Demand for third-party delivery services such as Postmates and Uber Eats has been on the rise for the past few years, and that’s not changing. What is changing is how restaurants will soon be required to recognize revenue when these third-party delivery services are involved. While the new revenue standard has been effective for public companies since the beginning of 2018, all other non-public entities will be impacted starting in 2019.
The FASB first issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to replace most existing revenue guidance under GAAP. To provide more clarity, the FASB has since published update ASU No. 2016-08 to address principal versus agent considerations when a third-party is involved. Although the new update provides direction, there is still complexity in determining how these sales utilizing a third-party should be recorded. Restaurants will need to analyze their contracts to determine who is the principal or agent in order to properly recognize revenue.
When determining whether the restaurant is acting as a principal or agent, the key factor to consider is which party has control over the good or service. This determination will dictate if revenue from third-party delivery sale is reported at the gross or net amount. If the restaurant is considered the principal, then the new guidance requires it to record revenue at the gross amount, whereas recording the net amount is the proper accounting treatment, if the restaurant merely acts as the agent in the sale.
Now, how should restaurants distinguish who has control over the good or service? There are several elements that may indicate that the restaurant controls the product, in which case they will be considered the principal in the transaction. Consider who has responsibility over the following factors:
- Decision over meal before customer orders and receives it
- Quality of meal and customer satisfaction (refunds)
- Price discretion
Who’s responsible for the meal until it’s delivered to the customer? If the meal is returned or incorrect, who bears the consequence? Who determines the price? If the answer to these questions is the restaurant, it is likely considered the principal. In this case, the restaurant should use gross recognition, separately recording the transaction price as revenue and the delivery charge as cost of sales. If the answer is the third-party delivery service, then the restaurant should use net recognition, recording revenue net of the commissions kept by the delivery service.
Even if the third-party delivery service has some say in setting prices to generate additional revenue, the restaurant could still ultimately be considered the principal. As the new revenue recognition guidance does not provide black and white answers, we recommend that restaurants review their third-party sales contracts with the aforementioned guiding points in mind, and also to look at the big picture when evaluating principal versus agent considerations.
With the effective date of the Topic 606 on the horizon, restaurants should gain familiarity with the guidance and assess the potential impact of third-party delivery sales on their current accounting practices. By preparing now, restaurants can avoid having to make adjustments in the future. If you have further questions on third-party delivery sales and properly implementing the new revenue recognition standards, contact Shelley Oswald, Senior Manager within the Hospitality and Consumer Product group at Peterson Sullivan.