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Revenue Recognition Update Lisa L. Acosta, Partner May 26, 2011

Transcript of Revenue Recognition Update - Pulp Fusionimages.pulpfusion.com/cpadallas/fcpemay2011/07 - 3pm -...

Revenue Recognition Update

Lisa L. Acosta, Partner

May 26, 2011

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Agenda

Recently Issued Accounting Standards Updates (ASUs) and Related Guidance

ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1)

ASU 2009-14, Certain Revenue Arrangements That Include Software Elements (EITF 09-3)

ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9)

Ongoing Standard-Setting Activities

Joint FASB / IASB Standards Projects

Revenue Recognition

1

ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1)

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1)

Question considered by the Task Force:

Fair value threshold under ASC 605-25 (EITF 00-21)

− Current guidance requires vendor specific objective evidence (VSOE) or third party evidence (TPE) to achieve separation and many companies have difficulty achieving this threshold

− Absence of VSOE or TPE most common reason for inability to separate under ASC 605-25

Scoping Questions

− Limited to scope of ASC 605-25

− ASU 2009-14 (EITF 09-3) addresses the applicability of EITF 08-1 to certain arrangements within ASC 985-605 (SOP 97-2)

3

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1) (continued)

Final Consensus:

Fair value threshold within ASC 605-25 modified to require best estimate of selling price when VSOE or TPE is not available

− Will result in separation in more circumstances

− References to fair value replaced with selling price

− Examples modified with estimated selling price considerations

Requires the relative selling price method of allocation

− Eliminates use of residual method

− Requires vendors to use a hierarchy of evidence of selling price (VSOE if available, then TPE if available, then estimated selling price (ESP))

− Requires that companies determine VSOE, TPE or ESP for ALL deliverables

4

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1) (continued)

Example:

− Product X does not have VSOE or TPE; ESP is $50

− Service Y has VSOE of $40

− Total arrangement consideration is $75

− At period end Product X is delivered and Service Y is undelivered

− Residual method revenue = $35 (75 – 40)

This method is no longer permitted for arrangements within the scope of ASC 605-25

− Relative selling price method = $42 [(50/90)*75]

This method is required for arrangements within the scope of ASC 605-25

5

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1) (continued)

Disclosures

− Ongoing disclosure objective

Provide qualitative and quantitative info about significant judgments made in application of ASU 2009-13

Changes in either judgments or application that may significantly affect timing or amount of revenue

− Summary of ongoing disclosure requirements

Nature of multiple-element arrangements and significant deliverables

General timing of revenue for deliverables and units of accounting

Performance, cancellation, termination and refund provisions

Significant factors, inputs, assumptions and methods used to determine selling price

Whether significant deliverables are separate units of accounting and, if not, why not

Effects of changes to selling price or method or assumptions used that significantly impact allocation of arrangement consideration

6

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1) (continued)

Transition Disclosures

− Qualitative description of change

− Supplement with quantitative disclosure to allow users to understand the impact of adoption and assess trends

− Companies to determine the appropriate quantitative disclosure to meet this objective which could include:

Amount of revenue recognized subject to ASU 2009-13 and amount that would have been recognized if transactions subject to the previous guidance

Retrospective disclosures for one year prior to adoption

Revenue recognized and the amount of deferred revenue for those arrangements still under the previous guidance as well as those arrangements under ASU 2009-13

7

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ASU 2009-13, Multiple-Deliverable Revenue Arrangements (EITF 08-1) (continued)

Effective Date

− Prospective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010

− Option for retrospective application if meet conditions in Statement 154 (ASC 250-10) for retrospective application

− Earlier application is permitted as of the beginning of fiscal year but can be applied in a period other than the first period of a fiscal year by retrospective application to beginning of year

8

ASU 2009-14, Certain Revenue Arrangements That Include Software Elements (EITF 09-3)

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ASU 2009-14, Certain Revenue Arrangements That Include Software Elements(EITF 09-3)

