REVENUE

The Company’s revenue consists of sales of finished products to customers through wholesale and retail channels. Revenue from the sale of products, including those that are subject to inventory consignment agreements, is recognized when control of the product is transferred to the customer and in an amount that reflects the consideration the Company expects to be entitled in exchange for the product. The Company generally considers control to transfer either when products ship or when products are delivered depending on the shipping terms in the agreement or purchase order. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment, the customer has legal title to the product, the Company has transferred physical possession of the product, and the customer has the significant risks and rewards of the product. Taxes imposed by governmental authorities on the Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

The following tables summarize the impact of adopting ASU 2014-09 on the Company's condensed consolidated balance sheets as of September 29, 2018 and the Company's condensed consolidated statements of income (loss) and comprehensive income (loss) for the Third Quarter and Year To Date Period (in thousands):



	September 29, 2018
	As Reported		Without Adoption of ASU 2014-09		Impact of Adoption of ASU 2014-09
Assets
Accounts receivable	$	261,678	$	240,178	$	21,500
Inventories	521,311		538,810		(17,499		)
Prepaid expenses and other current assets	129,410		112,332		17,078
Liabilities
Customer liabilities	$	52,111	$	14,850	$	37,261



	For the 13 Weeks Ended September 29, 2018
	As Reported		Without Adoption of ASU 2014-09		Impact of Adoption of ASU 2014-09
Net sales	$	608,827	$	614,357	$	(5,530	)
Cost of sales	282,295		281,990		305



	For the 39 Weeks Ended September 29, 2018
	As Reported		Without Adoption of ASU 2014-09		Impact of Adoption of ASU 2014-09
Net sales	$	1,754,566	$	1,750,513	$	4,053
Cost of sales	831,333		830,912		421

Retained Earnings Adjustments. The following table presents the changes in the retained earnings balance including the cumulative effect of adopting ASU 2014-09, net of taxes (in thousands):



	Retained Earnings
Balance at December 30, 2017	$	409,653
Net income (loss) attributable to Fossil Group, Inc.	(51,067		)
Markdowns adjustment, net of taxes	(27,325		)
Sales adjustment, net of taxes	783
Balance at September 29, 2018	$	332,044

Markdowns. The Company provides markdowns to certain customers in order to facilitate sales of select styles. Markdowns are estimated at the time of sale using historical data and are recorded as a reduction to revenue. Prior to the adoption of ASU 2014-09, markdowns were not recorded until agreed upon with the customer. The Company's policy is to record its markdown allowance as a reduction of accounts receivable.

Returns. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style that the Company has identified as being a poor performer for that customer or geographic location. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience and any specific issues identified. Product returns are accounted for as reductions to revenue, cost of sales, customer liabilities and an increase to other current assets to the extent the returned product is resalable. While returns have historically been within management's expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that the Company's products are performing poorly in the retail market and/or it experiences product damages or defects at a rate significantly higher than the historical rate, the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur.

Cooperative Advertising. The Company participates in cooperative advertising programs with its major retail customers, whereby the Company shares the cost of certain of their advertising and promotional expenses. Certain advertising expenses that were previously recorded in SG&A are now recorded as a sales discount due to the requirement under ASU 2014-09 that the service be considered distinct to qualify as a separate performance obligation. All other cooperative advertising expenses continue to be recorded in SG&A.

Multiple Performance Obligations. The Company enters into contracts with customers for its wearable technology that includes multiple performance obligations. Each distinct performance obligation was determined by whether the customer could benefit from the good or service on its own or together with readily available resources. The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company’s process for determining standalone selling price considers multiple factors including the Company’s internal pricing model and market trends that may vary depending upon the facts and circumstances related to each performance obligation. Revenue allocated to the hardware and software essential to the functionality of the product represents the majority of the arrangement consideration and is recognized at the time of product delivery, provided the other conditions for revenue recognition have been met. Revenue allocated to free software services provided through the Company's online dashboard and mobile apps as well as revenue allocated to the right to receive future unspecified software updates is deferred and recognized on a straight-line basis over the product's estimated usage period of two years.

Disaggregation of Revenue. The Company's revenue disaggregated by major product category and timing of revenue recognition was as follows (in thousands):



	For the 13 Weeks Ended September 29, 2018
	Americas		Europe		Asia		Total
Product type
Watches	$	213,365	$	157,877	$	115,296	$	486,538
Leathers	38,645		15,452		11,939		66,036
Jewelry	11,495		28,495		1,810		41,800
Other	5,559		5,709		3,185		14,453
Consolidated	$	269,064	$	207,533	$	132,230	$	608,827

Timing of revenue recognition
Revenue recognized at a point in time	$	268,485	$	207,247	$	132,098	$	607,830
Revenue recognized over time	579		286		132		997
Consolidated	$	269,064	$	207,533	$	132,230	$	608,827



	For the 39 Weeks Ended September 29, 2018
	Americas		Europe		Asia		Total
Product type
Watches	$	630,678	$	445,433	$	321,032	$	1,397,143
Leathers	119,732		46,405		37,078		203,215
Jewelry	33,973		78,152		4,584		116,709
Other	13,013		15,698		8,788		37,499
Consolidated	$	797,396	$	585,688	$	371,482	$	1,754,566

Timing of revenue recognition
Revenue recognized at a point in time	$	795,824	$	584,930	$	371,126	$	1,751,880
Revenue recognized over time	1,572		758		356		2,686
Consolidated	$	797,396	$	585,688	$	371,482	$	1,754,566

Practical Expedients and Contract Balances. As of September 29, 2018, the Company had no material contract assets on the Company's condensed consolidated balance sheets and no deferred contract costs. The Company had contract liabilities of $5.9 million and $4.6 million as of September 29, 2018 and December 30, 2017, respectively, primarily related to remaining performance obligations on wearable technology products. Additionally, the Company had contract liabilities of $3.7 million and $7.2 million as of September 29, 2018 and December 30, 2017, respectively, related to gift cards issued. The Company does not disclose remaining performance obligations related to contracts with durations of one year or less as allowed by the practical expedient applicable to such contracts. These remaining performance obligations primarily relate to unfilled customer orders that will be satisfied in less than one year. This includes confirmed orders and orders that the Company believes will be confirmed by delivery of a formal purchase order. The amount of unfilled customer orders is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of products. The Company has also elected to adopt the practical expedient related to shipping and handling fees which allows the Company to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.