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  • Revenue Recognition (Topic 605)

    An Amendment of the FASB Accounting Standards CodificationTM

    No. 2009-13 October 2009

    Multiple-Deliverable Revenue Arrangements

    a consensus of the FASB Emerging Issues Task Force

  • The FASB Accounting Standards CodificationTM is the single source of authoritative nongovernmental U.S. generally accepted accounting principles. An Accounting Standards Update is not authoritative; rather, it is a document that communicates the specific amendments that change the Accounting Standards Codification. It also provides other information to help a user of U.S. GAAP understand how and why U.S. GAAP is changing and when the changes will be effective. For additional copies of this Accounting Standards Update and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT 06856-5116 Please ask for our Product Code No. ASU2009-13. FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published quarterly by the Financial Accounting Foundation. Periodicals postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $230 per year. POSTMASTER: Send address changes to Financial Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. | No. 325

    Copyright 2009 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Foundation. Financial Accounting Foundation claims no copyright in any portion hereof that constitutes a work of the United States Government.

  • An Amendment of the FASB Accounting Standards Codification

    TM

    No. 2009-13 October 2009

    Revenue Recognition (Topic 605)

    Multiple-Deliverable Revenue Arrangements

    a consensus of the FASB Emerging Issues Task Force

    Accounting Standards Update

    Financial Accounting Standards Boardof the Financial Accounting Foundation

    401 MERRITT 7, PO BOX 5116, NORWALK, CONNECTICUT 06856-5116

  • Accounting Standards Update 2009-13

    Revenue Recognition (Topic 605)

    Multiple-Deliverable Revenue Arrangements

    a consensus of the FASB Emerging Issues Task Force

    October 2009

    CONTENTS

    Page Numbers

    Summary ........................................................................................................... 15 Amendments to the FASB Accounting Standards Codification .................... 741 Amendments to the XBRL Taxonomy ........................................................... 4244

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    Summary

    Why Is the FASB Issuing This Accounting Standards Update (Update)?

    The objective of this Update is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Vendors often provide multiple products or services to their customers. Those deliverables often are provided at different points in time or over different time periods. Subtopic 605-25, Revenue RecognitionMultiple-Element Arrangements, establishes the accounting and reporting guidance for arrangements under which the vendor will perform multiple revenue-generating activities. Specifically, this Subtopic addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting.

    Existing U.S. generally accepted accounting principles (GAAP) requires a vendor to use vendor-specific objective evidence or third-party evidence of selling price to separate deliverables in a multiple-deliverable arrangement. Vendor-specific objective evidence of selling price is the price charged for a deliverable when it is sold separately or, for a deliverable not yet being sold separately, the price established by management with the relevant authority. Third-party evidence of selling price is the price of the vendors or any competitors largely interchangeable products or services in standalone sales to similarly situated customers. If a vendor does not have vendor-specific objective evidence or third-party evidence of selling price for the undelivered elements in an arrangement, the revenue associated with both delivered and undelivered elements are combined into one unit of accounting. Any revenue attributable to the delivered products is then deferred and recognized as the undelivered elements are delivered by the vendor. An exception to this guidance exists if the vendor has vendor-specific objective evidence or third-party evidence of selling price for the undelivered elements in the arrangement but not for the delivered elements. In those situations, the vendor uses the residual method to allocate revenue to the delivered element, which results in the allocation of the entire discount in the arrangement, if any, to the delivered element.

    Constituents have raised concerns that this guidance results in financial reporting that does not reflect the underlying economics of transactions.

    Who Is Affected by the Amendments in This Update?

    The amendments in this Update will affect accounting and reporting for all vendors that enter into multiple-deliverable arrangements with their customers when those arrangements are within the scope of Subtopic 605-25. The

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    amendments in this Update do not affect arrangements for which industry-specific allocation and measurement guidance exists, such as Subtopic 605-35 for long-term construction contracts and Topic 985 for software transactions. However, the amendments in this Update will also affect vendors that are affected by the guidance in Accounting Standards Update No. 2009-13, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force), which is being issued concurrently with this Update. That Update will affect vendors that sell tangible products that include software. Arrangements include written, oral, and implied contracts between the sellers and their customers.

    What Are the Main Provisions?

    Accounting Guidance

    This Update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments in this Update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this Update also will replace the term fair value in the revenue allocation guidance with selling price to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.

    The amendments in this Update will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverables selling price.

    The amendments in this Update will require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. The amendments in this Update do not prescribe any specific methods that vendors must use to accomplish this objective; however, examples have been provided to illustrate the concept of estimated selling price and the relative selling price method.

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    Disclosures

    The amendments in this Update significantly expand the disclosures related to a vendors multiple-deliverable revenue arrangements. A vendor will be required to disclose the following information by similar type of arrangement:

    1. A description of the entitys multiple-deliverable arrangements, which includes the nature and terms of the arrangement

    2. The significant deliverables within its arrangements 3. The general timing of their delivery or performance of deliverables 4. The significant factors and estimates used to determine vendor-specific

    objective evidence, third-party evidence, or estimated selling price, and significant changes in the selling price or the methodology or the assumptions used to estimate selling price

    5. The general timing of revenue recognition for separate units of accounting.

    The objective of the disclosures is to provide information about the significant judgments made and changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition.

    In the year of adoption, vendors will be required to disclose information that enables users of its financial statements to understand the effect of adopting the amendments in this Update. To satisfy that objective, vendors will be required to disclose at a minimum the following qualitative information by similar types of arrangements:

    1. A description of any change in the units of accounting 2. A description of the change in how a vendor allocates t