Modifies scope of ASC 985-605 (SOP 97-2) to exclude tangible products containing both software and non-software components that function together to deliver the product's essential functionality

All tangible components now scoped out

− EITF 03-5 eliminated for tangible products, but concepts retained to determine if service deliverables are considered software deliverables

Software still scoped out if it is incidental to the products or services in the arrangement as a whole

ASC 605-25, as amended by ASU 2009-13 (EITF 08-1), applies to arrangements that are scoped out of ASC 985-605

10

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ASU 2009-14, Certain Revenue Arrangements That Include Software Elements(EITF 09-3) (continued)

Rebuttable presumption that software elements are considered essential to functionality of the tangible product if sales of the tangible product without the software elements are infrequent

− Exceptions should be isolated

− A pattern of regular sales by the vendor of the hardware without the software element would indicate that the software is not essential to the functionality of the hardware

− The following transactions do not taint this assessment

Standalone sales of replacement hardware

Standalone sales of the software

11

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ASU 2009-14, Certain Revenue Arrangements That Include Software Elements(EITF 09-3) (continued)

The hardware components must substantively contribute to the tangible product’s essential functionality – not simply a delivery mechanism

− Does the tangible product have other functionality or is it merely a storage device?

− Do customers usually run the software on the tangible product or do they typically load the software onto other hardware and then discard the tangible product?

− How are the tangible products described in the vendor’s marketing materials?

− What is the extent of integration of the hardware and software development teams?

12

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ASU 2009-14, Certain Revenue Arrangements That Include Software Elements(EITF 09-3) (continued)

Other guidance

− Stand alone sales of “essential” software are under SOP 97-2

− Undelivered elements (e.g. PCS and upgrades) related to the “essential” software are scoped out of SOP 97-2

− Bifurcate undelivered elements into software and non-software

− Apply EITF 08-1 to separate software deliverables accounted for under SOP 97-2 from hardware and related software deliverables scoped out

Initially allocate consideration to software deliverables as a group and non-software deliverables

Look to SOP 97-2 to further separate software deliverables

Disclosures, transition and effective date consistent with ASU 2009-13 (EITF 08-1)

13

ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9)

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9)

EXAMPLE Bio agrees to perform research and development services on a new drug candidate for

Pharma. Under the agreement, Bio is compensated as follows:

− $200 per hour, plus

− $5 million upon the successful completion of Phase I clinical trials. The trials are expected to be completed by the expiration of approximately half of the project’s expected total of 50,000 hours

During reporting period:

− Bio performs 30,000 hours of services and payment of $6 million is received

− Clinical trials are successfully completed (estimate of 50,000 hours of service is still appropriate) and payment of $5 million is received

$4 million is expected to be received for remaining 20,000 hours of service in future periods

15

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

Milestone Method

− $5 million milestone payment would be recognized as a performance bonus when the phase I clinical trials are successfully completed

− Total of $11 million recognized in current period

16

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

A milestone is:

− Event with substantive uncertainty at inception of arrangement

− Event achievement based in whole or in part on vendor’s performance or a specific outcome resulting from the vendor’s performance

− Achievement results in additional payments being due to the vendor

The milestone method is acceptable when the milestone is determined to be substantive

− Determination of whether a milestone is substantive is a matter of judgment and is assessed at the inception of the arrangement

17

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

To be considered substantive, a milestone should be:

− Commensurate with the effort required, or enhancement of the value of the delivered item

− Relate solely to past performance

− Reasonable relative to all other deliverables and payment terms in the arrangement

No bifurcation of an individual milestone

Milestone payment can not be refundable

18

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

Scope

− Portion of consideration contingent upon uncertain future events or circumstances

− Research or development deliverables or unit of accounting with a milestone payment if that payment is to be recognized in its entirety in the period the milestone is achieved

