Download Impact of the New Revenue Recognition Standard on Dealerships

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April 2017
Impact of the New Revenue Recognition Standard on Dealerships
Jon Hansen, Partner | DHG Assurance
The Financial Accounting Standards Board (FASB) has issued a new accounting standard for revenue recognition,
“ASC 606: Revenue from Contracts with Customers”, replacing nearly all existing revenue guidance under US Generally
Accepted Accounting Principles (GAAP). The new standard uses a 5-step process to analyze revenue recognition. This
memo will analyze the new standard at a high level to assess the GAAP impact on dealerships.
Effective dates
Sales of vehicles (new and used)
• Public entities: fiscal years beginning after December
15, 2017
• Non-public entities:
December 15, 2018
fiscal
years
beginning
after
Analysis of impact on dealerships:
Below, the key portions of the 5-step revenue process
under the new revenue standard are assessed for each of a
dealership’s typical key business areas:
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5-Step process under the new standard:
Step 1: Identify the contract with the customer
• Contract is for the sale of a vehicle and the transaction
has an associated written contract (Buyer’s Order).
Step 2: Identify the performance obligations of the contract
• The primary performance obligation is the delivery of
the vehicle. Other obligations (customization, etc.) are
typically fulfilled before the delivery of the vehicle.
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Step 3: Determine the transaction price
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation.
• The transaction price is clearly stated in the buyer’s
order. The majority of the price is for the vehicle itself.
Within the contract, other items can be listed (primarily for
extended warranty and similar policies). See analysis of
this component of the transaction price in the extended
warranties section below.
• For the sale of the parts, the performance obligation is
satisfied upon delivery of the parts.
Comparison to current practice:
Dealerships reporting under GAAP are typically recognizing
the revenue on the sale of parts upon delivery of the parts.
The new standard would typically not significantly change
this current practice.
Step 4: Allocate the transaction price to the performance
obligations in the contract
• The transaction price components are primarily split
between the delivery of the vehicle and the sale of
extended warranty and related products, if applicable.
Servicing of vehicles
5-Step process under the new standard:
Step 1: Identify the contract with the customer
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation.
• Contract is for the providing of repair of and/or
maintenance to the vehicle and the transaction has an
associated written contract (invoice).
• For the sale of the vehicle, the performance obligation is
satisfied upon delivery of the unit and completion / signing
of the contract.
Step 2: Identify the performance obligations of the contract
Comparison to current practice:
• The performance obligation is the performance of the
specified service(s).
Dealerships reporting under GAAP are typically recognizing
the revenue on the sale of new and used vehicles upon
delivery of the unit and completion / signing of the associated
contract, and are recording the amount of revenue identified
in the contract as the sales price of the vehicle. The new
standard would typically not significantly change this current
practice.
Step 3: Determine the transaction price
• The transaction price is clearly stated on the final invoice.
Step 4: Allocate the transaction price to the performance
obligations in the contract
• Although multiple repair services can be performed
as part of one repair order, the services are typically
completed within a relatively short timeframe and are all
related to repair and/or maintenance of the vehicle.
Sales of parts
5-Step process under the new standard:
Step 1: Identify the contract with the customer
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
• Contract is for the sale of parts and the transaction has
an associated written contract (parts purchase order /
invoice typically in one document)
• For the sale of repair and maintenance services, the
performance obligation is satisfied upon completion of
the service(s) and return of the vehicle to the customer.
Step 2: Identify the performance obligations of the contract
• The performance obligation is the delivery of the parts.
Comparison to current practice:
Step 3: Determine the transaction price
Dealerships reporting under GAAP are typically recognizing
the revenue on repair services upon completion of the service
and return of the vehicle to the customer. The new standard
would typically not significantly change this current practice.
• The transaction price is stated on the parts invoice.
Step 4: Allocate the transaction price to the performance
obligations in the contract
• The only performance obligation is the delivery of the
parts.
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Leasing of vehicles
Disclosure considerations
Lease contracts are specifically excluded from the scope of
the new revenue recognition standard. The FASB has issued
a new standard on leases, which will be effective in 2019 for
public entities and in 2020 for non-public entities. However,
this new leasing standard does not significantly change
lessor accounting from current practice.
Specific wording from ASC 606 below outlines the major
required disclosures under the new standard. Next to each
item, potential impact on current disclosure is noted.
ASC 606-10-50-1 The objective of the disclosure requirements
in this Topic is for an entity to disclose sufficient information
to enable users of financial statements to understand the
nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. To achieve that
objective, an entity shall disclose qualitative and quantitative
information about all of the following:
Sales of extended warranties
Updated guidance under the new revenue recognition
standard:
The key consideration for sales of extended warranty
products under the new revenue recognition standard (ASC
606) is the principal vs. agent consideration. In general
terms, a principal serves as the primary obligor for a
performance obligation, while an agent arranges for another
party to provide for goods or services
a. Its contracts with customers: Dealerships typically
disclose the nature of its contracts with customers.
However, the new standard does require disclosure of
the disaggregation of revenue among the significant
types of revenue. Therefore those that are not currently
doing so will need to disclose its breakout of revenue
by major type, beginning upon adoption of the standard.
Comparison to current practice:
Dealerships that sell products on behalf of outside warranty
companies typically recognize the revenue on the sale of
extended warranty products upon delivery of the warranty
contract to the customer, as the dealership serves as an
agent, not the principal or primary obligor. This practice will
not change under the new standard.
b. The significant judgments, and changes in the
judgments, made in applying the guidance in this
Topic to those contracts: Dealerships’ disclosures may
already cover this requirement, but dealerships should
assess whether any new judgments were made as part
of adopting the new standard and should disclose these
judgment items in the financial statement footnotes.
Dealership groups that have an extended warranty company
included within their financial statements are already required
under GAAP to defer and recognize the contract revenue
over the life of the associated contracts. This would remain
the same under the new standard.
c. Any assets recognized from the costs to obtain or
fulfill a contract with a customer: Not anticipated to be
applicable for dealerships.
Jon Hansen
Partner, DHG Assurance
704.367.5864
[email protected]
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