business tax & accounting seminar worth the wait? revenue … · • revenue recognition •...

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BUSINESS TAX & ACCOUNTING SEMINAR

WORTH THE WAIT? REVENUE RECOGNITION & OTHER ACCOUNTING UPDATES

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EMERGING ISSUES• Revenue recognition

• Goodwill

• Interest rate swaps

• Variable interest entities

• Discontinued operations

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REVENUE RECOGNITIONASU 2014-09

EFFECTIVE DATES

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Public Entity Non-public Entity

Annual periods beginning after December 15, 2016 December 15, 2017

Interim periods within annual periods beginning after December 15, 2016 December 15, 2018

Early application No Yes*

* Earliest application permitted is for annual and interim reporting periods beginning after December 15, 2016

RETROSPECTIVE APPLICATION

Option 1 – complete restatement for all periods presented

• No restatement for completed contracts which begin and end in same period

• Completed contracts with variable consideration – use transaction price at date contract was completed (rather than estimating)

Option 2 – report cumulative effect of initial application

• Change in accounting principle

• Apply change as an adjustment to opening retained earnings

• Contracts not completed at date of application will need to be evaluated as though standard was applied all along

• Disclose amount by which each financial statement line item is affected by application, as compared to prior guidance and reasons for significant changes

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FIVE-STEP PROCESS

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1 Identify the contract with customer

2 Identify separate performance obligations

3 Determine transaction price

4 Allocate transaction price to separate performance obligations

5 Recognize revenue when (or as) entity satisfies performance obligation

STEP 1IDENTIFY THE CONTRACT

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Approval (oral, written, or

implied by customary business practices)

Identification of each party’s

rightsIdentification of payment terms

Commercial substance

Probable collection

Consider whether multiple contracts need to be combined

Apply guidance to each contract that meets all of the following:

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Distinct performance obligation if both:

1. Customer can benefit from good or service on its own, or with readily available resources

2. Promise to transfer good or service is separately identifiable from other promises in the contract

If not distinct, combine with other promised goods or services until there is a distinct bundle

STEP 2IDENTIFY PERFORMANCE OBLIGATIONS

EXAMPLE

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How many performance obligations?

• ABC Construction signs a contract to refurbish a building and install five new elevators for $5m (including engineering, electrical, plumbing, etc.)

• ABC regularly sells these services separately to other customers

• A credit check on the business and its owner showed no collection issues

• Although not stated in the written contract, ABC has a customary business practice of providing elevator maintenance for one year after new installation at no additional charge

SOLUTION

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Two performance obligations

1. Refurbish building and install elevators (integrated – not separately identifiable)

2. Maintenance contract

Transaction price – amount of consideration an entity is expected to be entitled in exchange for transferring promised goods or services

Variable consideration –

• Consideration is variable if both –

1. Customer has valid expectation that entity will accept less consideration than as stated in contract

2. Facts or circumstances indicate entity’s intention is to offer a price concession

• Include some or all of an estimate of variable consideration only to the extent it is probable that a significant reversal will not occur

Methods to estimate variable consideration –

• Expected value

• Most likely amount

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STEP 3DETERMINE THE TRANSACTION PRICE

Existence of significant financing component

Non-cash consideration

Consideration payable to customer

OTHER FACTORS TO CONSIDER

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EXAMPLE

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What is the transaction price?

• Contract price is $5,000,000

• If project not completed within three months, contract provides for a penalty of $25,000 per month for each additional month

• Management determines at inception that it will take five months to complete

Contract price

Penalty(2 months beyond 3 month limit)($25,000 x 2)

Transaction price

SOLUTION

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$5,000,000

50,000

$4,950,000

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STEP 4ALLOCATE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS

EXAMPLE

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What transaction price is allocated to each performance obligation?• Total transaction price: $4,950,000

• ABC estimates standalone selling price for refurbishing the building and installing the elevators is $4,850,000

• ABC sells elevator maintenance contracts as a separate service to other customers for $30,000 per elevator per year ($150,000)

SOLUTION

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Standalone Selling Price Ratio

Allocated Transaction Price

Refurbish building and install elevators $ 4,850,000 97% $ 4,801,500Maintenance contract 150,000 3% 148,500

Total $ 5,000,000 100.00% $ 4,950,000

Allocate transaction price based on relative standalone selling price of each distinct performance obligation

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STEP 5RECOGNIZE REVENUE

Recognize revenue when (or as):

• Performance obligation satisfied

• Customer obtains control – ability to direct use and obtain benefits

Does this occur:

• Over a period of time?

• At a point in time?