− Does not conflict with other authoritative literature

Optional but an accounting policy election for similar transactions

19

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

Disclosures

− Accounting policy related to milestone arrangements

− For each arrangement with a material milestone payment:

Description of arrangement;

Details about milestones including amount earned during the period;

Whether milestone is substantive and factors considered in that assessment; and

Contingent consideration

20

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ASU 2010-17, Milestone Method of Revenue Recognition (EITF 08-9) (continued)

Effective for interim and annual periods beginning on or after June 15, 2010

− Early adoption permitted

Accounting policy change to milestone method or modifications of existing method to comply with new guidance

− Prospective basis with an option to apply retrospectively

21

Joint FASB / IASB Standards Projects:

Revenue Recognition

Background

Joint project between the FASB and the IASB

• Objective of project:

– Develop a standard based on a single model to deal with all types of contracts and business sectors

– Converge IFRS and U.S. GAAP

• Single revenue recognition standard would replace all current U.S. GAAP and IFRS revenue recognition standards

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Timetable

Discussion Paper Issued December 19, 2008

Exposure Draft June 24, 2010

Comment Deadline to FASB (970 letters received) October 22, 2010

Final Standard Target – Second Half of 2011

Effective Date

Separate Discussion Paper Issued; Informal indications are that it would be no earlier than 2015. If retrospective application is required, it would require 5 years for SEC registrants

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Remaining Redeliberation Plans

May 2011

• Disclosure (follow up)• Amortization of contract acquisition and fulfillment costs• Specific implementation guidance• Transition and effective date• Disclosures (follow up)• Follow up

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This presentation covers the Exposure Draft and joint Board redeliberations through April 14, 2011

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Scope of the Proposal

Scope of the proposal is limited to revenue arising from contracts with customers:

Customer: party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities

i.e., enforceable rights and obligations

Entity CustomerContract

26

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Main Steps to Apply the Exposure Draft (ED) Model

1

2

3

4

5

Allocate the transaction price to the separate performance obligations

Recognize revenue when each separate performance obligation is satisfied

Determine the transaction price

Identify the separate performance obligations in the contract

Identify the contract with a customer

27

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Step 1: Identify the Contract with a Customer - ED

A contract can be oral or implied by the entity’s customary business practices, but needs to meet all of the following requirements for the purpose of applying the proposed standard:

In addition, the contract is disregarded for the purpose of applying the proposed standard if:

It has commercial substance

The parties have approved the contract and are committed to satisfying their

respective obligations

The entity can identify each party’s enforceable rights

The entity can identify the terms and manner of settlement

It is wholly unperformed Both parties can terminate the contract without penaltyand

28

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Identify the Contract with a Customer (continued) – ED updated for RedeliberationsGenerally requirements are applied to a single contract with a customer. However:

Contract 1 Contract 2

Combine if one or more of these criteria are met:

Contract

Contract 1

Segment if goods or services are priced independently

Contract 2

• Negotiated as package with a single commercial objective

• The amount of consideration in one contract depends on the other contract

• The goods and services in the contracts are interrelated in terms of design, technology, or function

• In Jan 2011, the Boards decided to eliminate the proposed requirement in the ED to segment a contract if goods or services are priced interdependently

• Separate only if there are separate performance obligations; would not separate contracts

• Concept potentially achieved through the allocation step

29

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Step 2: Identify the Separate Performance Obligations in the Contract

A performance obligation is a promise (whether explicit or implicit) in a contract with a customer to transfer a good or service to the customer

Evaluate the terms of the contract and customary business practice to identify all promised goods or services (includes both enforceable and constructive obligations)

A bundle of promised goods or services that are highly interrelated should be accounted for as one performance obligation if the entity provides significant service of integrating those goods or services into a single item that the entity provides to the customer

30

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Identify the Separate Performance Obligations in the Contract (continued)

