January marks the end of most businesses’ first annual reporting period under the Financial Accounting Standards Board (FASB)’s new revenue recognition rules. Here’s how the new rules, outlined under ASC 606, may affect wine industry accounting.
Just over a year ago, ASC 606 officially came into effect for private businesses. The new revenue recognition rules standardize the principles of revenue recognition — i.e., the conditions under which a company may record revenue to its financial statements — across industry and transaction type. That means for most industries, legacy methods of determining when and how to recognize revenue are no longer valid — and the wine industry is no exception.
Like other businesses, wineries now have to decouple each of their revenue streams, then follow the five-step process outlined by the FASB to determine when revenue may be recognized. These five steps, or “principles,” are (in order):
- Identify the contract.
- Identify the performance obligation(s).
- Determine the expected transaction price
- Allocate the transaction price.
- Recognize revenue when (or as) the performance obligation is satisfied.
How this five-step process applies to real-world scenarios for wineries, whose contracts tend to be more complex than most simple, one-time agreements to exchange products for cash, may not be immediately obvious. That’s why we’ve taken the time to identify some common revenue streams for wineries and analyze how they should be treated under the new standards. So sit back, relax, and take pour your favorite glass of vino as BPM breaks down revenue recognition for these three common revenue-generating activities.
1. Tasting room sales
Here’s a common scenario: customers visit a winery that charges a certain amount for tastings. However, the tasting fees are waived with the purchase of a certain number of bottles. How many performance obligations are present?
The answer is two: the wine tasting itself and the sale of wine bottles. The waiving of the fee does not negate the fact that the winery must fully complete their obligation of pouring guests’ wine tastings.
That there are two performance obligations will come as a surprise to many wineries that, under the previous standards, recorded 100% of the total amount received at point-of-sale as a sale of wine. However, the new standard is clear in this regard: there are two performance obligations associated with this scenario, and the total revenue at point-of-sale (POS) must be allocated to both activities in accordance with each activity’s stand-alone fair value or selling price.
2. Sale of grapes
Another common activity for wineries that results in revenue is the sale of grapes directly to a customer (typically to another winery, if they cannot be used for its own production). This activity is usually conducted under a grape purchase and sale agreement executed in advance — and often covering multiple years — that provides for delivery and a pricing formula reflecting the then-market value.
In this kind of multi-year (or a multi-varietal) contract scenario, the trick is to make sure your accounting function allocates the transaction price not as a single revenue event upon the first, last or any individual delivery of grapes, nor upon the receipt of payment. Instead, you must determine the standalone selling price of each shipment or varietal and allocate the expected revenue, as agreed to in the contract, accordingly.
Furthermore, note that under current generally accepted accounting principles (GAAP), revenue should always be recognized upon delivery of the product or service — in this case, the grapes — not when payment is received. The thinking behind this principle is that income cannot reliably be said to be “earned” until the customer benefits from the agreed transaction.
3. Sale of wine wholesale
Sale of wine wholesale, whether in bulk or in bottles, to customers also presents challenges for accurately recognizing revenue under the new standard. Previously, it was common for wineries to record certain expenses associated with distributing their wine to wholesale customers as marketing- or operating-related expenses, which have the benefit of not being recorded as a reduction of the selling price of the wine or cost of goods sold (thereby improving a wineries’ margins).
That way of recognizing revenue, unfortunately, is likely not going to fly under the new standard. The usual understanding with wholesalers is the winery sells the wine at a discount in exchange for the wholesaler using their sales and marketing services to sell your brand in the wholesale sector. As a consequence, the only entity that can really be said to be spending on marketing is the wholesaler. Wineries will thus have to deduct the expenses associated with sale and delivery of wholesale wine from the selling price to ensure revenue is recognized correctly on their financial statements.
For the most part, the new guidance emphasizes the importance of recording recognizing “net sales” and scrutinizing all potential costs associated with being able to sell cases of wine.
Ensure your business recognizes all your revenue streams correctly. Contact BPM today.
You didn’t get into the wine business to stress about financial reporting. Let the experienced professionals in BPM’s Wine/Craft Beverage Industry Group handle your winery accounting and reporting needs, so you can get back to doing what you do best: making great wine.
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BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. We have served California’s wine and craft beverage communities for the past 30 years. Our Wine/Craft Beverage professionals serve the diverse needs of wineries and breweries of all sizes - from small négociants to large, fully-integrated winery, breweries and suppliers. Our specialized advisory services include business succession planning, mergers & acquisitions, due-diligence, valuation and CFO services. For more information, visit https://www.bpmcpa.com/Industries/Wine-Craft-Beverage