How the new revenue standard affects retail and consumer products entities to

How the new revenue standard affects retail and

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How the new revenue standard affects retail and consumer products entities to accrue for the costs of shipping and handling activities if revenue is recognized before contractually agreed shipping and handling activities occur. Under the standard, an entity recognizes revenue only when it satisfies an identified performance obligation by transferring a promised good or service to a customer. While shipping terms may provide information about when legal title to a good transfers to the customer, they are not determinative when evaluating the point in time at which the customer obtains control of the promised asset. Retail and consumer products entities must consider all relevant facts and circumstances to determine whether control has transferred. For example, when the shipping terms are free onboard (FOB) shipping point, entities should carefully consider whether the customer or the entity has the ability to control the goods during the shipment period. Furthermore, if the entity has the legal or constructive obligation to replace goods that are lost or damaged in transit, it should evaluate whether that obligation influences the customer’s ability to direct the use of and obtain substantially all of the remaining benefits from the goods. A selling entity’s historical practices also should be considered when evaluating whether control of a good has transferred to a customer because the entity’s practices may override the contractual terms of the arrangement. If an entity considers shipping and handling activities to be a promised service to the customer, we believe the related costs should be classified as cost of sales because the costs would be incurred to fulfill a revenue obligation. We believe entities need to apply judgment to determine how to classify shipping and handling costs when the related activities are not considered a promised service to the customer (e.g., when an entity uses the accounting policy election to account for shipping and handling as a fulfillment activity). This is because the standard does not address how entities should classify these costs. How we see it Under legacy guidance, entities did not recognize revenue if all of the significant risks and rewards of ownership had not transferred to the customer. For example, if the entity historically had agreed to repair or replace items lost or damaged in transit, even if the shipping terms were FOB shipping point, the delivery terms were generally accounted for as FOB destination point under legacy guidance. Under the standard, transferring risks and rewards of ownership is only one indicator of the timing of the transfer of control. As such, entities need to consider additional factors to determine when they transfer control of goods to the customer.
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  • Fall '17
  • meenakshi

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