GAAP Accounting for F&I Products: Revenue Recognition and Chargeback Reserves

GAAP Accounting for F&I Products: Revenue Recognition and Chargeback Reserves

September 24, 2025

Revenue recognition of Finance & Insurance (F&I) products is a critical area for auto dealerships, especially with the guidance provided by ASC 606, “Revenue from Contracts with Customers.” Dealerships routinely sell a variety of F&I products—such as extended warranties, GAP insurance, and maintenance plans—when they sell vehicles. Under ASC 606, the timing and amount of revenue recognized from these products depends on whether the dealership is acting as a principal or an agent. When a dealership sells a third-party F&I product, it typically acts as an agent. In these cases, the dealership recognizes only the commission it earns as revenue, and does so at the point of sale, since its performance obligation is satisfied once the contract is executed.

However, the accounting for chargebacks related to F&I products is often overlooked. Chargebacks happen when a customer cancels an F&I product before the end of its term, which can occur if the customer pays off their loan early or trades in their vehicle. When this happens, the dealership may have to repay a portion of the commission it previously recognized as revenue. ASC 606 requires that revenue be recognized only to the extent that it is probable a significant reversal will not occur. This means dealerships must estimate the likelihood and amount of future chargebacks and record a chargeback reserve at the time revenue is initially recognized.

The chargeback reserve affects contra-revenue and liability accounts, offsetting recognized commission revenue by the amount expected to be repaid in the future. To set an appropriate reserve, dealerships need to analyze their historical chargeback rates and consider any current trends that might affect future cancellations. As actual chargebacks occur, the reserve is adjusted, and any differences between estimated and actual chargebacks are reflected in the financial statements as changes in the estimate.

For dealership finance teams, it’s essential to review how the chargeback reserve is calculated and ensure the assumptions are reasonable and well-supported. Good documentation and clear disclosures about the reserve and the estimates behind it are also key to meeting financial reporting requirements. By paying close attention to both revenue recognition and the chargeback reserve, dealerships can present a more accurate picture of their financial performance and avoid surprises down the road.

For additional guidance, contact us today.  Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.