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CPAs & ADVISORS

REVENUE RECOGNITION

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ASU 2014-09, Revenue from Contracts with Customers

• Release date – May 28, 2014

• Comprehensive approach

• Replaces virtually all industry guidance

• Core principle• Entity should recognize revenue to depict the transfer of promised goods or services

to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for these goods and services

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OVERVIEW

CREATING A ONE-STOP SHOP FOR REVENUE LITERATURE

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REASONS FOR THE CHANGE

Remove inconsistencies

Provide more robust framework

Improve comparability

Enhance disclosures

Simplify financial statement preparation

Provide guidance for certain transactions

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SCOPE

Contracts with customers, except:• Lease contracts• Insurance contracts• Financial instruments• Certain guarantees (other than product warranties)• Certain nonmonetary exchanges

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EFFECTIVE DATE

Original Effective Date Revised Effective Date

Public Entities Fiscal years beginning after 12/15/16, including interim periods therein

Fiscal years beginning after 12/15/17, including interim periods therein

Nonpublic Entities Fiscal years beginning after 12/15/17 & interim periods in fiscal years beginning after 12/15/18

Fiscal years beginning after 12/15/18 & interim periods in fiscal years beginning after 12/15/19

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July 9th - FASB approved deferral of effective date by one year

REVENUE RECOGNITION – CHANGES TO EXPECT

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REVENUE RECOGNITION – CHANGES TO EXPECT

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REVENUE RECOGNITION – CHANGES TO EXPECT

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REVENUE RECOGNITION – CHANGES TO EXPECT

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REVENUE RECOGNITION – CHANGES TO EXPECT

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FIVE-STEP MODEL

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Step 1: Identify contract(s) with

customer

Step 1: Identify contract(s) with

customer

Step 2: Identify performance obligations

Step 3: Determine transaction price

Step 4:Allocate

transaction price

Step 5: Recognize

revenue

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Contract = “agreement between two or more parties that creates enforceable rights & obligations” & meets following criteria:

• Commercial substance• Approval & commitment by all parties• Identifiable rights, obligations & payment terms• Collectibility threshold

Minimum requirements to recognize revenue under the standard:

• Arrangement must meet the definition of a contract• Contract approval• Identification of each party’s rights• Clear payment terms• Contract has commercial substance• Collectibility is probable

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Application to portfolio of contracts:• Permitted if not materially different from application at

contract level

If criteria are not satisfied, revenue cannot be recognized until either:

• Entity has no remaining obligations or substantially all consideration has been received & is nonrefundable• Contract has been terminated & consideration is nonrefundable

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Step 1: Identify contract(s) with

customer

Step 1: Identify contract(s) with

customer

Step 2: Identify performance obligations

Step 3: Determine transaction price

Step 4:Allocate

transaction price

Step 5: Recognize

revenue

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Performance obligation• Promise to transfer goods/services to customer• Can be explicitly identified in contract or implied by customary

business practices• One contract could equal one or many performance obligations• Significant judgment may be required

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Separate performance obligations should be identified if good or services meet both of following:• Customer can benefit from good/service on its own or with

other readily available resources; &• Distinct within context of contract, i.e., not highly dependent

on, or highly interrelated with, other promised goods/services in contract

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Step 1: Identify contract(s) with

customer

Step 1: Identify contract(s) with

customer

Step 2: Identify performance obligations

Step 3: Determine transaction price

Step 4:Allocate

transaction price

Step 5: Recognize

revenue

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Transaction price = amount of consideration entity expects to be entitled to (after collectibility threshold is met)• Contract terms • Customary business practices• Time value of money (if significant financing component)• Variable consideration (including consideration of

constraint) • Cash & noncash consideration

Entity should consider the terms of the contract & customary business practices to determine the transaction price

Specific guidance for:• Variable consideration• Refund liabilities• Financing components• Noncash consideration• Consideration payable to a customer

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Step 1: Identify contract(s) with

customer

Step 1: Identify contract(s) with

customer

Step 2: Identify performance obligations

Step 3: Determine transaction price

Step 4:Allocate

transaction price

Step 5: Recognize revenue

Allocate based on relative standalone selling prices of separate performance obligations

• Observable price when sold separately (best evidence)• Otherwise, estimate based on:o Adjusted market assessmento Cost plus margino Residual value - only if highly variable or uncertaino Other

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Step 1: Identify contract(s) with

customer

Step 1: Identify contract(s) with

customer

Step 2: Identify performance obligations

Step 3: Determine transaction price

Step 4:Allocate

transaction price

Step 5: Recognize revenue

FIVE-STEP MODEL

Revenue recognized when (or as) control of good/service is transferred to customerTransfer of control occurs when customer has ability to direct use of, & receive benefits from, good/serviceCan be recognized over time or at a point in time, depending on how performance obligations are satisfied

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Control is transferred over time, if any of following criteria are met:• Customer controls asset as it is created/enhanced• Customer receives & consumes benefits of entity’s

performance as entity performs• Entity’s performance doesn’t create asset with alternative

use to entity & customer doesn’t control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract

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Measuring progress toward satisfaction of obligation• Output methods

o Milestones reachedo Units producedo Only used if value of WIP & value of units produced but not

yet delivered is immaterial

• Input methodso Costs incurredo Machine hours usedo Time lapsed

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Control transferred at a point in time indicated by following:• Present right to payment from customer• Customer has legal title• Customer has physical possession• Customer has significant risks/rewards of ownership• Customer has accepted asset

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INDUSTRY IMPACT - CONSTRUCTION

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INDUSTRY IMPACT – HEALTH CARE

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INDUSTRY IMPACT - OTHERS

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INDUSTRY IMPACT - OTHERS

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REVENUE RECOGNITION – TAKE ACTION

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CROSS-FUNCTIONAL IMPLEMENTATION TEAM REQUIRED

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Department

Board of Directors Approve changes to compensation plans

Tax Impact of changing in timing of revenue recognition

Legal Redraft contract terms with customers

IT System updates

Internal Audit Review new internal controls & documentation

Investor Relations Communication strategy, manage analysts’ expectations

Treasury Review debt covenants for impact of changes in revenue timing

HR Review compensation & incentive plans

Marketing Review advertising plans & sales incentive programs

Operations Review contract fulfillment costs for capitalization

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• Insurance• Asset management• Not-for-profit• Oil & gas• Power & utilities• Software• Gaming• Time share

• Aerospace & defense• Airlines• Broker dealer• Construction contractors• Depository institutions• Health care• Hospitality• Telecommunications

AICPA TASK FORCES

Report to FinRec

Develop helpful hints/considerations for implementation

Draft issues posted to AICPA Financial Reporting Center OR submitted to the FASB Transition Resource Group

16 Industry task forces:

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ASU – REVENUE RECOGNITION

The amendments are intended to reduce diversity in practice when entities adopt the new revenue standard and decrease the cost and complexity of applying the new guidance• Licensing & Performance obligations (issued)• Principal vs. agent (pending)• Transition guidance (pending)

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THANK YOU

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