indicates that sales incentives that are offered voluntarily, without charge by a company, for use by a customer as a result of a single exchange transaction, and will not result in a loss on the sale are recognized at the later of: The date at which the related revenue is recorded by the vendor, or The date at which the sales incentive is offered. Restaurant business operations employ some of the most creative marketing individuals.