introducing the new revenue recognition standard asu 2014 …
TRANSCRIPT
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WS+B CLIENT CPE
INTRODUCING THE NEW REVENUE RECOGNITION STANDARD ASU 2014-09November 19, 2014Dave DaceyFrank Boutillette
WS+B CLIENT CPE
Today’s Objective
Understand differences between new standard and current GAAP
Walk away with best practice implementation practices
Understand timing considerations for new standard implementation
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WS+B CLIENT CPEEffective Dates
Public entities – Years and interim periods beginning >= 12/15/2016 (e.g. calendar 2017)
Non-public entities – Three election alternatives: 1. The public entity effective date years beginning >= 12/15/2016,
(e.g. calendar 2017)
2. Years beginning >= 12/15/2016 (e.g. calendar 2017) and interim periods during years beginning >= 12/15/17 (e.g. calendar 2018)
3. Years beginning >= 12/15/2017 (e.g. calendar 2018) and interim periods during years beginning >= 12/15/17 (e.g. calendar 2018)
WS+B CLIENT CPEInitial Adoption Considerations
Full retrospective application – cumulative effect to opening retained earnings (or equivalent) of the earliest period presented in the financial statements (three practical expedients) Modified retrospective application – retrospective
application at the date of initial application• Disclose quantitative effect of each financial statement
line item in current period of application• Disclose reasons for significant changes
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WS+B CLIENT CPEConditions for Revenue Recognition
Existing GAAP
Arrangement supported by evidence
Buyer’s price fixed and determinable
Collection is reasonably assured
Delivery has occurred or services have been rendered
New Standard
When performance obligation is satisfied by transferring promised goods or services to a customer (e.g. customer “obtains control”)
Recorded in an amount that reflects consideration to which the entity expects to be entitled
To recognize revenue entities should follow the 5-step process
WS+B CLIENT CPE
Framework for Recognizing Revenue
Existing GAAP - ABCD
A. Arrangement supported by evidence
B. Buyer’s price fixed and determinable
C. Collection is reasonably assured
D. Delivery has occurred or services have been rendered
New Standard – 5 Steps1. Identify contract(s) with a customer2. Identify performance obligations
in the contract3. Determine the transaction price4. Allocate the transaction price to
the contract’s performance obligations
5. Recognize revenue when or as entity satisfies a performance obligation
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WS+B CLIENT CPEStep 1Identifying Contract(s) With Customers
Contract creates enforceable rights and obligations and meets all of the following:• Approval and commitment or its parties• Identified rights of the parties• Identified payment terms• Has commercial substance• Collectability of consideration is probable
Enforceability is a matter of law Contracts can be written, oral or implied
WS+B CLIENT CPE
When Does a Contract Not Yet Exist?
When there is a uniform enforceable right to terminate a wholly unperformed contract, without compensating the other party
Unperformed contracts meet both of the following criteria:• No promised goods or services yet transferred and
• No entitlement to yet receive consideration
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WS+B CLIENT CPEConditions for Combining Multiple Contracts With Same Customer
Any of the following triggers combining contracts:• Contracts negotiated as a package
• Consideration paid for one contract depends on price or performance of another contract
• Goods or services in the contracts represent a single performance obligation
WS+B CLIENT CPEContract Modifications
AKA “Change Order” “Variation” or “Amendment” Change in scope or price or both Modification exists when there is an approval that
creates enforceable right and obligation that either:• Creates a new contract or• Changes an existing contract
Modifications can be written, oral or implied Changes in scope, where price change hasn’t been
finalized requires an estimate
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WS+B CLIENT CPEConditions for Accounting for ContractModification as a Separate Contract
Must meet both:• The addition of promised goods or services are distinct
from original contract
• Incremental contract price reflects entity’s “standalone selling price” of additional promised goods or services
If both conditions not met, modification isn’t accounted for as a separate contract
WS+B CLIENT CPEAccounting for Contract Modifications That Are Not Separate Contracts
If remaining goods or services “are distinct” from goods or services transferred prior to date of modification:• Termination of existing contract and creation of a new
contract
• Consideration is the sum of (1) unrecognized consideration that was promised under prior contract plus (2) consideration promised under contract modification
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WS+B CLIENT CPEAccounting for Contract Modifications That Are Not Separate Contracts
If remaining goods or services “are NOT distinct” from goods or services transferred prior to date of modification:• Contract (with modification) represents a single
performance obligation
• Adjust revenue at the date of modification on a cumulative catch-up basis
WS+B CLIENT CPEComparison of Contract Modification Guidance
Current GAAP
Guidance was industry specific (e.g. construction contracts)
New Standard
Principles based
Focused on type of modification:• Is it a separate contract?
