Revenue Recognition

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Revenue Recognition. Current Developments Developed and presented by Samuel A. Monastra, CPA. Revenue Recognition. SAMUEL A. MONASTRA, CPA - PowerPoint PPT Presentation

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Revenue Recognition

Revenue RecognitionCurrent Developments

Developed and presented by Samuel A. Monastra, CPA

SAMUEL A. MONASTRA, CPA

Mr. Monastra is a Director with McGladrey, LLP. He has extensive experience with publicly held companies and large privately held companies. Industry focus: manufacturing, life sciences & technology, financial services, and public sector.

Mr. Monastra served in executive roles with National CPA firms, and as a member of the Editorial Board of the Pennsylvania CPA Journal. He has also been a frequent speaker for numerous State CPA Societies, the Institute of Internal Auditors, and the Institute of Management Accountants on financial reporting topics.

Mr. Monastra has a focus on financial reporting with a particular emphasis on Revenue Recognition, IASB/FASB Convergence, IFRS, Business Combinations, Asset Impairments, and Fair Value.

Revenue RecognitionRevenue is usually one of the largest items on a companys financial statements. Accordingly, both in substance and form, it may be one of the most important components to present fairly, in all material respects, in accordance with the applicable financial reporting framework. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are continuing to jointly define revenue recognition for what is truly becoming a worldwide economy Revenue RecognitionFASB - rules based IASB principles based

The FASB based the rules for revenue recognition on a document housed within the SEC reporting guidelines: SEC Staff Accounting Bulletin No. 104 (SAB 104)Additional guidance is based upon SFAS No. 48 Revenue Recognition When the Right of Return Exists and AICPA Statement of Position No.97-2 Software Revenue Recognition

Revenue RecognitionToday, Revenue Recognition Codification 605Sub-section10Overall15Products20Services25Multiple Element Arrangements28Milestone Method30Rights to Use35Construction & Production Contracts40Gains & Losses45Principal Agent Considerations50Customer Payments & IncentivesRevenue RecognitionHere are the basics:

Revenue must be earned or realized before financial statement recognitionEARNED when an entity has substantially performed what is necessary to be entitled to the benefits of the revenueREALIZED when assets received or receivable are readily convertible into known amounts of cashRevenue RecognitionRecognize revenue when the transaction is consummated (revenue is both earned and realized)The four bedrock principles:persuasive evidence of an arrangementprice is fixed or determinableability to paydelivery or performance has occurredRevenue RecognitionAlso consider:Right of return/ refund policyParties must be independent of each otherMust be an arms length transactionSeller has no further obligationsNot a consignmentRevenue RecognitionAreas of concern include:bill and hold transactionsChannel stuffingEarly/ delayed shipmentsSegregation of goodsIgnore customer acceptance provisionsSide agreements

Revenue RecognitionAreas of concern include:Related party transactionsSales cut-offsUnusual terms not typical for the company or industryFraudRevenue RecognitionAreas of concern include with rights of return:Allowed to return unsold itemsInability to estimate or significant increase in inventory in distribution channelNew products and newness of productsShift in product demand or technologyLong return periodsGoods become obsolete, used up, fulfill original purpose, break, etc.

Revenue RecognitionPresent authoritative sources:

Accounting Standards CodificationTopic 600 -- RevenuesTopic 985 -- Software

Revenue RecognitionIndustries with specific revenue recognition revenue recognition rules and exceptions include:SectionIndustry905Agriculture908Airlines910Contractors- Construction912Contractors- Federal Government915Development Stage Companies920Entertainment- Broadcasters922Entertainment- Cable TV924Entertainment- Casinos 926Entertainment- Film928Entertainment- MusicRevenue RecognitionRevenue recognition sale of breeding livestock

The gain or loss on the sale of breeding livestock, regardless of whether purchased or raised, is included in gross revenue. This treatment recognizes the fact that the sale of breeding livestock, either as cull animals or as seed stock, is a normal, planned, and ongoing part of the business.Revenue Recognition Theatres:

