Financial accounting standards are always changing, but they don’t always accommodate every business and every scenario. No company is more grouchy about one incoming change than Amazon.com, Inc . The online retail giant recently commented on ASC 606, an accounting standard update set to take effect next year. Under the change, sales figures will be diluted or exaggerated in their gross form.
And it is not just companies like Amazon who will be effected. Every public company will need to adopt the accounting transition too. Essentially, distinguishing end-user sales from bulk sales to retailers gets a bit trickier. Beyond that, ASC 606 throws a spanner in the works of loyalty programs, gift cards and in-store credit cards services as well.
A massive headache for public company retailers is on its way. The Financial Accounting Standards Board will implimement a new update in 2018. It changes how and when public companies can account for certain revenues. The impact might be minute for most public companies. For Amazon though, a retail juggernaut with a host of in-house financial services and products, ASC 606 greatly effects its financials. Management sees the change material enough to point out in its July SEC filing.
In the filing, Amazon.com, Inc. states that, after evaluating ASC 606’s impact, it won’t be able to account for revenues the way it usually does. The greatest changes “relate to the timing of when we recognize revenue,” the retailer points out. For investors, this essentially means the “the gross amount of revenue” that [Amazon] presents will be diluted.
The changes of ASC 606 for Amazon.com, Inc.
The sale of in-house made products get the worst end of the stick. Under the ASC 606, the sale of products like the Amazon Echo and Kindle exaggerate by a large margin. The sales of those products have to be recognized upon their sale to the retailer store and not to end customers.
In essence, if Best Buy secures a 100,000 Amazon Echo speakers to sell, Amazon has to recognize that as an actual sale. Whether Best Buy manages to sell those speakers to end-buyers is no longer Amazon’s concern. There are timing limits and other effects too. However, ASC 606 will insists on changing when Amazon can recognize in-house product sales.
There is also the effect ASC 606 has on services like in-store gift cards. Amazon will need to recognize the entire portion of its gift cards values within nine months of the purchase. The company usually waited until their redemption or date of expiry.
Amazon.com, Inc. also point out that “certain advertising services will be classified as revenue”. Currently, the firm accounts for some internal product ad services as a reduction in cost of sales. That will be no more once ASC 606 comes into effect.
Investors should note that Amazon.com, Inc will adopt the change in the first quarter on 2018. In the case of its retained eanings, the retailer will not entirely restate past periods but make cumulative adjustments. Other major public retailers that have acknowledged the change include Starbucks, Gap, Wal-Mart and Nordstorm.