Revenue Recognition

We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Revenue recognized excludes sales taxes. Amounts billed to customers for delivery and setup are included in net sales. For most products, we require payment before the products or services are delivered to the customer.

Our beds sold with SleepIQ^® technology contain multiple performance obligations including the bed and SleepIQ’s hardware and software. We analyze our multiple performance obligation(s) to determine whether they are distinct and can be separated or whether they must be accounted for as a single performance obligation. We determined that the beds sold with the SleepIQ technology have two performance obligations consisting of: (i) the bed; and (ii) SleepIQ's hardware and software. SleepIQ’s hardware and software are not separable as the hardware and related software are not sold separately and the software is integral to the hardware’s functionality. We determine the transaction price for multiple performance obligations based on their relative standalone selling prices. The performance obligation related to the bed is satisfied at a point in time. The performance obligation related to SleepIQ technology is satisfied over time based on the ongoing access and usage by the customer of software essential to the functionality of SleepIQ technology. The deferred revenue and costs related to SleepIQ technology are recognized on a straight-line basis over the product’s estimated life of four years because our inputs are generally expended evenly throughout the performance period.

At June 30, 2018 and December 30, 2017, we had deferred contract liabilities of $71 million and $73 million, of which $31 million and $30 million are included in other current liabilities, respectively, and $40 million and $43 million are included in other non-current liabilities, respectively, in our consolidated balance sheets. We also had deferred contract assets of $45 million and $43 million, of which $19 million and $17 million are included in other current assets, respectively, and $26 million and $26 million are included in other non-current assets, respectively, in our consolidated balance sheets. During the three and six months ended June 30, 2018, we recognized revenue of $8 million and $16 million, respectively, that was included in the deferred contract liability balance at the beginning of the period.

Revenue from goods and services transferred to customers at a point in time accounted for approximately 97% and 98% of our revenues for the three and six months ended June 30, 2018, respectively.

Net sales from each of our channels was as follows (in thousands):



	Three Months Ended		Six Months Ended
	June 30, 2018		June 30, 2018
Retail	$	286,853	$	642,922
Online and phone	24,927		52,894
Company-Controlled channel	311,780		695,816
Wholesale/Other channel	4,558		9,155
Total	$	316,338	$	704,971

Obligation for Sales Returns

We accept sales returns during a 100-night trial period. Accrued sales returns represents a refund liability for the amount of consideration that we do not expect to be entitled to because it will be refunded to customers. The refund liability estimate is based on historical return rates and is adjusted for any current trends as appropriate. Each reporting period we remeasure the liability to reflect changes in the estimate, with a corresponding adjustment to net sales. The activity in the sales returns liability account was as follows (in thousands):



	Six Months Ended
	June 30, 2018			July 1, 2017
Balance at beginning of year	$	19,270		$	15,222
Additions that reduce net sales	36,555			32,434
Deductions from reserves	(39,298		)	(35,054		)
Balance at end of period	$	16,527		$	12,602