• Are remaining goods or services “distinct” or “not distinct”
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WS+B CLIENT CPEComparison of Collectability and Contracts
Current GAAP
One of four conditions for revenue recognition
Transaction price equal to what the entity expects to receive
New GAAP Refers to customer’s “credit
risk” Probability of collection is
consideration as to whether a valid contract exists
Transaction price not adjusted for customer credit risk
Impairments of receivables is presented as an expense
WS+B CLIENT CPEStep 2Identifying Performance Obligations
Old GAAP
Units of account referred to as “deliverables” or “elements”
New GAAP Units of account referred to as
“performance obligations”
Defined as a promise to transfer a “distinct” or “series of distinct” goods or services to a customer
FASB feels that new GAAP may provide for more performance obligations than old GAAP
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WS+B CLIENT CPETwo Conditions for Distinct Goods and Services Under New Standard
Capable of being distinct either on its own or in conjunction with other goods or services Distinct within the context of the contract
• The good or service is not an input of another good or service
• Does not significantly modify or customize another good• Not highly dependent or inter-related with other goods or
services
WS+B CLIENT CPEPerformance Obligations May Include But Not Be Limited To Sale of goods produced Resale of goods purchased Resale of rights to goods or
services Performing contractually
agreed upon task(s) Providing service of
standing ready to provide goods or services
Providing a service of arranging of another party to transfer goods or services to a customer (e.g. acting as an agent)
Granting rights to future goods or services that a customer can resell or provide to its customer
Constructing, manufacturing or developing an asset for a customer
Granting licenses Granting options (a material right)
to a customer to purchase additional goods or services
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WS+B CLIENT CPEStep 3Determining the Transaction Price
Transaction price defined – Amount of consideration for which the entity “expects to be entitled” in exchange for transferred goods and services
Consider the following in determining the transaction price:• Variable consideration and constraining estimates• Significant financing components• Noncash considerations• Consideration payable to the customer
WS+B CLIENT CPEConsidering Variable Consideration Causes of variable consideration
• Discounts, rebates, refunds, credits
• Price concessions, incentives, performance bonuses, penalties, or other similar items
• Contingent entitlement such as right of return
How variable consideration is identified:• Explicitly stated in the contract
• Customary business practice
• Published policy or specific statements of price concessions
• Other facts may be indicators of intent to offer a price concession
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WS+B CLIENT CPEConstraining Estimates of Variable Consideration
The principle – Variable consideration can be constrained in the recognition of revenue.
Constraints pertain to uncertain estimates in determining variable consideration adjustments
Revenue should only be recognized to the extent that it is probable that the amount of cumulative revenue will not reverse
WS+B CLIENT CPEFactors in Assessing Probability and Amount of a Constraining Estimate
Factors outside of the entity’s control (e.g. 3rd party judgments and actions, weather conditions, market volatility, etc.)
Uncertainty of the amount of consideration not expected to be resolved for a long period of time
Entity’s experience (or supporting evidence) has limited predictive value)
Entity’s history of price concessions or changing payment terms in similar circumstances
The contract has a broad range of possible consideration amounts
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WS+B CLIENT CPE
Evaluating Variable Consideration
Current Standards
Inconsistent between industries
Recognize revenue when variability is resolved
New Standards
One accounting model
Only recognize revenue when it is probable that variable consideration will not reverse
Consideration can now be estimated, so revenue recognition may be accelerated
WS+B CLIENT CPE
Existing Business New Business
How much revenue would you recognize? – Current Standards1. Assume that all other steps for revenue recognition have been met.2. Distributor sells 10 pairs of women’s shoes to a retailer for $100.
Retailer has historically returned 8% of products that they couldn’t resell to distributor annually.
Industry returns average 9%
How much revenue should be recorded?
1. $92 (8% expected returns)
2. $91 (9% expected returns )
3. Record no revenue
Too early to establish the distributor’s track record for average returns
Industry returns average 9%
How much revenue should be recorded?1. $91 (9% expected returns)
2. Record no revenue
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WS+B CLIENT CPE
Existing Business New Business
How much revenue would you recognize? – New Standard1. Assume that all other steps for revenue recognition have been met.2. Distributor sells 10 pairs of women’s shoes to a retailer for $100.
Retailer has historically returned 8% of products that they couldn’t resell to distributor annually.
Industry returns average 9%
How much revenue should be recorded?
