revenue from contracts with customers- tom eiseman

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Revenue from Contracts with Customers- Tom Eiseman


  • 1. A Global Reach with a Local Perspective Revenue from Contracts with Customers Tom Eiseman, CPA | Principal in Charge of Assurance

2. Single, principle-based revenue standard More robust framework for recognizing revenue Clarified principles Simplified preparation of financial statements Increased comparability across industries Convergence of U.S. and International Standards Better disclosures Objective 2 3. An entity will recognize revenue to depict the transfer of goods or service to customers in an amount that reflects the consideration to which the entity expects to be entitled. Underlying principle 3 4. Applies to all contracts with customers except- Leases Financial instruments Guarantees other than product warranties Certain nonmonetary exchanges Insurance contracts Scope 4 5. Public entities- Annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. All other entities- Annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted for nonpublic companies, but no earlier than the effective date for public companies. Effective date 5 6. Either Retrospectively to each prior reporting period presented Retrospectively with the cumulative effect of initial application recognized at the date of initial application Initial application 6 7. Identify contracts with customers Identify the separate performance obligations in the contract Determine the transaction price Allocate the transaction price to separate performance obligations Recognize revenue when (or as) each performance obligation is satisfied Five step approach 7 8. A contract is an agreement between parties that creates enforceable rights and obligations. A contract can be written, oral or implied by an entitys customary business practice. Identify contracts 8 9. Required criteria- Approval and commitment of the parties Identification of the rights of the parties Identification of the payment terms The contract has commercial substance Collection of the consideration is probable Identify contracts 9 10. Contracts are combined and accounted for as a single contract if they are entered into at or near the same time with one customer and one or more of the following criteria are met- The contracts achieve a single commercial objective and are negotiated as a package The price or performance of one contract influences the amount of consideration to be paid in other contracts The goods or services in the separate contracts represent a single performance obligation Identify contracts 10 11. A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises to transfer more than one good or service to the customer, the entity should account for each promised good or service as a performance obligation only if it is distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer. Identify performance obligations 11 12. A good or service is distinct if both of the following criteria are met Capable of being distinct The customer can benefit from the good or service either on its own or together with other resources that are readily available Distinct within the context of the contract The promise to transfer the good or service is separately identifiable from other promises in the contract Identify the performance obligations 12 13. Indicators that a good or service is distinct The entity does not provide a significant service of integrating the individual goods or services The good or service does not customize or significantly modify another contractually promised good or service The good or service is not highly dependent on or highly interrelated with other goods or services in the contract Identify performance obligations 13 14. The transaction price is the amount of consideration to which an entity expects to be entitled for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Determine the transaction price 14 15. Variable consideration Constraining estimates of variable considerations The existence of a significant financing component Noncash consideration Consideration payable to the customer Determine the transaction price 15 16. Variable consideration Variable consideration is consideration that is contingent on the outcome of future events. Variable consideration includes incentives, penalties, rebates, and discounts. Variable consideration is estimated using either the probability-weighted amount or most likely amount. The approach that is expected to best predict the amount of consideration should be used. Determine the transaction price 16 17. Constraining estimates of variable consideration Variable consideration should be included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty is subsequently resolved. Determine the transaction price 17 18. Indicators that variable consideration could result in significant reversal of cumulative revenue: Amount is highly susceptible to factors outside of the entitys influence. Resolution of uncertainty is not expected for a long time. The entity has limited experience with similar contracts. There is a large number and broad range of possible outcomes. Determine the transaction price 18 19. Significant financing component The transaction price should be adjusted for any significant financing component. The entity should consider: The length of time between the transfer of goods or services and payment Whether the consideration would be different had the customer paid cash at the time of transfer The interest rate in the contract and prevailing interest rates Entities may disregard the time value of money if the period between transfer and payment is less than one year. Determine the transaction price 19 20. Noncash consideration Measured at fair value Measured at standalone selling price of the goods or services if fair value of the noncash consideration cannot be reasonably be estimated Determine the transaction price 20 21. Consideration payable to a customer Consideration paid to a customer or to a customers customer reduces the transaction price unless the payment is made in exchange for a distinct good or service that the customer transfers to