Revenue Recognition (Topic 605)

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Transcript of Revenue Recognition (Topic 605)

Proposed Accounting Standards UpdateIssued: June 24, 2010 Comments Due: October 22, 2010

Revenue Recognition (Topic 605)

Revenue from Contracts with Customers

This Exposure Draft of a proposed Accounting Standards Update of Topic 605 is issued by the Board for public comment. Written comments should be addressed to: Technical Director File Reference No. 1820-100

The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. An Accounting Standards Update is not authoritative; rather, it is a document that communicates how the Accounting Standards Codification is being amended. It also provides other information to help a user of GAAP understand how and why GAAP is changing and when the changes will be effective. Notice to Recipients of This Exposure Draft of a Proposed Accounting Standards Update The Board invites individuals and organizations to send written comments on all matters in this Exposure Draft of a proposed Accounting Standards Update. Responses from those wishing to comment on the Exposure Draft must be received in writing by October 22, 2010. Interested parties should submit their comments by email to director@fasb.org, File Reference No. 1820-100. Those without email should send their comments to Technical Director, File Reference No. 1820-100, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Do not send responses by fax. All comments received constitute part of the FASBs public file. The FASB will make all comments publicly available by posting them to its website and by making them available in its public reference room in Norwalk, Connecticut. An electronic copy of this Exposure Draft is available on the FASBs website until the FASB issues a final Accounting Standards Update.

Copyright 2010 by Financial Accounting Foundation. All rights reserved. Permission is granted to make copies of this work provided that such copies are for personal or intraorganizational use only and are not sold or disseminated and provided further that each copy bears the following credit line: Copyright 2010 by Financial Accounting Foundation. All rights reserved. Used by permission.

Financial Accounting Standards Boardof the Financial Accounting Foundation 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116

Proposed Accounting Standards Update Revenue Recognition (Topic 605) Revenue from Contracts with Customers June 24, 2010 Comment Deadline: October 22, 2010 CONTENTSParagraph Numbers Introduction and Questions for Respondents IN1IN29 185 14 5 67 833 811 1216 1719 2024 2533 3453 3549 5053 5456 5763 6468 6983 7380 8183 8485

Proposed Guidance Introduction Objective Scope Recognition of revenue Identifying the contract Combination and segmentation of contracts Contract modifications Identifying separate performance obligations Satisfaction of performance obligations Measurement of revenue Determining the transaction price Allocating the transaction price to separate performance obligations Onerous performance obligations Contract costs Presentation Disclosure Contracts with customers Significant judgments in the application of the proposed guidance Effective date and transition Implementation Guidance and Illustrations Segmentation of a contract Contract modifications

IG1IG96 IG2 IG3

Paragraph Numbers Identifying performance obligations Sale of a product with a right of return Product warranties and product liabilities Principal versus agent considerations Customer options for additional goods or services Nonrefundable upfront fees Licensing and rights to use Determining whether a good or service is distinct Satisfaction of performance obligations Software license Shipment of a product with risk of loss Sale and repurchase of an asset Consignment arrangements Bill-and-hold arrangements Determining whether goods or services are transferred continuously Customer acceptance Determining the transaction price Variable consideration Collectibility The time value of money Consideration payable to the customer Allocating the transaction price to separate performance obligations Contract costs Presentation Disclosure Approval by the Board Background Information and Basis for Conclusions Introduction Background Scope Contracts and customers Contracts outside the scope of the proposed guidance Contracts partially within the scope of other standards Exchanges of products to facilitate a sale to another party Recognition of revenue Contract-based revenue recognition principle Combination and segmentation of contracts Contract modifications Identifying separate performance obligations IG4IG39 IG5IG12 IG13IG19 IG20IG23 IG24IG26 IG27IG30 IG31IG39 IG40IG43 IG44IG73 IG45 IG46 IG47IG53 IG54IG57 IG58IG62 IG63IG68 IG69IG73 IG74IG85 IG75IG77 IG78IG80 IG81IG84 IG85 IG86IG88 IG89IG90 IG91 IG92IG96 page 78 BC1BC252 BC1BC2 BC3BC8 BC9BC26 BC12BC17 BC18BC21 BC22BC24 BC25BC26 BC27BC75 BC27BC34 BC35BC38 BC39BC41 BC42BC59