1. $92 (8% expected returns)
2. $91 (9% expected returns )
3. Record no revenue
Too early to establish the distributor’s track record for average returns
Industry returns average 9%
How much revenue should be recorded?1. $91 (9% expected returns)
2. Record no revenue
WS+B CLIENT CPEA Few More Principles Regarding Variable Consideration
Adjust estimate at the end of each reporting period (Type 1 subsequent event) Exception for sales-based or usage-based royalty
income. Only recognize revenue after both of the following:• Subsequent sale or usage occurs and • Performance obligation related to the royalty has been
satisfied (or to the extent it is partially satisfied)
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WS+B CLIENT CPEVariable Consideration and Financing Components (When Financing is Involved)
Adjust promised amount of consideration for the effects of the time value of money Factors to consider include:
• Amount of promised consideration and “cash” selling price of the goods
• Combined effect of both:The length of time to transfer and customer’s payment andPrevailing market interest rate
WS+B CLIENT CPEFactors Precluding a SignificantFinance Component
Advanced customer payment of goods or services and customer discretion on when to take delivery of such goods or services Substantial variable consideration based on the
occurrence or non-occurence of future events, outside the control of the parties Differences between promised consideration and cash
selling price not related to financing
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WS+B CLIENT CPE
A Few Final Words on Financing
Use a discount rate that would be used in a financing transaction between the entity and its customer at the contract’s inception
Present interest income effects separately from revenue
No requirement to adjust for effects of financing component if contract is one year or less
WS+B CLIENT CPE
Non-Cash Consideration
Measure at fair value of non-cash consideration of if not reasonably determinable then by reference to stand-alone selling price of consideration being transferred If consideration varies, apply principles of constraining
estimates Assess when control is obtained of non-cash
consideration
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WS+B CLIENT CPE
Consideration Payable to a Customer
Consideration payable could be cash, credits or other items (e.g. voucher or coupon)
Reduction of transactions price = reduction of revenue at the later of:• Either when the revenue is recognized for the related goods or
services or• When the entity promises to pay the customer
Variable reductions follow principles of constraints Consideration for distinct goods or services = charge to
appropriate account for the particular good or service
WS+B CLIENT CPEStep 4Allocate Transaction Price to Performance Obligations
If more than one obligation = Allocate to each obligation for what the entity expects to be entitled
Allocating based on relative standalone selling price estimated based on methods including but not limited to: • Adjusted market assessment approach• Expected cost plus margin approach• Residual approach if either:Highly variable selling prices from past transactions orNo established price yet on a standalone basis
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WS+B CLIENT CPE
Determining Standalone Selling Price
Current GAAP
Based on following heirarchy:• 1st VSOE
• 2nd Third Party Evidence
• 3rd Best Estimate
Industry specific guidance such as software and films (e.g. for software VSOE or defer)
New GAAP
Eliminates VSOE requirement for software transactions
Standalone selling price must be determined for each performance obligation
Standalone selling price can be calculated or estimated in various ways
WS+B CLIENT CPE
Allocating Discounts
Generally proportionate to all performance obligations Specific to one (or more) but not all obligations if all of
the following:• Regularly sells distinct goods or services (or bundled goods
or services) on a standalone basis• Regularly sells bundle(s) at a discount• Observable evidence that discount belongs to specific
bundle(s)
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WS+B CLIENT CPE
Other Allocation Considerations
Allocate variable consideration to single performance obligations (if related to those obligations) or in a manner based on standalone selling price
Changes to transaction price in same manner as allocations done at contract’s inception
Follow contract modification rules where applicable
WS+B CLIENT CPEStep 5Recognizing Revenue When (or as) the Entity Satisfies Performance Obligations
Recognize revenue when (or as) entity transfers promised good or service and customer obtains control
Control of asset = Customer’s ability to direct the use of the asset and obtains benefits of the asset
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WS+B CLIENT CPEControl Of Good Or Service TransferredIf “One” Of The Following Occurred:
Customer receives and consumes benefits of entity’s performance
Entity’s performance creates or enhances an asset that customer controls
Entity’s performance doesn’t create an asset with alternative use to the entity and entity has an enforceable right to payment for performance completed to date
WS+B CLIENT CPE
Comparison with Existing Guidance
Current GAAP
Percentage of completion is normally applied for long-term contracts
Milestone and progress payment – agreement to pay assuming performance
New GAAP New guidance requires
analysis of contract to determine whether performance obligation is satisfied over time or at a point in time
Milestone or progress payment based on right to receive payment if contract were terminated
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WS+B CLIENT CPEIndicators that Performance ObligationsAre Satisfied at a Point in Time Include, but not Limited To
Customer obligated to pay and entity has present right to receive payment
Customer has legal title to the asset
Physical possession of asset has been transferred
Customer has significant risks and rewards of ownership
Customer has accepted the asset
WS+B CLIENT CPEQualitative and Quantitative DisclosuresAbout the Following Contracts with customers, including:
• Revenue and impairments• Disaggregation of revenue (public companies only)• Information about contract balances and remaining performance
obligations (public companies only)• Assets recognized from cost to obtain or fulfill contracts• Significant judgments and changes in judgments regarding
timing of performance obligations Contract balances information including activity during period Disclosure of description regarding performance obligations
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WS+B CLIENT CPE
Disclosures
The revenue recognition standard states that the objective of the disclosure requirements • Enable users of financial statements to understand the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, and assets recognized from the costs to obtain or fulfill a contract with a customer.
