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Accounting for Sales Incentives Used in the Restaurant Industry

By Bob Berti

The economic recession has had an overwhelming impact on many industries that vie for the consumer dollar - among them the restaurant segment of the hospitality industry. With corporate travel cut to a minimum and consumers cutting their discretionary spending on dining out, restaurants have reported reduced customer counts and lower average checks since the recession. Per-meal spending has decreased 20 percent since 2008. Consumers have reduced their consumption of beverages, appetizers, and desserts and are looking for better values.

Restaurants have benefited from offering various types of monetary incentives to customers, and no doubt they will continue to do so. The accounting for these incentives, which can be confusing, differs according to the type of incentive that is used.

The accounting guidance pertaining to sales incentives is discussed in Financial Accounting Standards Board Accounting Standards Codification (ASC) 605-50 (Revenue Recognition/Customer Payments and Incentives) and ASC 405-10 (Liabilities). While much of the discussion presented in the guidance refers to software, manufacturing, and retailer discounts and rebates, it also applies to some of the more common incentives used by the restaurant industry to induce sales, including:

  • Coupons and rebates in a single purchase transaction;
  • Rights to discounts on future purchases;
  • Volume discounts resulting in a cash rebate; and
  • Free products or services with the purchase of one or more products or services.

The general rule for accounting for incentives (coupons and discounts) indicates that sales incentives that are offered voluntarily, without charge by a company, for use by a customer as a result of a single exchange transaction, and will not result in a loss on the sale are recognized at the later of:

  1. The date at which the related revenue is recorded by the vendor, or
  2. The date at which the sales incentive is offered.

Restaurant business operations employ some of the most creative marketing individuals. Incentives to stimulate revenue and head count have taken on many varieties. In reading the accounting standards pertaining to sales incentives, one has to distinguish between sales incentives that involve coupons and those that involve rebates. The sales incentives that involve cash rebates will require the restaurant company offering the sales incentive to make an estimation of the amount of sales incentives to be exercised or awarded. If reasonable estimates cannot be made, then a liability shall be recognized for the maximum potential amount of sales incentives that could be awarded. The sales incentives that involve only coupons will be recorded as a reduction of revenue at the time of sale, assuming a loss on the sale does not occur.

Restaurant sales incentives most frequently consist of coupons or discounts available through print media, the Internet, and direct-mail advertising. As an example, a restaurant company offers a coupon for $1 off the customer's next purchase. The coupon is not redeemable for cash value. Customer A makes a purchase at a restaurant in the amount of $10 and presents the $1 coupon. The restaurant company will record revenue on the sale of product in the amount of $9. It is assumed that the use of the $1 discount in the example would not have resulted in a loss in the sale. This particular form of discount is offered voluntarily and without charge. The revenue is reduced by the discount amount at the time the coupon is presented, which is the later date under criteria (2) above.

Another commonly used sales incentive in the restaurant industry is a discount coupon issued to a customer after he or she completes a dining experience. The offer provides the customer a discount (for example, $10) on the next visit to the restaurant. The accounting treatment for this discount coupon (again assuming its use would not have resulted in a loss in the sale) is similar to the treatment discussed in the previous paragraph.

A completely different accounting treatment occurs in the case of a franchiser who offers sales incentives and coupons. If the franchisee will be reimbursed by the franchiser for discount coupons presented by the consumer, then the franchiser must estimate the amount of discount coupons to be used if that number can be reasonably estimated. If a reasonable estimate cannot be made, a liability should be recognized for the maximum potential amount of sales incentives that could be exercised. This concept is similar to that of requiring an estimate for product returns because the company is attempting to predict the actions of its customers.

Although the accounting standards under ASC 605-50 do not specifically address typical sales incentives in the hospitality industry, using discount coupons is recognized as a reduction of revenue at the time of the sales transaction. However, if a franchiser or vendor is providing a form of cash reimbursement to the franchisee or retailer that is accepting the discount coupon, then the franchiser or vendor would be required to recognize a liability for the estimate of the dollar amount of discount coupons expected to be used.

Bob Berti is a partner with Crowe Horwath LLP in the Chicago office. He can be reached at 630.574.1620 or

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