The Financial Accounting Standards Board (FASB) issued a standards update on “Revenue From Contracts With Customers,” replacing almost all revenue guidance under Generally Accepted Accounting Principles (GAAP) nearly six years ago. The new standard is effective for all companies, and many auto dealers although the changes have not had a material impact on most revenue lines. Instead, dealerships have been focusing on the modifications needed to remain compliant in recognizing revenue and on their financial statement disclosures.
Part 1 of this this two-part series examined how dealerships should recognize revenue using the Five-Step Model. Now, we will review the new presentation and disclosure requirements.
Under the new standard, an auto dealer must reconsider how they present assets and liabilities on their balance sheet in relation to whether a receivable is a traditional or a contract asset. A liability includes items like unused gift cards, reserves for parts or vehicle returns, and chargeback reserves. The distinction between receivables is whether the dealership’s right to collect is conditional or unconditional. When a dealership sells a vehicle, and the customer takes delivery or gains control of the asset, the performance obligation is complete. It is at that time the dealership has a right to receive consideration (payment). This transaction will then show on the balance sheet as a receivable.
When a dealership enters into a transaction that contains multiple services or parts, or a vehicle, it cannot demand payment for each performance obligation and must wait to bill the customer until all the obligations are met. Unbilled revenue is still recognized, even though the customer has not been billed. This conditional payment is considered a contract asset on the balance sheet. While both assets are subject to a degree of risk, a contract asset faces more risk because of its dependence on performance.
Dealerships must remember to account for contract liabilities, which encompasses the obligation to provide goods or services to a customer after payment. Annual disclosure requirements now demand that dealerships include qualitative information along with their quantitative data.
Additional disclosures to be considered include:
- In contracts with customers, disaggregated revenue must now be considered. Some dealerships were disclosing disaggregated revenue prior to the update, however, now all dealerships must;
- Dealerships must disclose new judgments made due to the adoption of ASC 606. The revenue recognition standard seeks to understand the judgments applied to the application of the new guidance, specifically around significant judgments in identifying performance obligations, estimating variable pricing, and allocations of the transaction price when more than one performance obligation exists, and changes to previously held judgments.; and
- Assets recognized from costs to obtain/fulfill contracts, although, this requirement is not expected to have a significant impact on dealerships.
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If you need assistance or have questions about revenue recognition compliance, Selden Fox can help. Our team has considerable experience in this area and is here to assist. For additional information please call us at 630.954.1400 or click here to contact us.