the entity. Determine the transaction price 21 22. The transaction price is allocated to the separate performance obligations based on the relative standalone selling prices of the goods or services promised. The best evidence of standalone selling price is the observable price when sold separately. If no observable price is available, it is estimated using expected cost plus margin, market prices for similar goods or services, or the residual approach. Allocating the transaction price 22 23. An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. Transfer occurs when (or as) the customer obtains control of that good or service. Control of an asset is the ability to direct the use of and obtain substantially all of the remaining benefits from the asset. Recognize revenue 23 24. Indicators of control- The entity has a right to payment for the asset The customer has legal title to the asset The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the asset The customer accepted the asset Recognize revenue 24 25. An entity will recognize revenue over time if one of the following criteria is met: The customer simultaneously receives and consumes the benefits provided by the entitys performance as the entity performs. The entitys performance creates or enhances an asset that the customer controls as the asset is created or enhanced. The entitys performance does not create an asset with an alternate use to the entity and the entity has an enforceable right to payment for performance completed to date. Recognize revenue 25 26. Measuring progress for revenue recognized over time Revenue is recognized over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. Methods used include Output methods units produced, contract milestones, surveys of work performed Input methods costs incurred, labor hours expended, time lapsed, machine hours used Recognize revenue 26 27. The objective is the disclosure of sufficient information to enable users to understand the nature, amount, timing and uncertainly of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about- Contracts with customers Significant judgments and changes in judgments in applying guidance Assets related to cost to obtain or fulfill a contract Disclosures 27 28. Key disclosures for nonpublic companies Revenue recognized from contracts with customers Impairment losses recognized on any receivables or contract assets arising from contracts with customers Opening and closing balances of receivables, contract assets and contract liabilities For performance obligations fulfilled over time, the methods used to recognize revenue Disclosures 28 29. Key disclosures for nonpublic companies Information about performance obligations including: When the entity typically satisfies performance obligations The significant payment terms including variable consideration and significant financing component The nature of goods or services that the entity has promised to transfer including any transfer from a third party Obligations for returns, refunds and other similar obligations Types of warranties and related obligations Judgments and changes in judgments made in applying guidance that significantly affect amount and timing of revenue recognition Disclosures 29 30. Incremental costs of obtaining a contract are recognized as an asset to the extent the entity expects to recover these costs. This includes all costs that the entity would not have incurred if the contract had not been obtained. These costs can be expensed when incurred if the amortization period is one year or less. Costs to obtain a contract with a customer 30 31. First, apply any applicable guidance from other standards including standards addressing inventory, property and equipment, internal-use software and costs of software to be sold, leased or marketed If no other applicable guidance exists, recognize an asset for costs that meet all of the following criteria: Relate directly to contract or specific anticipated contract Generate or enhance resources that will be used in satisfying performance obligations in the future Are expected to be recovered Costs to fulfill a contract 31 32. A warranty is accounted for as a separate performance obligation if the customer has the option to purchase the warranty separately. A warranty is accounted for as a cost accrual if it is not sold separately, unless the warranty is to provide the customer with a service in addition to assurance that the product complies with agreed-upon specifications. The portion of a warranty that provides a service in addition to assurance that the product complies with specifications is accounted for as a separate performance obligation. Warranties 32 33. The upfront fee is recognized as revenue when goods or services are provided to the customer. The period of revenue recognition could extend beyond the initial contract period if the entity grants the customer the option to renew the contract. Nonrefundable upfront fees 33 34. All of the following criteria must be met to recognize revenue in a bill-and-hold arrangement: The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement) The product must be separately identified as belonging to the customer The product must be currently ready for physical transfer to the customer The entity cannot have the ability to use the product or to direct it to another customer Bill and hold arrangements 34 35. Questions? 35 36. Tom Eiseman, CPA Principal In Charge of Assurance [email protected] 423-756-7100 Contact the Subject Matter Expert Tom has experience with clients in a variety of industries, including manufacturing, distribution, securities brokers and dealers, investment entities, oil and gas exploration, restaurants, broadcasting and not-for-profit entities. He has been involved with initial public offerings and periodic SEC filings for over 25 years. His experience includes clients with extensive international operations. He is licensed to practice in Tennessee, Georgia and Massachusetts. Tom is a member of the American Institute of Certified Public Accountants (AICPA) and the Tennessee Society of Certified Public Accountants (TSCPA). He currently is a member of the TSCPAs Peer Review Committee. 36