By: Adam Raudsep, CPA, Senior Manager
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASC 606). This standard, along with subsequent amendments and clarifications issued by the FASB, fundamentally changes how companies across industries will recognize, measure, present, and disclose information about revenue.
Under the new guidance, a company will now have to recognize revenue when it transfers goods or services to a customer (i.e. control has transferred), rather than when the risk of loss from the sale of goods or services has passed to the customer. As a result, the new model could lead to very different revenue recognition patterns and amounts.
For nonpublic entities—which most members of the wine industry are—the new standard goes into effect for annual reporting periods beginning on or after December 15, 2018, and interim periods beginning after December 15, 2019, with early adoption permitted for any period beginning after December 15, 2016.
While the impact of the new standard on wineries isn’t as drastic as it is for others most will still need to spend extra time reviewing their revenue channels for affected areas in order to analyze the impact of the new standard.
All wineries will need to revisit their financial statements and consider any necessary enhancements to meet the revenue recognition presentation and disclosure requirements.
Following are a couple of key areas wineries should consider when implementing the new revenue recognition standard.
Trade Spending – a reminder…
Providing a certain level of product support for your sales channels—trade spending—is part of doing business when you’re a winery. The process, however, isn’t without its issues when it comes to financial accounting and reporting warranting some discussion.
Under both legacy US generally accepted accounting principles (ASC 605) and the new guidance of ASC 606, trade spending incentives are presumed to be a reduction of revenue. That reduction presumption can be overcome if a company can show it received an identifiable benefit from the trade spend. An example of an identifiable benefit would be a good or service that the company would pay for to promote or market their product regardless if the customer purchases the company’s product or not. Product demonstration costs or advertising are generally viewed as identifiable benefits. The amount paid for these types of goods or service also must be representative of fair value. In the event the amount paid exceeds fair value, then the excess amount should be netted against revenue.
Other Associated Performance Obligation Considerations
A contract with a customer generally explicitly states the goods or services that an entity promises to transfer to a customer. However, the promised goods or services identified in a contract with a customer may not be limited to the goods or services explicitly stated in that contact. This is because a contract with a customer may also include promises implied by an entity’s customary business practices, published policies or specific statements if, at the time of entering into the contract, those promises create a reasonable expectation of the customer that the entity will transfer a good or service to the customer.
This concept is important because if an entity does not identify an implied promise in a contract, it could recognize revenue at the wrong time.
Examples of arrangements that may contain additional performance obligations include:
- Grape sale contracts (i.e. different varietals and/or delivery expectations)
- Custom winemaking services (i.e. blending, aging, bottling)
- Bulk wine sale contracts (i.e. different varietals and/or delivery expectations, temporary storage arrangements)
New Financial Statement Disclosure Requirements
All companies will need to disclose significant judgements made in applying the new guidance including the timing of satisfying performance obligations, determining the transaction price at the contract level, and allocating amounts to performance obligations within the contract. In addition, the new standard requires disclosure of information about contracts with customers, which for wineries may include:
- The nature of the goods or services the entity has promised to transfer, highlighting any performance obligations where the entity is acting as an agent
- When the entity typically satisfies its performance obligations, such as upon shipment, upon delivery, as services are rendered, or upon completion of service
- Significant payment terms, including when payment typically is due
- Whether any contracts have a significant financing component
- Whether any consideration amount is variable, and information about the methods, inputs and assumptions used for assessing whether the estimate of variable consideration is constrained
- Obligations for returns, refunds, and other similar obligations