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Input Method Output Method

Basis Efforts or inputs to satisfaction of performance obligation

Direct measurements of value of goods service transferred

Disadvantage

May not be direct relationship between inputs and transfer of control of goods or services to customer

Outputs may not be directly observable and information may not be available with undue cost

Examples:

• Resources consumed

• Labor or machine hours

• Costs incurred

• Time elapsed

• Surveys on performance completed to date

• Milestones reached or time elapsed

• Units produced or delivered

• Appraisals of results achieved

Determine best method that depicts entity’s progress toward complete satisfaction of performance obligation and transfer of control to customer

METHODS OF MEASUREMENT

EXAMPLE

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• Allocated transaction price is $4,801,500

• Labor hours are determined to be the best estimate of progress

• Total hours budgeted are 16,000

• Approximately 2,000 hours relate to procuring the elevators, which management determines should be excluded from the measure of progress

When is revenue recognized for refurbishment of building and installation of elevators?

SOLUTION

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Hours* Percentage RevenuesMonth 1 1,400 10% 480,150Month 2 2,100 15% 720,225Month 3 2,800 20% 960,300Month 4 4,200 30% 1,440,450Month 5 3,500 25% 1,200,375

Total 14,000 100% $ 4,801,500

* Assumes actual hours = budgeted hoursManagement must reassess and update throughout contract

EXAMPLE

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When is revenue recognized for maintenance contract?• Allocated transaction price is $148,500

• Management estimates that maintenance services will be rendered evenly over the one year period

SOLUTION

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• Monthly revenue recognized during months 1-5 = $0

• Monthly revenue during months 6-17 = $12,375 ($148,500 / 12)

COSTS TO OBTAIN OR FULFILL CONTRACT

Incremental costs of obtaining contract –

• Recognized as an asset and expense over contract period

• If contract is less than one year – expense as incurred

Costs to fulfill a contract –

• Generally, apply requirements of other standards

• Otherwise, report asset if all of the following exist:

1. Relate directly to the contract

2. Generate or enhance entity’s resources to be used in satisfying performance obligations

3. Expected to be recovered

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Yes

Separate contract

No

Additional goods and services are

distinct

Terminate existing contract –create new

contract

Additional goods and services are

not distinct

Part of existing contract

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CONTRACT MODIFICATIONSAre both of the following true?

1. Scope increases because of addition of distinct goods or services

2. Price increase is reflective of entity’s standalone selling prices of additional goods or services

• Nature

• Timing

• Amount

• Uncertainty of revenue

• Cash flows arising from contracts with customers

Sufficient for users to understand

• Contracts with customers

• Significant judgments or changes thereto

• Assets recognized from costs to obtain or fulfill contracts

Qualitative and quantitative information about

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DISCLOSURES

DOES NOT APPLY TO

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Lease contracts (Topic 840)

Financial instruments(various topics)

Guarantees – other than product warranties

(Topic 460)

Insurance contracts (Topic 944)

Other contractual rights or obligations

(various topics)

Non-monetary exchanges between entities in same LOB to facilitate customer

sales other than the parties to the exchange

WHAT SHOULD I BE DOING NOW?

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BOOK & TAX DIFFERENCES

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GOODWILLASU 2014-02

WHAT’S CHANGED?

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New GAAP Old GAAP

Amortization Generally SL over 10 years None

Impairment testing level Entity or reporting unit Reporting unit only

Impairment testing frequency Upon triggering event At least annually, or after

triggering event

Qualitative testing Yes Yes

Impairment loss Excess of CV over FV Excess of CV over implied FV

Disclosure of tabular reconciliation

No – if only change is amortization Yes

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INTEREST RATE SWAPSASU 2014-03

Substantially identical terms for swap and borrowing (assume perfect match)

Option to measure swap at settlement value,

rather than fair value

Documentation in place when FS

available to be issued (rather than swap inception)

Can benchmark based on Prime Rate

Can apply on a swap-by-swap basis

Two implementation approaches –

modified retrospective or full retrospective

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SIMPLIFIED HEDGE ACCOUNTING APPROACH

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VARIABLE INTEREST ENTITIESASU 2014-07

WHAT’S CHANGED?

Accounting policy election not to apply VIE guidance for all current and future lessor entities

No consolidation of VIEs that meet the following criteria:

1. Common control

2. Lease arrangement

3. Substantially all activities between the entities are leasing activities

4. If lessee guarantees lessor obligation(s), principal amount of obligation at inception cannot exceed value of asset

Additional disclosures apply

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DISCONTINUED OPERATIONSASU 2014-08

WHAT’S CHANGED?

Old GAAP:

• Single component

• Disposed of, or held for sale

• No continuing involvement

• No continuing cash flows

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Definition of a discontinued operation:

New GAAP – either:

1. Component or group of components

• Disposed of, or held for sale

• Represents strategic shift with major impact on operations and results

2. Acquired business or non-profit classified as held for sale on date of acquisition

Component – operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.

WE ARE ALWAYS AVAILABLE FOR YOUR QUESTIONS

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John Weaverjweaver@berrydunn.comPhone: 603.518.2618

Sandra Pappajohnspappajohn@berrydunn.comPhone: 603.518.2615