AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

© 2013 McGladrey LLP. All Rights Reserved. © 2013 McGladrey LLP. All Rights Reserved.

July 30, 2013

Joint revenue recognition project update for finance leaders

© 2013 McGladrey LLP. All Rights Reserved.

Brian Marshall Biography [email protected]

Brian is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Brian’s responsibilities include consulting with clients and engagement teams on complex accounting issues associated with these subject matters, facilitating training events for McGladrey professionals and external participants and writing interpretive guidance for McGladrey publications. He is also responsible for monitoring standard setting by the FASB and the FASB’s EITF and PCC, writing Firm comment letters on proposed standards to the FASB and has been a member of EITF working groups. Prior to joining McGladrey in 2007, Brian worked as a senior program manager in the accounting practices group of a Fortune 50 company, serving as a resource on complex technical accounting matters for the company’s global accounting community. Brian also was employed by a Big 4 firm for over eight years in various offices in the U.S. and Europe, with his last position being a senior manager in the assurance services group. Brian is a certified public accountant in the states of Connecticut and New York, and is a member of the AICPA.


Richard Stuart Biography [email protected]

Richard is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise are revenue recognition, leasing, variable interest entities and International Financial Reporting Standards. Richard’s primary responsibilities are consulting with clients and engagement teams on complex accounting issues, facilitating training events and writing interpretive guidance for McGladrey publications. Richard also monitors standard-setting activities domestic and internationally, and assists in developing Firm positions on proposed accounting standards. He is a former member of the FASB’s Valuation Resource Group and the AICPA’s Financial Reporting Executive Committee, and has also served on various EITF and AICPA working groups. Before joining McGladrey, Richard worked for two large multinational companies in their Accounting Practices Groups, and also spent time on the staff of the AICPA and FASB developing accounting standards. He started his career with Coopers and Lybrand, including a rotation in the Firm’s National Technical Accounting Group. Richard is a certified public accountant in the state of Connecticut, and is a member of the AICPA.


McGladrey overview

Largest U.S. provider of assurance, tax and consulting services focused on the middle market

Nearly 6,500 professionals and associates in more than 75 offices nationwide

US member of RSM International (RSMI) – a network of independent accounting, tax and consulting firms worldwide - Offices in more than 100 countries with over 32,500 people


Agenda

Overview Proposed five-step revenue model Other changes as a result of the model Disclosures, effective date and transition Closing / Questions

The information in this presentation is based on our understanding of the FASB and IASB decisions to date and our expectations of what will be in the final standard when published. The information in the final standard could be different from that being presented today.


Objective

Help finance leaders gain an understanding of the significant changes that will result from the joint revenue recognition project to enable them to gauge the impact these changes will have on their company


Overview


Background and status

Preliminary views document issued in Dec. 2008 Exposure draft issued in June 2010 Revised exposure draft issued in Nov. 2011 Redeliberations began in July 2012 Final standard expected in the third quarter of 2013


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 or services


Scope

Applies to all contracts with customers except those for: - Financial instruments - Guarantees other than warranties - Insurance - Leases - Certain nonmonetary exchanges

Contracts with performance obligations in multiple standards

Recognition and measurement principles also applicable to sales of nonfinancial assets that are not classified as revenue


Proposed five-step revenue model


Overview

Five-step model to comply with core principle

Identify the contract with a customer

(Step 1)

Identify the separate

performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction price to the

separate performance obligations

(Step 4)

Recognize revenue when (or as) each performance obligation is

satisfied (Step 5)



1. Identify the contract with a customer

Customer - A party that has contracted to obtain goods or services that

are an output of an entity’s ordinary activities Contract

- Enforceable agreement between parties - Can be written, oral or implied

Contract combination - Required for contracts entered into at or near the same time if

certain criteria are met Contract modifications

- Treat separately if distinct performance obligation is added and the price is consistent with its standalone selling price

- Otherwise combine with remaining goods or services


2. Identify separate performance obligations

Promise in a contract to transfer a good or service Account for good or service separately if it is both:

- Capable of being distinct because the customer can benefit from the good or service on its own or together with other resources readily available to the customer

- Distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract

Indicators of a distinct good or service within contract context: - No significant integration or modification services - Can be purchased without significantly affecting other promised

goods or services in the contract - Not part of certain consecutively delivered goods or services


3. Determine the transaction price

Amount of consideration to which an entity expects to be entitled to receive from a customer

Variable / contingent consideration - Estimate based on probability-weighted or most-likely amount - However, only include in transaction price if not subject to a

risk of significant revenue reversal • Evaluate based on experience with similar performance

obligations among other factors

Time value of money - Only affects transaction price if significant financing

component exists - Can ignore if time between payment and transfer of goods or

services is one year or less


3. Determine the transaction price

Noncash consideration - Measure at fair value if reasonably estimable or by

reference to standalone selling price of related goods or services

Consideration payable to a customer - Reduction of transaction price unless in exchange for

distinct good or service

Collectibility - Not directly considered in transaction price - Impairment from credit losses (bad debt expense)

presented as a separate line item


4. Allocate the transaction price

Generally based on relative standalone selling prices of separate performance obligations

Standalone selling price - Observable price when sold separately (best) - Otherwise, estimate based on:

• Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?