Paragraph Numbers Satisfaction of performance obligations Measurement of revenue Determining the transaction price Allocating the transaction price to separate performance obligations Onerous performance obligations Components of the onerous test Presentation of the liability for onerous performance obligations Rejection of an alternative measurement approach for some performance obligations Contract costs Costs of fulfilling a contract Costs of obtaining a contract Presentation Relationship between contract assets and receivables Disclosure Disclosure objective Disaggregation of reported revenue Reconciliation of contract balances Description of performance obligations Onerous performance obligations Assumptions and uncertainties Implementation guidance Sale of a product with a right of return Product warranties and product liabilities Principal versus agent considerations Customer options for additional goods or services Licensing and rights to use Product financing arrangements Transition Effective date and early adoption Costs and benefits Consequential amendments Sales of assets that are not an output of an entitys ordinary activities BC60BC75 BC76BC129 BC79BC111 BC112BC129 BC130BC148 BC135BC141 BC142BC143 BC144BC148 BC149BC158 BC149BC155 BC156BC158 BC159BC166 BC163BC166 BC167BC185 BC171 BC172BC175 BC176BC180 BC181BC182 BC183 BC184BC185 BC186BC230 BC187BC194 BC195BC207 BC208BC209 BC210BC220 BC221BC226 BC227BC230 BC231BC235 BC236BC238 BC239BC247 BC248BC252 BC248BC252 Page Numbers Appendix A: Glossary Appendix B: Summary of Proposed Amendments to the FASB Accounting Standards Codification 146 148

Introduction and Questions for RespondentsWhy are the FASB and the IASB publishing this Exposure Draft?IN1. Revenue is a crucial number to users of financial statements in assessing a companys performance and prospects. However, revenue recognition requirements in U.S. generally accepted accounting principles (GAAP) differ from those in International Financial Reporting Standards (IFRSs), and both sets of requirements are considered to be in need of improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions. Although IFRSs provide less guidance on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply to transactions beyond simple transactions. In addition, those standards have limited guidance on important topics such as revenue recognition for multiple-element arrangements. Accordingly, 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: (a) (b) (c) (d) IN3. remove inconsistencies and weaknesses in existing revenue recognition standards and practices; provide a more robust framework for addressing revenue recognition issues; improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and simplify the preparation of financial statements by reducing the number of requirements to which entities must refer.

IN2.

To meet those objectives, the FASB and the IASB have jointly developed a draft standard on revenue and, hence, are proposing amendments to the FASB Accounting Standards CodificationTM and to IFRSs.

Who would be affected by the proposals?IN4. The proposed guidance would affect any entity that enters into contracts to provide goods or services that are an output of the entitys ordinary activities, unless those contracts are within the scope of other requirements of U.S. GAAP or IFRSs.

1

IN5.

In U.S. GAAP, the proposed guidance would supersede most of the guidance on revenue recognition in Topic 605. In IFRSs, the proposed guidance would supersede IAS 18 and IAS 11 and related Interpretations. In addition, the existing requirements for the recognition of a gain or loss on the sale of some nonfinancial assets that are not an output of the entitys ordinary activities (for example, property, plant, and equipment within the scope of Topic 360 or IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property) would be amended to be consistent with the proposed revenue recognition and measurement requirements. Appendix B contains additional information on proposed amendments to the Accounting Standards Codification.

IN6.

IN7.

What are the main proposals?IN8. The proposed guidance specifies the principles that an entity would apply to report useful information about the amount, timing, and uncertainty of reve