• If the bundle of promised goods or services is not a single performance obligation because there is no significant integration service, an entity should account for a promised good or service as a separate performance obligation only if both of the following conditions are met:

• The good or service has a distinct function; and

• The pattern of transfer to the customer is different from the pattern of transfer of other promised goods or services in the contract

• A good or service would have a distinct function if either:

• The vendor regularly sells the good or service separately, or

• The customer can use the good or service either on its own or together with resources that are readily available to the customer

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Presenter
Presentation Notes

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Step 3: Determine the Transaction Price – ED Updated for Redeliberations• The amount of consideration that an entity receives, or expects to receive, from a customer, in exchange for

transferring goods or services (excluding amounts collected on behalf of third parties)

• To determine transaction price, consider:

– the estimates of variable consideration;

• Methods to estimate expected consideration

– the effect of time value of money if the contract includes a financing component that is significant to the contract;

– the fair value of non-cash consideration; and

– the nature of consideration paid to a customer (discount and/or payment for other goods or services)

• To account for the effects of a customer’s credit risk, the Boards tentatively decided:

– The transaction price would not reflect the effects of a customer’s credit risk. Rather, a vendor would measure revenue at the promised amount of consideration (i.e., at the stated contract price adjusted for discounts and billing changes unrelated to credit)

– There would be no minimum collectibility threshold (e.g., reasonably assured or probable) for a vendor to recognize revenue

– Expected impairment losses on the contract (i.e., bad debts) would be presented in the income statement as a separate line item adjacent to the revenue line item (as contra revenue)

32

Presenter
Presentation Notes

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Step 3: Determine the Transaction Price (continued)• Transaction price: The estimated total amount of consideration to which the vendor will

be entitled under the contract

– Includes an estimate of variable consideration, using the more predictive of the following approaches depending on the circumstances

• Probability-weighted amount (e.g., if there is a large pool of homogeneous transactions with a number of possible outcomes)

• The most likely amount (e.g., if there are binary outcomes)

– Allocate the transaction price to the separate performance obligations determined in step 2, using the allocation methodology described in step 4. This allocation affects:

• The amount of revenue recognized upon satisfaction of a performance obligation (subject to a constraint describe on a later slide)

• The amount of revenue to which costs are compared to determine whether the remaining performance obligations in the contract are onerous

33

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Step 4: Allocate the Transaction Price to the Performance Obligations – ED Updated for Redliberations

A

Transaction price allocated based on relative standalone selling prices

B C

Performance obligations

Observable price

Estimated price

How to estimate the standalone selling price?

Best evidence

If not available

Adjusted market assessment

approach

Expected cost plus a margin approach

34

Residual technique

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Step 4: Allocate the Transaction Price to the Performance Obligations (continued) – ED Updated for Redeliberations

Changes in the transaction price after initial allocation

• Generally, any change in the transaction price is allocated to all performance obligations including satisfied performance obligations in proportion to the original allocation of the transaction price

• However, a vendor would allocate a change in a variable transaction price entirely to one performance obligation if both of the following criteria are met:

• The contingent payment terms of the contract relate specifically to the vendor’s efforts to satisfy that performance obligation or a specific outcome from satisfying that separate performance obligation; and

• The amount allocated to that particular performance obligation, including the change in the transaction price, is reasonable relative to all of the performance obligations and payment terms in the contract, including other potential contingent payments

35

Presenter
Presentation Notes

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Step 4: Allocate the Transaction Price to the Performance Obligations (continued)• Constraint on cumulative revenue recognized

– The amount of cumulative revenue that a vendor may recognize on a contract is limited to amounts that the vendor is reasonably assured of being entitled to receive

– A vendor is not reasonably assured of being entitled to receive amounts if

• The customer could avoid paying the additional amount without breaching the contract (e.g., a sales-based royalty)

• The vendor has no experience with similar types of contracts (or other persuasive evidence)

• The vendor has experience, but that experience is not predictive of the outcome of the contract based on an evaluation of:

• The susceptibility of the outcome to factors outside the influence of the entity

• The amount of time until the uncertainty is resolved

• The extent of the vendor’s experience

• The number and variability of the possible consideration amounts

36

Presenter
Presentation Notes

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Step 5: Recognize Revenue When a Performance Obligation Is Satisfied

• Based on the Boards’ redeliberations, a vendor would first determine whether a performance obligation is satisfied continuously

– If so, revenue is recognized on a continuous basis, using the method that best depicts the transfer of goods and services to the customer

– Methods should be consistently applied to similar performance obligations and circumstances

– Input / output methods would both be acceptable

– If not, revenue is recognized when control transfers to the customer

37

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Recognize Revenue When a Performance Obligation is Satisfied (continued)

• A vendor would satisfy a performance obligation continuously (i.e., as a service) if at least one of the following two criteria is met:

– The vendor’s performance creates or enhances an asset that the customer controls as the asset is being created or enhanced, or

– The vendor’s performance does not create an asset with an alternative use to the vendor and at least one of the following conditions is met:

– The customer receives a benefit as the vendor performs each task;

– Another entity would not need to reperform the tasks performed to date by the vendor if that other entity were to fulfill the remaining obligation to the customer; or

– The vendor has a right to payment for performance to date even if the customer could cancel the contract for convenience

38

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Indicators That Control Is Transferred for a Good

The customer has legal title

The customer has an unconditional obligation to pay

The customer has physical

possession

Risks and rewards of ownership

Indicators that the customer has obtained control of a

good

No single factor in isolation is determinative. For example, physical possession of goods by a customer may not coincide with transfer of control in bill-and-hold and consignment arrangements

39

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Costs of Fulfilling a Contract

• If the costs incurred in fulfilling a contract do not create an asset that is eligible for recognition under another standard, recognize an asset only if specified criteria under the proposed standard are met

• Contract fulfillment costs would be capitalized if they:

– Relate directly to an existing contract or a specific contract under negotiation;

– Generate or enhance resources of the entity that would be used to satisfy performance obligations in the future; and

– Are expected to be recovered

• If unable to distinguish the costs that relate to future performance from the costs that relate to past performance, recognize those costs as expenses when incurred

• Costs relating directly to a contract include costs that are incurred before the contract is obtained if those costs relate specifically to an anticipated contract

• Costs of abnormal amounts of wasted materials, labor, or other resources that were not considered in the price of the contract should be recognized as an expense when incurred

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Presenter
Presentation Notes

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Costs of Obtaining a Contract -Redeliberations

• In their redeliberations, the Boards decided tentatively that: • An entity should recognize an asset for the incremental

costs of obtaining a contract that the entity expects to recover

• That asset should be presented separately on the statement of financial position and subsequently measured on a systematic basis consistent with the pattern of transfer of the goods or services to which the asset relates

• Incremental costs of obtaining a contract are costs that the entity would not have incurred if the contract had not been obtained

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Subsequent Measurement – Onerous Provisions - Redeliberations

• Evaluate the outstanding performance obligations, both at contract inception and at each reporting date, to determine whether the unsatisfied performance obligations in the aggregate are onerous

• Recognize a liability and corresponding loss if the remaining performance obligations are onerous:

Transaction price allocated

to the remaining performance obligations

<Remaining

costs to satisfy the performance

obligations

=

Onerous contract and related asset

impairment and/ or liability to be

recognized

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Presenter
Presentation Notes
��

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Contract Modifications – Redeliberations

• Contract modification• A contract modification is any change in the scope or price of an existing

contract initiated by the entity or the customer.• The Boards tentatively decided that if a contract modification results only in the

addition of a separate performance obligation at a price that is commensurate with that additional performance obligation, the vendor would account for the modification as a separate contract

• Otherwise, the vendor would reevaluate the performance obligations and reallocate the transaction price to each separate performance obligation