WS+B CLIENT CPE
Qualitative and quantitative information is required
Contracts with customers-including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
Significant judgments and changes in judgments-determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
Assets recognized from the costs to obtain or fulfill a contract
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WS+B CLIENT CPE
Disaggregation of Revenue
An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue
WS+B CLIENT CPE
Examples of Categories
Type of good or service (major product lines)
Geographical region (country or region)
Market or type of customer (government and nongovernment customers)
Type of contract (fixed-price and time-and-materials contracts)
Contract duration (short-term and long-term contracts)
Timing of transfer of goods or services (revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
Sales channels (goods sold directly to consumers and goods sold through intermediaries).
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WS+B CLIENT CPE
Non Public Entity Relief
An entity, may elect not to apply the quantitative disaggregation disclosure guidance however, the entity shall disclose, at a minimum, • revenue disaggregated according to the timing of transfer of
goods or services (revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred to customers over time) and
• qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows.
WS+B CLIENT CPE
Contract Balances
Entity should disclose all of the following: • Opening and closing balances of receivables, contract assets,
and contract liabilities, if not otherwise separately presented or disclosed
• Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
• Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price)
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WS+B CLIENT CPE
Contract Balances
An entity shall explain how the timing of satisfaction of its performance obligations (see paragraph 606-10-50-12(a)) relates to the typical timing of payment (see paragraph 606-10-50-12(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.
WS+B CLIENT CPE
Contract Balances
Provide an explanation of the significant changes in the contract asset and liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples include any of the following: • Changes due to business combinations • Cumulative catch-up adjustments to revenue that affect the corresponding contract
asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification
• Impairment of a contract asset • A change in the time frame for a right to consideration to become unconditional
(that is, for a contract asset to be reclassified to a receivable) • A change in the time frame for a performance obligation to be satisfied (that is, for
the recognition of revenue arising from a contract liability).
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WS+B CLIENT CPE
Non-Public Entity Relief
An entity, may elect not to provide any or all of the disclosures in paragraphs 606-10-50-8 through 50-10. However, the entity shall provide the disclosure in paragraph 606-10-50-8(a), which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed
WS+B CLIENT CPE
Disclosures on Performance Obligations
Description should include all of the following:• When the entity typically satisfies its performance obligations (for example, upon
shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement
• The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained
• The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (acting as an agent)
• Obligations for returns, refunds, and other similar obligations• Types of warranties and related obligations
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WS+B CLIENT CPETransaction Price Allocated to the Remaining Performance Obligations
An entity shall disclose the following information about its remaining performance obligations: • The aggregate amount of the transaction price allocated to the
performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period
• An explanation of when the entity expects to recognize as revenue which the entity shall disclose in either of the following ways: On a quantitative basis using the time bands that would be most
appropriate for the duration of the remaining performance obligations By using qualitative information
WS+B CLIENT CPETransaction Price Allocated to the Remaining Performance Obligations As a practical expedient, an entity need not disclose the information regarding
the remaining performance obligation if either of the following conditions is met: • The performance obligation is part of a contract that has an original expected
duration of one year or less. • The entity recognizes revenue from the satisfaction of the performance obligation in
accordance with paragraph 606-10-55-18.
An entity shall explain qualitatively whether it is applying the practical expedient and whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed• For example, an estimate of the transaction price would not include any estimated
amounts of variable consideration that are constrained
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WS+B CLIENT CPE
Non-Public Entity Relief
May elect not to provide the disclosures for Remaining Performance Obligations
WS+B CLIENT CPE
Warrantees and Licensing
Warrantees:• If distinct service, consider warrantee to be a performance
obligation
• If not a distinct service, account for as a guarantee
Licensing – Account as a separate performance obligation if it is distinct, otherwise account with other promised goods or services
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WS+B CLIENT CPE
Have a Great Day!
Dave Dacey, [email protected]
Frank Boutillette, [email protected]