I’ll Book Some Revenue With That Toaster

Another significant change in revenue recognition in the New Revenue Standard is the change in the way sales incentives are handled. Under current GAAP, unless you as the vendor are also a customer of your customer and paying for something in that capacity as a customer, any cash or a cash equivalent such as a bill credit or a gift card redeemable from you is considered a sales incentive that is recorded as contra-revenue. On the other hand if you give the customer an item you do not sell in the ordinary course of business such as bank giving away a free toaster for opening up an account, a wireless service provider giving away iTunes gift cards or a credit card company giving away loyalty points that can be redeemed for airline tickets or other merchandise, those items are still sales incentives, but are recorded as expense.

The new standard changes the accounting for sales incentives. Cash or cash equivalent sales incentives are still recorded as contra-revenue, and the cost of non-cash equivalent sales incentives is still expensed, but under the new standard the non-cash sales incentives are now considered a distinct performance obligation that must have a portion of the revenue from the contract – known as the Total Transaction Price (TTP) – allocated to them. The portion allocated to the non-cash sales incentive is recognized as revenue when the performance obligation is satisfied.

In the case of a service company giving away a different company’s gift card for signing a two year service agreement that means a portion of the revenue will be recognized as soon as that gift card is delivered which will generally mean earlier revenue recognition than under today’s rules. In the case of loyalty programs where points are earned and merchandise is usually delivered (long) after the transaction that resulted in the award of loyalty points, revenue will be recognized (significantly) later than under today’s rules.

No matter which way your company’s revenues are impacted, the one thing that is clear is that change is coming and it will be incumbent on preparers to be able to crisply outline how and why revenue is changing under the new standard to investors, internal management and really everyone in your company.