aicpa webcast "understanding the new revenue recognition standard" presented by mcgladrey

Understanding the New Revenue Recognition Standard

June 16, 2014

American Institute of CPAs® 2Learning Center

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Today’s presenters


Brian [email protected]

Brian is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Brian’s responsibilities include consulting with clients and engagement teams on complex accounting issues associated with these subject matters, facilitating training events for McGladrey professionals and external participants and writing interpretive guidance for McGladrey publications. He is also responsible for monitoring standard setting by the FASB and the FASB’s EITF and PCC, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups.

Prior to joining McGladrey in 2007, Brian worked as a senior program manager in the accounting practices group of a Fortune 50 company, serving as a resource on complex technical accounting matters for the company’s global accounting community. Brian also was employed by a Big 4 firm for over eight years in various offices in the U.S. and Europe, with his last position being a senior manager in the assurance services group. Brian is a certified public accountant in the states of Connecticut and New York, and is a member of the AICPA.


Richard [email protected]

Richard is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise are revenue recognition, leasing, variable interest entities and International Financial Reporting Standards. Richard’s primary responsibilities are consulting with clients and engagement teams on complex accounting issues, facilitating training events and writing interpretive guidance for McGladrey publications. Richard also monitors standard-setting activities domestic and internationally, and assists in developing Firm positions on proposed accounting standards. He is a former member of the FASB’s Valuation Resource Group and the AICPA’s Financial Reporting Executive Committee, and has also served on various EITF and AICPA working groups.

Before joining McGladrey, Richard worked for two large multinational companies in their Accounting Practices Groups, and also spent time on the staff of the AICPA and FASB developing accounting standards. He started his career with Coopers and Lybrand, including a rotation in the Firm’s National Technical Accounting Group. Richard is a certified public accountant in the state of Connecticut, and is a member of the AICPA.


Kim is a senior technical manager of the accounting standards team of the AICPA. In her role she is responsible for:• Managing the AICPA Insurance Expert Panel and

AICPA NAIC Task Force• Preparing comment letters and member

communications related to Revenue Recognition• Serving as a liaison with FASB, IASB, NAIC and SEC

Staff on insurance issues• Staying abreast of CPA technical issues, and IASB

and FASB Standards in order to educate and address member needs

Prior to joining the AICPA, Kim started her career in the Short Hills, NJ office of KPMG LLP with a concentration in financial services. She then worked at Metropolitan Life Insurance Company as a Manager in Institutional Business – Finance.

Kim [email protected]


Agenda

OverviewFive-Step Revenue Model Other IssuesDisclosures, Effective Date and Transition Post Standard Activities


Overview


OverviewFASB/IASB joint project on revenue recognition completed last month resulting in substantially converged standardsFASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606)Single revenue recognition model for contracts with customers that will impact almost all entities


Core principle

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services


ScopeApplies to all contracts with customers except those for:• Financial instruments• Guarantees other than warranties• Insurance• Leases• Certain nonmonetary exchanges

Recognition and measurement principles also apply to most sales of nonfinancial assets that are not classified as revenue


Five-step revenue model


1. Identify the contract with a customer Customer• A party that has contracted to obtain goods or services that

are an output of an entity’s ordinary activities

Contract• Agreement between two or more parties that creates

enforceable rights and obligations

Contract combination• Required for contracts entered into at or near the same time

with same customer or related parties if meet certain criteria

Contract modifications• Specific guidance addresses whether to treat modification as

a separate contract, termination of the existing contract and creation of a new contract, or as part of the existing contract


2. Identify performance obligations

Performance obligation is a promise in a contract to transfer a distinct good or service (or a series of distinct goods or services)Account for good or service separately if it is distinct, which includes both:• Capable of being distinct, because the customer can

benefit from the good or service on its own or together with other resources readily available to the customer

• Distinct within the context of the contract, because the good or service is separately identifiable from other goods or services


3. Determine the transaction priceAmount of consideration to which an entity expects to be entitled to from a customerVariable consideration• Examples: Bonuses, penalties, price concessions• Estimate based on expected value or the most-likely amount,

whichever is more predictive• Subject to a constraint

- Only include amount for which it is probable that a significant reversal in cumulative revenue recognized will not occur

- Exception for sales-based or usage-based royalties on licenses of intellectual property

Significant financing componentOther considerations


4. Allocate the transaction priceGenerally based on relative standalone selling prices of performance obligations• Best evidence of standalone selling price is observable price

when sold separately- If no directly observable price, use techniques such as

cost plus margin or adjusted market assessment- Residual or reverse residual methods may be used if price

is highly variable or uncertain and other performance obligations have observable standalone selling prices