Recognize revenue at the time of exhibition unless nonrefundable guarantees are paid by the exhibitor (which may happen with ahot film when the exhibitor bears little risk), in which case revenue is recognized upon execution of the license agreement, provided all of the following criteria are met.The license fee is known and collected or the cost can be reasonably determined and collected.The licensee has accepted the film in accordance with the license agreement.The film is available for its first showing. Revenue Recognition Casinos:Casino revenue is reported on the accrual basis. Revenue recognized and reported by a casino is generally defined as a win from gaming activities, that is, the difference between gaming wins and losses, not the total amount wagered. Base jackpots shall be charged to revenue ratably over the period of play expected to precede payout; however, if immaterial, they shall be charged to revenue when established. Any portion of the base jackpot not charged to revenue when the jackpot is paid shall be charged to revenue at that time. Revenue RecognitionIndustries with specific revenue recognition revenue recognition rules and exceptions include:SectionIndustry932Extractive Industries- Oil & Gas940Financial Services- Brokers & Dealers942Financial Services- Depository & Lending944Financial Services- Insurance946Financial Services- Investment Companies948Financial Services- Mortgage Banking952Franchisors954Health Care Entities 958Not-for-Profit Entities970 Real Estate- GeneralRevenue RecognitionFranchise Revenue

Revenues include retail sales at Company restaurants and franchise and property revenues. Franchise revenues include royalties, and initial and renewal franchise fees. Property revenues include rental income from operating lease rentals and earned income on direct financing leases on property leased or subleased to franchisees. Retail sales at Company restaurants are recognized at the point of sale and royalties from franchisees are based on a percentage of retail sales reported by franchisees. Royalties are recognized when collectibility is reasonably assured. Initial franchise fees are recognized as revenue when the related restaurant begins operations. A franchisee may pay a renewal franchise fee and renew its franchise for an additional term. Renewal franchise fees are recognized as revenue upon receipt of the non-refundable fee and execution of a new franchise agreement. In accordance with SFAS No. 45, Accounting for Franchise Fee Revenue, the cost recovery accounting method is used to recognize revenues for franchisees for whom collectibility is not reasonably assured. Rental income on operating lease rentals and earned income on direct financing leases are recognized when collectibility is reasonably assured.Revenue RecognitionIndustries with specific revenue recognition revenue recognition rules and exceptions include:SectionIndustry972Real Estate-Common Interest Realty Associations974Real Estate-REITs976Real Estate-Retail Land978Real Estate-Time Sharing 980Regulated Operations985Software

Revenue RecognitionSoftware Industry

NuancesSales cycleDevelopment costsMultiple deliverablesMode of deliveryRevenue Recognition The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:Remove inconsistencies and weaknesses in existing revenue requirements.

Provide a more robust framework for addressing revenue issues.

Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.

Provide more useful information to users of financial statements through improved disclosure requirements.

Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB and the IASB are proposing amendments to the FASB Accounting Standards Codification and to IFRSs, respectively.

Revenue Recognition FASB vs. IASB

FASB - rules based IASB principles based

What does it mean to have a rules based system?What Does it mean to have a principles based system?

Revenue RecognitionFASB vs. IASB

Why the different systems?CultureGeographyLegal system

Revenue RecognitionFASB vs. IASB

What Does International Convergence of Accounting Standards Mean? The phrase international convergence of accounting standards refers to both a goal and the path taken to reach it.The FASB believes that the ultimate goal of convergence is a single set of high-quality, international accounting standards that companies worldwide would use for both domestic and cross-border financial reporting.

Today, the path toward that goal is the collaborative efforts of the FASB and the International Accounting Standards Board (IASB) to both improve U.S. generally accepted accounting principles (U. S. GAAP) and International Financial Reporting Standards (IFRS) and eliminate the differences between them.

Revenue RecognitionFASB vs. IASB

The FASB believes that there is demand for international convergence, driven by investors desire for high-quality, internationally comparable financial information that is useful for decision-ma