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
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Current Guidance New Principle
General Recognition Concepts
Ind
ust
ry-s
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ific
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idan
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are
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Rea
l Est
ate
Sale
s (S
ub
top
ic 3
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)
Co
ntr
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rs -
Co
nst
ruct
ion
Rev
enu
e R
eco
gnit
ion
(S
ub
top
ic 9
10
-60
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Rea
l Est
ate
- G
ener
al R
even
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Rec
ogn
itio
n
(Su
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Rea
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- R
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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)
WHO’S IMPACTED
All entities that enter into contracts with customers
Public, private, not-for-profit
Regardless of industry
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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
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SCOPE
Contracts with customers, except
Lease contracts
Insurance contracts
Financial instruments
Certain guarantees (other than product warranties)
Certain nonmonetary exchanges
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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 entity’s ordinary activities
Must determine if contract is with customer, collaborator or entity with elements of both
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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
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SOME ENTITIES WILL BE AFFECTED MORE THAN OTHERS
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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
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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
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STEP 1 – IDENTIFY CONTRACT(S) WITH CUSTOMER
Contract
Commercial Substance
Approval & commitment
Identifiable rights, obligations & payment terms
Collectibility
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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 customer’s ability & intent to pay as amounts become due
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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
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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
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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
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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
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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 entity’s performance as entity performs
Entity’s performance doesn’t create asset with alternative use to entity & customer doesn’t 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
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STEP 5 – RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED
Measuring progress toward satisfaction of obligation
Output methods
Milestones reached
Units produced
Only used if value of WIP & value of units produced but not yet delivered is immaterial
Input methods
Costs incurred
Machine hours used
Time lapsed
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
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STEP 5 – RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED
Control transferred at a point in time indicated by following
Present right to payment from customer
Customer has legal title
Customer has physical possession
Customer has significant risks/rewards of ownership
Customer has accepted asset
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
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STEP 5 – RECOGNIZE REVENUE
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Control transferred at a point in time
Present right to
payment Legal title
Physical possession
Significant risk &
rewards of ownership
Customer acceptance
STEP 5 – RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED
Licenses - Entity must first determine if license is distinct from other goods or services in arrangement. For licenses that are not distinct, entity would combine license with other goods & services in contract & recognize revenue when it satisfies combined performance obligation
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
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STEP 5 – RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED
For distinct licenses, entity would assess nature of promise before applying revenue recognition model to license arrangements
Right to use - License is promise to provide right to use entity’s IP as it exists at a
point in time when license was granted, which transfers to customer at a point in
time
Access - License that allows customer to access intellectual property as it exists
at time of access results in revenue recognition over time
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
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CONTRACT COSTS
Incremental Cost of Obtaining a Contract - Capitalized if recoverable
Direct response advertising would be expensed
Costs to Fulfill Contract - Entity would recognize asset only if costs meet all of following criteria
Relate directly to contract or specific anticipated contract, e.g., direct labor or materials
Generate or enhance resources that would be used to satisfy performance obligations in future
Are expected to be recovered
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FINANCIAL STATEMENT DISCLOSURES
Significantly expanded disclosures
Quantitative & qualitative information about nature, amount, timing & uncertainty of revenue & cash flows
Limited relief offered to nonpublic companies on some of qualitative disclosures
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EFFECTIVE DATE & TRANSITION
Public companies
First interim period within annual reporting periods beginning on or after December 15, 2016
Early application would not be permitted
Nonpublic entities
Additional year after public company effective date
Early application permitted as early as public company date
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EFFECTIVE DATE & TRANSITION
Two transition options
Transition
2015*
2016*
2017*
Disclosure
Full retrospective method with practical expedients
Cu
mu
lati
ve c
atch
-u
p f
or
com
ple
ted
&
exi
stin
g co
ntr
acts
Completed & existing contracts restated & presented under new
standard
Existing, new & completed
contracts restated & presented under new standard
Modified retrospective method
Existing contracts presented under legacy U.S. GAAP
Cu
mu
lati
ve
catc
h-u
p fo
r ex
isti
ng
con
trac
ts Any remaining
legacy contract
For each line item effect of applying the ASU vs. not
applying
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* Dates are for public entities; nonpublic organizations will be one year later.
CROSS-FUNCTIONAL IMPLEMENTATION TEAM REQUIRED
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Department
Board of Directors Approve changes to compensation plans
Tax Impact of changing in timing of revenue recognition
Legal Redraft contract terms with customers
IT System updates
Internal Audit Review new internal controls & documentation
Investor Relations Communication strategy, manage analysts’ expectations
Treasury Review debt covenants for impact of changes in revenue timing
HR Review compensation & incentive plans
Marketing Review advertising plans & sales incentive programs
Operations Review contract fulfillment costs for capitalization
NEXT STEPS
Substantial additional implementation guidance & outreach from FASB expected in upcoming months
We plan to issue
White papers
General
Industry specific
C&RE
Health Care
M&D
Alerts on AICPA implementation guides
Webpage
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JOINT TRANSITION RESOURCE GROUP (TRG)
First meeting July 18, 2014, with one additional meeting in October 2014 & four in 2015. All meetings will be public & co-chaired by vice chairmen of IASB & FASB
Members include financial statement preparers, auditors & users representing wide spectrum of industries, geographical locations & public & private companies & organizations
Anyone can submit potential implementation issue for discussion at TRG meetings. IASB & FASB will evaluate each submission & prioritize issues for discussion at TRG meetings
TRG will NOT issue guidance
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THANK YOU
FOR MORE INFORMATION // For a complete list of our offices
and subsidiaries, visit bkd.com or contact:
Name, Credentials // Title [email protected] // 888.888.8888
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