• Exceptions to relative standalone selling price allocation- Discounts and variable consideration allocated to specific

performance obligations under certain circumstances


5. Recognize revenue

Recognize revenue as performance obligations are satisfied by transferring control to customer• Determine if satisfied (and revenue recognized) over time based

on meeting any of the following criteria:- Customer simultaneously receives and consumes benefits

as the entity performs- Entity’s performance creates or enhances an asset that

customer controls as it is created or enhanced- Entity’s performance does not create an asset with an

alternative use to the entity and there is an enforceable right to payment for performance completed to date

• If satisfied over time, select method of progress toward completion (e.g., output or input method)


5. Recognize revenue

Recognize revenue as performance obligations are satisfied by transferring control to customer (cont.)• If not satisfied over time, performance obligation is considered

to be satisfied (and revenue recognized) at a point in time- Recognize revenue when customer obtains control based on

consideration of several indicators, including when customer has:

• Present obligation to pay• Legal title• Physical possession• Significant risks and rewards of ownership• Accepted the asset


Other issues


Contract costsGuidance only applies if costs not in scope of other ASC TopicsCapitalize costs to fulfill a contract or anticipated contract if those costs:• Directly relate to the contract or anticipated contract;

• Generate or enhance resources that will be used to satisfy performance obligations in the future; and

• Are expected to be recovered

Capitalize incremental costs to obtain a contract if expected to be recovered• Practical expedient to expense when amortization period would

have been one year or less


WarrantiesCustomer has option to purchase separately or warranty provides an additional service• Treat as a performance obligation

Customer does not have an option to purchase separately and warranty does not provide an additional service• No revenue impact but must accrue expected costs• Consider the following in determining whether warranty

provides an additional service:- Whether warranty is required by law- Length of warranty period- Nature of tasks to be performed under warranty


Licensing

Evaluate whether license is distinct from other goods or servicesIf distinct, recognize revenue at either a point in time or over time, depending on the nature of the license• If considered a right to use intellectual property as it exists

at license grant date, recognize revenue at a point in time• If considered a right to access intellectual property as it

exists throughout license period, recognize over time


Treatment similar to current U.S. GAAPReturn rightsLoss contractsCustomers’ unexercised rights (“Breakage”)Gross vs. netConsignment arrangementsBill-and-hold arrangementsCustomer acceptance


Balance sheet presentationContract asset/contract liability based on comparison of entity’s performance to customer’s performance• Entity > customer = contract asset• Entity < customer = contract liability

Receivables are presented separately from other assets• Unconditional right to receive consideration


Disclosures, effective date and transition


DisclosuresDisclosure objective:• Sufficient information regarding nature, amount, timing

and uncertainty of revenue and related cash flows

Annual and interim disclosures for public business entities greatly expandedPrivate company disclosure requirements are extensive as well, but substantially less than those of public business entities


Effective date

Effective date for public business entities and certain not-for-profit entities and employee benefit plans• Annual reporting periods beginning after December 15,

2016, including related interim periods• Early application is prohibited

Effective date for all other entities• Annual reporting periods beginning after December 15,

2017, and interim periods in years thereafter• Early application is allowed (earliest would be for interim

reporting periods in annual reporting periods beginning after December 15, 2016)


Transition options

Retrospective transition method• Apply ASU 2014-09 to all prior periods• Certain practical expedients are allowed

Cumulative catch-up transition method• No restatement of prior periods• Apply ASU 2014-09 to in-progress contracts as of the adoption

date going forward and subsequent contracts• Recognize a cumulative effect adjustment at adoption date for

effects of applying ASU 2014-09 to in-progress contracts• Disclose in the year of adoption the effect on each line item in the

financial statements as a result of adoption


Post standard activities


What to do now?

Develop an implementation plan Training Evaluate accounting changes Determine transition method• Interim disclosures before effective

Potential IT system/software application changes Educate key stakeholders


Joint Transition Resource Group for Revenue Recognition

Responsible for informing the FASB and the IASB about potential issues that could arise when implementing the new standard Group will solicit, analyze, and discuss stakeholder issues that apply to common transactions that could reasonably create diversity in practiceProvide information to help the Boards determine what, if any, action will be needed to resolve diversity in practiceWill not issue guidance


AICPA Financial Reporting Center: Revenue Recognition

Provides up to date information on the new Revenue Recognition standard, plus FASB and AICPA activities: www.aicpa.org/revenuerecognitionResources will include:• Business Brief/Roadmap • Learning and Implementation Plan• Audit Committee Primer• Financial Reporting Alert• Conferences• CPE Products• Journal of Accountancy Articles• Blog Posts• Webcasts• NEW Accounting Guide on Considerations for Applying the new

Revenue Recognition Standard

http://www.aicpa.org/revenuerecognition


Aerospace and DefenseAirlinesBroker DealersConstruction ContractorsDepository InstitutionsEnergy and Utilities Gaming HealthCare

HospitalityInsurance Investment CompaniesNot-for-ProfitOil and GasSoftwareTelecommunicationsTimeshares

AICPA Revenue Recognition Industry Task Forceswww.aicpa.org/revenuerecognition

http://www.aicpa.org/revenuerecognition


Questions