REVENUE RECOGNITIONDealing With The ChangesChris Rouse, CPANovember 13, 2014

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Revenue Recognition

The New Revenue Recognition Standard• Issued in May 2014, effective for publics beginning 2017

and for non-publics ending 2018– Eliminates all industry and transaction guidance in

current standards– Largest impact on service business, but potentially

will impact all businesses– Prior periods presented may be either recast or

disclose the effect on prior financials

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Revenue Recognition

Overarching Principles• Defines revenues as inflows or other enhancements of

assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations

• 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 and services– In effect, revenue is recognized as changes in assets

and liabilities are recognized

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Revenue Recognition

Overarching Principles• Compare to Concept Statement #5 – “Revenues are

considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues”

• Compare to current recognition principles (1) persuasive evidence of transaction, (2) delivery has occurred, (3) fee is fixed or determinable and (4) collectability is assured

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Revenue Recognition

The following steps are used to apply the core principle• Identify the contract with a customer• Identify the separate performance obligations in the

contract• Determine the transaction price• Allocate the transaction price to the separate

performance obligations• Recognize revenue when performance obligations

satisfied

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Revenue Recognition

Identify the contract with a customer• May be in writing or oral, but must be documented• Identify rights and obligations, payment terms• Must have commercial substance and be probable of

collection• Not a contract if either party can cancel a wholly

unperformed contract without compensating the other party– Becomes recordable when either party performs

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Identify the separate performance obligations in the contract• A performance obligation is a promise to transfer a good

or service to the customer• At contract inception, the seller must identify each

distinct good or service promised in a contract

Revenue Recognition

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Identify the separate performance obligations in the contract• This is a key element in the new standard, and while it is

similar to the current “multiple deliverables” Standard, there are important differences– Entities not currently applying the multiple

deliverable standard may have multiple performance obligations

– Entities currently applying the multiple deliverables standard may experience different performance obligations

Revenue Recognition

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Revenue Recognition

Determine the transaction price• Transaction price is the amount of consideration

expected to be received• Must consider the effect of …– Variable consideration (discounts, rebates, etc.)– Financing component– Noncash consideration– Consideration payable to the customer

• Consider the terms of the contract and the seller’s customary business practices

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Allocate the transaction price to the separate performance obligations• Allocated in proportion to the standalone selling price– If not directly observable, estimate it– Standard includes guidance for different situations

Revenue Recognition

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Recognize revenue when performance obligations satisfied• May be a point in time or over time, depending on how

the obligation is satisfied– If over time, would be either the input or output

method, whichever is most appropriate

Revenue Recognition

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Revenue Recognition

New standard also covers related matters• Contract modification, additional goods and services• Right of return, bill and hold, consignments, repurchase

agreements• Product warranties• Licenses, rights of use, upfront fees• Principal vs. agent

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Revenue Recognition

Disclosures• Categories of revenue based on economic factors

effecting nature, amount, timing and uncertainty of revenues and cash flows– e.g., product line, geography, market or type

customer, contract type or duration, sales channel, etc.

– Non-publics can just disclose qualitative info on the above, but must disclose quantitative revenue info based on timing (i.e., point of time vs. over time)

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Revenue Recognition

Disclosures• Publics must present in tabular form an analysis of

contract assets and contract liabilities (illustration in Standard)

• Information about performance obligations, e.g.– Goods or services involved– When satisfied– Payment terms– Obligations for returns, warranties, etc.

• Judgments, and changes in judgments, made in applying the Standard

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Revenue Recognition

Getting ready for the new standard• Study the parts of the new standard that apply to you,

and review the implementation guidance on the FASB and AICPA websites

• Evaluate current contracts with customers– Identify performance obligations and information

systems– Identify transaction prices

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Revenue Recognition

Getting ready for the new standard• Evaluate current revenue recognition practices and

compare to requirements of new standard– Communication of completion of performance

obligations• Consider necessary changes in contract to achieve

desired revenue recognition timing– Transfer of risks and rewards of ownership

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Revenue Recognition

Getting ready for the new standard• Consider effect on compensation arrangements, income

taxes, etc.– May effect timing of compensation based on revenue

or net income– Some tax revenues are determined by GAAP

• Consider changes to information system to capture necessary info– Much of the information necessary to implement the

new standard does not exist in the accounting department

Revenue Recognition

Getting ready for the new standard• Point: This is a complicated standard

– the first time

– after that it’s a snap

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Revenue Recognition

In Conclusion….

Bon Auditpetite!Questions??

Contact any WB professional, or contact Chris Rouse

crouse@windhambrannon.com 404-898-2000