Augmented Reality Retail Accounting: Measurement and Reporting of
Investments in AR-based Retail Experiences and Technologies
Introduction
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
Augmented reality (AR) is increasingly being adopted by retailers as a way to enhance the in-
store shopping experience and drive business value. With AR, virtual graphics, images and
information can be overlaid on top of the real world in real-time using mobile devices or
specialized head-mounted displays. This allows for interactive and experiential shopping
opportunities unlike traditional e-commerce or brick-and-mortar models alone. Retailers are
deploying AR for applications like virtual product try-ons, interactive product displays,
guided selling, and more immersive shopping environments.
However, accounting for investments in AR retail experiences and technologies presents
some new challenges. As these initiatives are often technology-focused and aim to transform
retail operations in the future, it can be difficult to assign valuation and measure tangible
returns in the short-term. Traditional accounting metrics may not fully capture the long-term
strategic value of AR investments. This paper will explore guidelines for how retailers can
accurately measure and report their AR investments on financial statements to comply with
generally accepted accounting principles (GAAP) while also communicating the strategic
importance of these initiatives.
The rise of AR in retail
Augmented reality is gaining momentum across many industries but is seeing especially
strong adoption among retailers as a way to enhance shopping experiences. Major retailers
around the world have started deploying AR apps and displays to allow for virtual product
try-ons, interactive product information, guided selling features, and more immersive online
and in-store experiences. Industry analysts predict global AR retail spending will grow from
around $3 billion in 2021 to over $20 billion by 2026 as capabilities expand and user
familiarity increases. As shoppers continue to demand personalized, engaging, and
convenient experiences, AR provides new opportunities for retailers to differentiate
themselves from competitors and improve sales.
Accounting challenges with AR investments
While AR holds promise for transforming retail, accounting for investments in these
emerging technologies presents some challenges:
- Tangibility: AR initiatives often involve significant upfront costs for technology
development and deployment but may not generate tangible short-term financial returns. This
intangible nature makes valuation and impact measurement difficult using traditional
accounting methods.
- Uncertainty: The future potential of AR retail experiences is still uncertain, and widespread
adoption depends on continued technology advancement as well as shifting consumer
preferences. This uncertainty complicates valuation of long-term strategic value.
- Intangible assets: Significant AR investments go towards developing intangible assets like
software, content, platforms and brand value rather than physical stores or inventory.
Intangible assets require different accounting treatment and valuation approaches.
- Strategic importance: While an AR investment may not generate immediate financial
returns, it could be strategically important for the future of the retail business. Traditional
accounting focuses more on tangible short-term financial impacts rather than long-term
strategic value.
- Complex attribution: It is challenging to directly attribute sales, profits or other KPIs to a
specific AR investment due to the numerous influencing factors in retail. This complicates
measuring return on investment.
Financial reporting guidelines for AR investments
To address these challenges and ensure accurate accounting and reporting of AR initiatives,
GAAP provides guidelines that retailers should follow:
Capitalization of development costs: Upfront costs related to development of AR software,
content and platforms should generally be capitalized as intangible assets per ASC 350-40 if
certain recognition criteria are met. This avoids expensing the full amount initially.
Amortization period: Capitalized development costs should be amortized over their estimated
useful life, typically 3-5 years for AR/VR software. Amortization should start when the asset
is ready for use rather than when development is complete.
Impairment review: Retailers must regularly review capitalized AR assets for potential
impairment indicators and record write-downs if the carrying value exceeds fair value. This
ensures assets are not overvalued on the balance sheet.
Intangibles valuation: Companies can use an income approach like relief-from-royalty to
appraise the fair value acquisition of AR technologies, or replacement cost for self-developed
intangibles. Comparable transactions also provide guidance.
Non-GAAP metrics: Retailers should continue reporting GAAP financials but supplement
with non-GAAP metrics like member growth, engagement rates, repeat usage to convey
strategic AR impacts.
Strategic importance disclosures: Management’s discussion and analysis in annual reports
provides an opportunity to qualitatively discuss how AR investments are strategically
important for the long-term, even if short-term financial impacts are limited.
By following these accrual-based accounting standards for impairment review, amortization
of intangible assets and appropriate disclosures of strategic value, retailers can accurately
report AR investments while still communicating their future impact to stakeholders.
AR use cases in retail and initial results
Retailers have been exploring and piloting numerous AR applications within stores and
online:
Virtual product try-ons allow shoppers to "try on" items using AR before purchase. Early
adopters include companies like IKEA, Sephora, and Bose. Research shows this significantly
increases average order value and reduces returns.
Guided selling provides step-by-step instruction to employees on the sales floor using AR
overlays. Lowe's saw a 30% increase in attachment rates for add-on items from associates up-
selling with AR.
Interactive product displays bring static catalog pages and advertisements to life through AR,
enriching online and in-store experiences alike. Gatorade engaged fans through AR
augmented posters at sporting events.
Personalized store layouts use AR to visualize shopper-specific store designs before building
physical spaces. Pop-Up Grocer worked with retailers to optimize store layout AR
prototypes.
While widespread positive impacts are still emerging, initial results illustrate AR's sales
enablement potential across the retail lifecycle through virtual inventory previews,
frictionless transactions, and data-driven personalization at scale. Retailers report engagement
rates 4x higher with AR versus conventional digital channels. Most importantly for
accounting purposes, these use cases are generating longer shopper visits and higher order
values on average.
Measuring return on AR investments
As AR initiatives become more mainstream within retail, valid methods are needed to
accurately measure return on these investments:
Attribution Models: Statistical analysis can connect AR touchpoints like a virtual try-on with
subsequent sales. Bayesian attribution improves on simple last-click models to factor in full
customer journey influence.
Lifetime Customer Value: Rather than short-term returns alone, model how AR increases
long-term loyalty, repeat visits and incremental purchases from each customer over time.
Non-financial KPIs: Track metrics like session times, engagement, completion rates and task
success that indicate strategic value even if financial impacts are indirect initially.
Surveys & Interviews: Ask customers directly how AR influenced purchase decisions and
improved experiences to understand qualitative strategic value beyond transactions.
Control Groups: Where possible, test new AR features against a control cohort not exposed to
better isolate impacts. Consider seasonality and other factors.
Intangible Asset Valuation: Use accepted valuation methodologies annually to reassess fair
value of AR technologies as strategic assets, separate from traditional ROI.
While directly attributing bottom-line impacts remains challenging, these approaches validate
AR's ability to influence crucial drivers of long-term value like retention, cross-selling and
relationship equity with customers in ways important for financial accounting standards.
Accounting for AR workforce support
In addition to enabling technologies themselves, retailers must account for internal support
required to deploy and evolve AR experiences over time. This includes:
Operating Expenses: Costs associated with specialized AR/VR team members (developers,
designers, data specialists), hardware/equipment and general operating costs should be
expensed as incurred per ASC 730.
Salaries & Training: Account for increased labor expenses as new roles emerge and existing
employees require AR training. Training costs should also be expensed per ASC 350-40
unless improving/extending a specific asset.
Professional Services: Fees for consultants aiding AR adoption and strategy execution
represent recurring expenses amortized over contract periods per ASC 340-10.
Maintenance & Support: Fees paid to technology vendors providing ongoing support for AR
platforms, software updates and infrastructure must be expensed as incurred versus
capitalizing according to contract terms.
While adding operating expenses in the short-term, these investments in building internal
capabilities are critical to extracting long-term strategic value from AR and generating
intangible assets that compound over time according to GAAP standards. Both technology
assets and supporting organizational structure require investment and accounting treatment.
Conclusion
In conclusion, there are clear accounting guidelines retailers must follow to accurately
measure and report investments in AR retail experiences and technologies according to
GAAP. This ensures transparency while standardizing measurements for benchmarking
industry progress. Specifically, standards around capitalizing development costs as intangible
assets, annual impairment reviews, strategic communication in MD&A discussions and
supplementing GAAP accounting with non-financial metrics are prudent practices. Modeling
lifetime customer value beyond short-term returns also provides a more holistic perspective
aligned with strategic motivations for AR adoption. While traditional accounting focuses
heavily on tangible transactions, methodologies are emerging to quantify indirect and long-
term impacts through careful attribution, surveys and valuation of resulting intangible assets.
Overall compliance with GAAP standards enables retailers to strategically invest in AR as a
driver of future retail value while maintaining financial reporting credibility. As AR
capabilities and use cases continue advancing rapidly, accounting for these disruptive
technologies will similarly require ongoing evaluation and potential refinement over time.
