Effective December 15, 2018 (calendar year 2019) for all private companies, your dealership must comply with the new revenue recognition standards. ASC (Accounting Standards Codification) 606 – Revenue From Contracts With Customers, was issued by the Financial Accounting Standards Board (FASB), the body that is responsible for Generally Accepted Accounting Principles (GAAP), in conjunction with the International Accounting Standards Board (IASB).
The goal of these new requirements is simple: improving financial reporting. This standardization of revenue recognition practices should make it easier to simplify comparisons across entities, jurisdictions, industries, and capital markets as it makes financial statements more useful.
The guidance provided to implement ASC 606 consists of five steps plus additional financial disclosure requirements:
- Identify the contract with the customer. Contracts between you and the buyers contain the transaction price and performance obligations. What does a “contract” look like for your dealership?
- Identify the performance obligations of the contract. You promise to transfer goods and/or services to your customers. Is your obligation the delivery of a part, the completion of a specific service, the finalizing of a contract, or the delivery of the vehicle?
- Determine the transaction price. What will the customer provide in exchange for the goods or services? Transaction prices for dealerships are often presented on invoices or buyers’ orders.
- Allocate the transaction price to the performance obligations in the contract. This is a matter of “matching” the components of the transaction price to the goods or services delivered.
- Recognize revenue when (or as) the performance obligation is satisfied. Revenue is recognized when the customer, “…obtains control of that good or service.” Sometimes, a contract is not fulfilled immediately, but over a period of time. In that case, revenue is recognized incrementally after finding a way to measure progress, until the performance obligation is completely satisfied.
- Is the dealership required to allocate a portion of the transaction price to free oil changes, tires, or maintenance?
Though the goal of ASC 606 is understandable, implementation may be more challenging. How does this affect your dealership when recognizing revenue on the sales of vehicles, parts, and extended warranties? What about leased vehicles? Do your financial statements contain all required disclosures? Contact us
, and we can help you sort it all out.