EY AccountingLink 21 Technical Line How the new revenue

Ey accountinglink 21 technical line how the new

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EY AccountingLink | ey.com/us/accountinglink 21 | Technical Line How the new revenue standard affects retail and consumer products entities The standard does not prescribe a single approach that must be applied in all circumstances in which a sales-based or usage-based royalty is promised in exchange for a license of IP and the contract includes a minimum guaranteed amount. An entity should consider the nature of its arrangements and make sure the measure of progress it selects does not override the core principle of the standard. An entity should disclose the accounting policy it selects because this would likely affect the amount and timing of revenue recognized. Up-front fees in franchising arrangements Retail and consumer products entities may receive fees up-front upon the opening of a new franchise store and/or the granting of a new franchise term in addition to ongoing royalties based on a percentage of sales. Under the standard, entities must evaluate whether up-front fees relate to the transfer of a promised good or service. These entities should determine whether the nonrefundable up-front fees are compensation for one or more of the following: An initial service (i.e., a performance obligation) that is satisfied at the onset of the arrangement Promises that are not distinct from the performance obligations satisfied throughout the life of the franchise agreement Activities that they must undertake to fulfill a contract (e.g., administrative, setup activities) and that do not transfer a good or service to a customer The standard requires that the up-front fees be included in the transaction price and allocated to the performance obligations in the contract. That is, treatment of the nonrefundable up- front fees should be no different from any other consideration received by the entity as part of the arrangement. Example 57 in the standard 25 illustrates the accounting for a franchising arrangement with a nonrefundable up-front fee. How we see it The legacy GAAP guidance regarding the accounting for franchise contracts has been superseded. If a franchising contract includes nonrefundable up-front fees, entities need to carefully evaluate whether those payments relate to a separate performance obligation distinct from the franchise license. Warranty arrangements Retail and consumer products entities often sell products with warranties, which can be explicitly included in the contractual arrangement with a customer or may be required by law or regulation. In addition, an entity may have established an implicit policy of providing warranty services to maintain a desired level of satisfaction among its customers. Whether explicit or implicit, warranty obligations extend an entity’s obligations beyond the transfer of control of the good or service to the customer, requiring it to stand ready to perform under the warranty over the life of the warranty obligation.
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  • Fall '17
  • meenakshi

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