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Presenter
Presentation Notes

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Other Considerations

• Product Warranties and Product Liabilities

• Prepayment for goods and services and breakage

• Sale and repurchase of an asset

• Licensing of intellectual property

• Nonrefundable upfront fees

• Rights of return

• Customer incentives including options for additional goods and services

• Principal vs. agent

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Presenter
Presentation Notes

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Disclosures - ED

High level disclosure objective • Intended to assist users to understand amount, timing and uncertainty of

revenue and cash flows arising from contracts with customersDisclosures about contracts with customers• Disaggregation of revenue• Reconciliation from opening to closing aggregate balances of contract

assets and liabilities• Information about onerous performance obligations including a

reconciliation from opening to closing balance of onerous performance obligations

• Information about performance obligations including a maturity analysis of remaining performance obligations in contracts longer than one year

45

Presenter
Presentation Notes

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Disclosures (continued) - ED

Disclosures about significant judgments and related changes

• Judgments in determining the timing of satisfaction of performance obligations

• Judgments in determining the transaction price and allocating it to performance obligations

• For performance obligations satisfied continuously, an entity would disclose:— the methods used to recognize

revenue (output method, input method…)

— an explanation of why such methods faithfully depict the transfer of goods or services

• An entity would disclose the methods, inputs and assumptions used to:— estimate the transaction price— estimate standalone selling prices— measure obligations for returns,

refunds, etc.— measure the liability for onerous

performance obligations

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Tentative Changes from Revenue Recognition ED (Pending Completion of Redeliberations)

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Current GAAP Bridge to ED / Redeliberations

Persuasive evidence of an arrangement exists

An agreement that creates enforceable rights and obligations (may be written, oral or implied by customary business practice with a customer)

Delivery has occurred or services have been rendered

Revenue is recognized when performance obligations are satisfied – customer obtains control of goods or services

Price is fixed or determinableTransaction price must be reasonably estimable – lower threshold than “fixed” criteria

Collectibility is reasonably assured No explicit collectibility threshold

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Summary of Potential Changes to Current Practice (Pending Completion of Redeliberations)

Note: The Boards’ trend in redeliberations to date has been to reduce the differences between the Exposure Draft and current U.S. GAAP

•Identifying the contract with a customer•Written vs. verbal (what is legally enforceable?)

•Identifying the separate performance obligations•The definition of “distinct function” •Software subscriptions•Software development arrangements•Long-term construction contracts

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Summary of Potential Changes to Current Practice (continued)(Pending Completion of Redeliberations)

•Determining the transaction price•Estimating variable consideration vs. fixed or determinable•Impact of rebates and incentives currently under ASC 605-50 (formerly EITF 01-9)

•Time value of money

•Identifying Performance Obligations•Material rights versus “significant incremental discounts”

•Allocating the transaction price to performance obligations• Software transactions would no longer require VSOE for separation

• Recognize revenue without regard to collectibility

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Summary of Potential Changes to Current Practice (continued) (Pending Completion of Redeliberations)

•Recognizing revenue• The concept of “transfer of control” vs. “delivery”• Treatment of service contracts and long-term construction contracts that

don’t qualify for continuous transfer•Other

•Contract costs (requirement to capitalize certain contract acquisition and fulfillment costs vs. policy election)

•Onerous contracts vs. recording losses as incurred•Presentation and disclosures – greatly expanded disclosures

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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Presenter’s contact details

Lisa L. AcostaKPMG LLP(214) 840-2218(212) [email protected]

FASB UPDATE 5151

Thank You

© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The information contained herein is of a general nature and is not intended to addressthe circumstances of any particular individual or entity. Although we endeavour to provideaccurate and timely information, there can be no guarantee that such information is accurateas of the date it is received or that it will continue to be accurate in the future. No one shouldact on such information without appropriate professional advice after a thorough examinationof the particular situation.