Article written by:
Dustin Minton, CPA, MBA
Director, Assurance & Business Advisory Services
Anna Markin, CPA, MBA
Manager, Assurance & Business Advisory Services
For the past few years, the delivery trend has been on the rise with many delivery service providers (DSPs) like DoorDash, Grubhub, and Uber Eats providing an easy and convenient platform for your customers to order whatever type of food they want and have it delivered to their front door. Many concepts, both limited and full service, were starting to leverage these DSPs as another revenue source to expand their customer base and brand. Then came the pandemic and all of a sudden everyone needed to adapt to off-premise dining through delivery. For those that had not embraced DSPs fully, it became a trial by fire to learn the ins and outs, along with the related hefty fees. As lockdowns continued and dine-in sales continued to decline, delivery services were on the rise, compensating for the loss of sales elsewhere. Therefore, we want to discuss the accounting treatment of these delivery services and related fees.
Accounting for delivery fees falls under ASC Topic 606, ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) that became effective in 2019 for all private companies (except Franchisors which received a one-year extension) and requires an in-depth analysis of the principal versus agent relationship. Analysis of the relationship is not straightforward, as management needs to determine which party, restaurant, or DSP controls the transaction.
Having control over a transaction generally means you have control over the following:
- Menu pricing
- Menu offerings
- Customer satisfaction
- Delivery management
Additionally, one needs to identify who is the end customer – the DSP or customer patron. By answering those questions, we can determine who is a principal versus an agent in the relationship. This conclusion will drive the accounting – recording revenues gross or net of DSP fees. The key is to identify who controls the transaction prior to delivery to the end customer.
Example 1 – Restaurant is Principal
Restaurant X enters into a contract with a DSP for delivery services for which 30% of the sale is payable to DSP. Restaurant X determines the menu offerings, menu prices, and retains responsibility for the overall customer satisfaction of the food quality. Should customers not be satisfied, Restaurant X would be responsible for handling any customer complaints or comps deemed necessary. DSP is only responsible for the delivery of the food. In this example, Restaurant X is the principal, as control over the transaction resides with Restaurant X. Restaurant X would record revenue at the gross amount and record a DSP fee based on 30% of the sale amount.
Assume a pizza sells for $10 in this example. Restaurant X would recognize revenue of $10 and a DSP fee of $3, which would be presented as cost of sales.
Example 2 – DSP is Principal
Restaurant X enters into a contract with a DSP for delivery services for which DSP is paid 30% of the sale. DSP determines the menu offerings and menu prices on its app platform and retains responsibility for the overall customer satisfaction of the food quality. Should customers not be satisfied, DSP would be responsible for handling any customer complaints or comps deemed necessary. Restaurant X is only responsible for the preparation of the food. In this example, DSP is the principal as control over the transaction resides with DSP. DSP is the end customer for Restaurant X. Restaurant X would record revenue net of DSP fee based on 30% of the sale amount.
Assume a pizza sells for $10 in this example. Restaurant X would recognize net revenue of $7 ($10 sale net of $3 DSP fee). There would be no impact to cost of sales.
Indeed, navigating the DSP fee accounting intricacies are not easy and are based on the contract you have entered into. Be sure to review your contract with the DSP to understand the responsibilities and control of each party. If the restaurant is deemed principal, accounting for the DSP follows what you would normally do by recording sales gross; however, if the DSP is deemed principal, the top line sales will be reduced by this fee paid to the DSP.
It is also important for franchisors to revisit the definition of what sales number royalties and advertising fees are based on. Sales will be lower if the DSP is deemed the principal in the transaction.
When in doubt, please do not hesitate to reach out to our experienced Restaurant team.