REVENUE RECOGNITION - bkd.com A ONE-STOP SHOP FOR REVENUE LITERATURE Current Guidance 3 New...

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  • experience clarity //

    CPAs & ADVISORS

    FASB/IASB Joint Project

    REVENUE RECOGNITION

  • May 28, 2014 - ASU 2014-09, Revenue from Contracts with Customers, is released

    Single, converged, comprehensive approach to revenue recognition, regardless of industry

    Replaces virtually all existing U.S. GAAP for revenue recognition

    Effective for public companies in 2017 with additional year for nonpublic entities

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  • CREATING A ONE-STOP SHOP FOR REVENUE LITERATURE

    3

    Current Guidance New Principle

    General Recognition Concepts

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    The transfer of a promised good or service determines when revenue is recognized and occurs when (or as) the customer obtains control of the asset. Transfer can be made either at a point in

    time or over time.

    Persuasive evidence of an arrangement exists

    Delivery has occurred or services have been rendered

    Price is fixed or determinable

    Collectibility is reasonably assured

    Construction and production type contracts (Subtopic 605-35)

  • WHOS IMPACTED

    All entities that enter into contracts with customers

    Public, private, not-for-profit

    Regardless of industry

    4

  • REASONS FOR THE CHANGE

    Remove inconsistencies in existing requirements

    Provide more robust framework

    Improve comparability across companies, industries & capital markets

    Enhance disclosure

    Simplify financial statement preparation

    Provide guidance for transactions that did not previously have authoritative guidance

    5

  • SCOPE

    Contracts with customers, except

    Lease contracts

    Insurance contracts

    Financial instruments

    Certain guarantees (other than product warranties)

    Certain nonmonetary exchanges

    6

  • CUSTOMERS VS. COLLABORATORS

    Proposal does not apply to pure collaborative arrangements, that is

    Parties share in risk of developing product

    Not for sale of goods or services that are output of entitys ordinary activities

    Must determine if contract is with customer, collaborator or entity with elements of both

    7

  • FIVE-STEP MODEL

    Step 1 Identify contract(s) with customer

    Step 2 Identify performance obligations

    Step 3 Determine transaction price

    Step 4 Allocate transaction price to performance obligations

    Step 5 Recognize revenue when (or as) performance obligation is satisfied

    8

  • SOME ENTITIES WILL BE AFFECTED MORE THAN OTHERS

    9

    Industry Step 1 Identify Contract

    Step 2 Identify Performance Obligations

    Step 3 Determine Transaction Price

    Step 4 Allocate Transaction Price

    Step 5 Recognize Revenue

    Contract Costs

    Health Care X X X X X X

    Finance - Asset Mgrs.

    X X X X X X

    Real Estate & Construction

    X X X X X

    Manufacturing X X X X X

  • 10

    STEP 1 IDENTIFY CONTRACT(S) WITH CUSTOMER

    Contract = agreement between two or more parties that creates enforceable rights & obligations & meets following criteria

    Commercial substance

    Approval & commitment by all parties

    Identifiable rights, obligations & payment terms

    Collectibility threshold

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine

    Transaction Price

    Step 4: Allocate Transaction Price

    Step 5: Recognize Revenue

  • 11

    STEP 1 IDENTIFY CONTRACT(S) WITH CUSTOMER

    Contract

    Commercial Substance

    Approval & commitment

    Identifiable rights, obligations & payment terms

    Collectibility

  • 12

    COLLECTIBILITY

    Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is probable that it will collect amount of consideration due in exchange for goods or services

    Assessment is based on both customers ability & intent to pay as amounts become due

  • 13

    STEP 2 IDENTIFY PERFORMANCE OBLIGATIONS

    Performance obligation

    Promise to transfer goods/services to customer

    Can be explicitly identified in contract or implied by customary business practices

    One contract could equal one or many performance obligations

    Significant judgment may be required

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine

    Transaction Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

  • 14

    STEP 2 IDENTIFY PERFORMANCE OBLIGATIONS

    Separate performance obligations should be identified if good or services meet both of following

    Customer can benefit from good/service on its own or with other readily available resources; &

    Distinct within context of contract, i.e., not highly dependent on, or highly interrelated with, other promised goods/services in contract

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

  • 15

    STEP 3 DETERMINE TRANSACTION PRICE

    Transaction price = amount of consideration entity expects to be entitled to (after collectibility threshold is met)

    Contract terms

    Customary business practices

    Time value of money (if significant financing component)

    Variable consideration (including consideration of constraint)

    Cash & noncash consideration

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

  • STEP 3 DETERMINE TRANSACTION PRICE

    Revenue from variable consideration constrained unless

    Entity has experience with similar contracts & is able to estimate cumulative amount of revenue

    Based on experience, significant reversal of revenue previously recorded is not probable

    Step 1: Identify Contract(s)

    with Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

    16

  • STEP 4 ALLOCATE TRANSACTION PRICE TO SEPARATE PERFORMANCE OBLIGATIONS

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

    Allocate based on relative standalone selling prices of separate performance obligations

    Observable price when sold separately (best evidence) Otherwise, estimate based on

    Adjusted market assessment

    Cost plus margin

    Residual value - Only if highly variable or uncertain

    Other

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  • STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED

    Revenue recognized when (or as) control of good/service is transferred to customer

    Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service

    Can be recognized over time or at a point in time, depending on how performance obligations are satisfied

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

    18

  • STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED

    Control is transferred over time if any of following criteria are met

    Customer controls asset as it is created/enhanced

    Customer receives & consumes benefits of entitys performance as entity performs

    Entitys performance doesnt create asset with alternative use to entity & customer doesnt control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract

    Step 1: Identify Contract(s) with

    Customer

    Step 2: Identify Performance Obligations

    Step 3: Determine Transaction

    Price

    Step 4: Allocate

    Transaction Price

    Step 5: Recognize Revenue

    19

  • STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS A