Sell-Through Revenue Recognition
Challenges of revenue recognition
Generally, manufacturers recognize revenue either when products are delivered to distributors (sell-in) or when distributors resell products to end-users (sell-through). It is becoming more common for channel-centric companies to recognize revenue on a sell-through basis, because revenue is not considered earned as long as the distributor retains the right to return the goods, or the sale price is not “fixed and determinable.”
The rules of sell-through revenue recognition come into play when there are rights of return, stock rotation rights or when back-end rebates or co-op / MDF payments reduce revenue. Complexities also arise when products and services are bundled together under a single SKU or invoice. See below for relevant rules from the AICPA, FASB, PCAOB and SEC. These revenue recognition rules and guidelines all demand increasing diligence from accounting staff to ensure compliance and be audit-ready.
Manual processes present challenges
Unfortunately, the majority of existing ERP and accounting software packages don’t accommodate the complex revenue management and compliance needs for sell-through revenue recognition. This forces companies to manage revenue recognition activities outside their standard financial systems by using complicated spreadsheets and manual processes. Since these approaches are error prone and not scalable, setting up effective controls for risk mitigation end up being an even bigger challenge.
Did you know?
Revenue is not considered earned as long as the distributor retains the right to return the goods, or the sale price is not “fixed and determinable.”