Subsequent changes in the transaction price that are not contract modifications are allocated on a relative standalone selling price basis unless certain criteria are met


5. Recognize revenue

Recognize revenue as performance obligations are satisfied based on transfer of control

Determine if satisfied (and revenue recognized) over time, based on whether entity’s performance: - Creates or enhances an asset the customer controls; or - Benefits customer as entity performs and another entity would

not need to reperform work completed to date (for pure services contracts); or

- Does not create an asset with an alternative use and vendor has right to payment for performance to date

Select method of progress toward completion (output or input)


5. Recognize revenue

If prior criteria not met, then satisfied at a point in time Recognize revenue when customer obtains control

based on following indicators: - Entity has right to payment

- Entity has transferred physical possession

- Customer has legal title

- Customer has risks and rewards of ownership

- Customer has accepted goods or services


Other changes as a result of the model


Contract costs

Capitalize direct costs of fulfilling a contract or anticipated contract if those costs: - Generate or enhance a resource that will be used to satisfy

performance obligations in the future (e.g., setup costs); and

- Are expected to be recovered

Capitalize incremental costs to obtain a contract if expected to be recovered - Unless amortization period would have been one year or

less in which case have the option to immediately expense


Return rights

Defer revenue by recording a refund liability for goods expected to be returned

Adjust refund liability (and revenue) for changes in return expectations

Record asset for right to recover products at former carrying amount less costs of recovery


Warranties

Customer option to purchase separately or warranty provides an additional service - Separate performance obligation recognized over time

No customer option to purchase separately and warranty does not provide an additional service - Recognize revenue and accrue expected costs - Consider following in determination of whether additional

service is being provided: • Whether warranty is required by law • Length of warranty period • Nature of tasks to be performed


Optional goods or services

Considered a performance obligation if provides a material right customer otherwise would not receive

Estimate standalone selling price of option using: - Directly observable option price - Option discount adjusted for likelihood of exercise and

discount available without the option

Allocate portion of transaction price to option based on relative standalone selling prices

Recognize allocated revenue on transfer of control of optional goods or services or when option expires


Onerous performance obligations

Removed from model during redeliberations FASB decided to retain existing guidance regarding

the recognition of losses from contracts with customers, including that within ASC 605-35


Other changes

Licensing and rights to use - Revenue recognized at either a point in time or over time

depending on the characteristics of the license • If considered the provision of a right to intellectual property,

recognize at a point in time • If considered the provision of a service or access to intellectual

property, recognize over time

Repurchase agreements - Entity obligation (forward) or right (call option) to repurchase

asset - Customer right to require entity to repurchase asset (put option)

Shipments with risk of loss


Treatment similar to current U.S. GAAP

Customers’ unexercised rights (“Breakage”) Nonrefundable upfront fees Principal vs. agent considerations Consignment arrangements Bill-and-hold arrangements Customer acceptance


Balance sheet presentation

Contract asset/contract liability based on comparison of entity’s performance to customer’s performance

Entity > customer = contract asset Entity < customer = contract liability Receivables are classified separately from other

asset - Unconditional right to receive consideration


Disclosures, effective date and transition


Disclosures

Disclosure objective: - Quantitative and qualitative information regarding nature, amount,

timing and uncertainty of revenue and related cash flows Annual disclosures for public companies include:

- Disaggregation of revenue - Opening and closing balances of contract assets and liabilities and

related information - Transaction price allocated to remaining performance obligations - Contract costs - Description of performance obligations - Significant judgments made including methods and inputs used to

determine transaction price and standalone selling price - Many more

Interim disclosures for public companies are greatly expanded as well

Private company annual and interim disclosure requirements are substantially less than those of public companies


Effective date

Public companies - Annual reporting periods beginning after December 15,

2016, including related interim periods - Early application is prohibited (FASB only)

Private companies (FASB only) - Annual reporting periods beginning after December 15,

2017, and interim periods in years thereafter - Early application is allowed (earliest would be date that

public companies are required to adopt)


Transition

Transition options - Retrospective

• Apply new revenue guidance to all prior periods • Certain practical expedients are allowed

- Modified retrospective • No restatement of prior periods • Apply new revenue guidance to in-progress contracts as of the

adoption date going forward and subsequent contracts • Recognize a cumulative effect adjustment to retained earnings

for application of the new revenue guidance to in-progress contracts

• Disclose in the year of adoption the effect on each line item in the financial statements as a result of adoption


Closing / Questions


Questions?


For more information, please contact:

Brian Marshall [email protected] 203.312.9329

Richard Stuart [email protected] 203.905.5027

mailto:[email protected]

mailto:[email protected]


McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting, tax and consulting firms. The member firms of RSMI collaborate to provide services to global clients, but are separate and distinct legal entities which cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party.

McGladrey, the McGladrey signature, The McGladrey Classic logo, The power of being understood, Power comes from being understood and Experience the power of being understood are trademarks of McGladrey LLP.


McGladrey LLP

800.274.3978 www.mcgladrey.com

AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

Business

mcgladrey professionals

mcgladrey publications

mcgladrey overview largest

proposed accounting

proposed standards

complex accounting issues

software revenue recognition

general revenue recognition