The document discusses the new revenue recognition standard issued by the FASB and IASB in 2014. It summarizes the core principle of the new standard which is to recognize revenue when control of goods or services are transferred to a customer. It outlines the 5-step model for revenue recognition which includes identifying performance obligations, determining transaction price, allocating price to obligations, and recognizing revenue when obligations are satisfied. The standard represents a principles-based approach to revenue recognition and is expected to impact how the topic is taught with a focus on the new 5-step model.

1. Revenue Recognition: What Is the
Impact of the New Standard on the
Intermediate Accounting Course
Jefferson P. Jones Auburn University
Donald P. Pagach North Carolina State
University
1

2. Intermediate Accounting:
Reporting & Analysis 2e
Publishes 2/15/15

3. FASB/IASB Revenue Project
• Initial Identification of the topic - 2002
• Initial exposure draft – June 2010
• Revised exposure draft – November 2011
• Final standard – May 2014
– GAAP - Annual reporting periods beginning after Dec. 15, 2016
– IFRS - Annual reporting periods beginning on or after Jan. 1, 2017
– Retrospective application – practical expedient allowed
– Early application is prohibited under GAAP, allowed under IFRS

4. Core Revenue Recognition 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.
CONTRACT
Company Customer
Enforceable rights
and obligations
• Contract-based revenue recognition principle 4

5. General Framework
• Asset/Liability Approach: Revenue is based on
changes in the assets and liabilities arising from
an entity’s contract with a customer.
• Contract gives the seller the rights to receive
consideration and imposes obligations to transfer
goods or services to the customer (performance
obligation).
• An entity recognizes revenue from increases in its
net position in a contract as it satisfies a
performance obligation.

6. Scope
• Applicable to all contracts with customers,
except for:
– Lease contracts
– Insurance contracts
– Contractual rights or obligations within the scope of
other topics (e.g., financial instruments, debt, etc.)
– Guarantees (other than product or service warranties)
– Nonmonetary exchanges between entities in the same
line of business to facilitate sales to customers

7. Five Step Model of Revenue
Recognition
7
Step 1
• Identify the contract with a customer
Step 2
• Identify the performance obligations in the contract
Step 3
• Determine the transaction price
Step 4
• Allocate the transaction price to the performance
obligations in the contract
Step 5
• Recognize revenue when, or as, the company satisfies a
performance obligation

8. Step 1: Identifying the Contract with
the Customer
• What is a contract?
– An agreement between two or more parties that
creates enforceable rights and obligations
– Meets the following requirements:
• The contract must be approved by each party
• The company must be able to identify each party’s
enforceable rights regarding the goods or services to be
transferred
• The company has to be able to identify the payment
terms for the goods or services to be transferred
• The contract must have commercial substance
• It is probable that the company will collect the
consideration to which it is entitled

9. Step 1: Key Issues
– Termination Rights: wholly unperformed contracts
that can be unilaterally canceled without penalty.
– Combining Contracts: Combine two or more
contracts entered into at or near the same time
with the same customer (or related parties) if one
or more of the following criteria are met:
• The contracts are negotiated as a package with a single
commercial objective
• The amount of consideration to be paid in one contract
depends on the price or performance of the other
contract
• The goods or services promised in the contracts are a
single performance obligation

10. Step 1: Key Issues
– Contract Modification:
• Treated as a new, separate contract, if:
– Distinct goods or services or added AND
– Price increases by an amount that reflects the standalone
selling price of the additional goods or services
• If not a separate contract, then the modification is
treated as an adjustment to the original contract.
– Prospective Method
– Cumulative Catch-Up Method
– Collectability
• Reduce the contract price for ay amounts the seller
does not expect to collect

11. Step 2: Identify Performance Obligations
– What is a performance obligation?
• A promise (implicit or explicit) in a contract to transfer a
good or service.
– When do separate performance obligations exist?
• Key: Distinct goods or services
• A good or service is distinct (and accounted for
separately) if it is:
– Capable of being distinct: Customer can benefit from the
good or service on its own or with other readily available
resources
– Distinct within the context of the contract: Seller’s promise is
separately identifiable from other promises in the contract
(e.g., no significant integration, modification, customization)

12. Example – Identifying Performance
Obligations
• Nonrefundable Upfront Fees: A health club offers
one-year memberships for a nonrefundable fee
of $100 paid at the inception of the contract and
$50 a month.
• Customization of software: A company provides
a two-year software license to a customer as well
as two years of bundled customer support.
Neither the software nor the customer support
are sold on a stand-alone basis.

13. Example – Identifying Performance
Obligations
• Construction: A company enters into a
contract to build a building. The company is
responsible for the overall management of the
project and identifies various goods and
services to be provided, including engineering,
site clearance, foundation, procurement,
construction of the structure, piping and
wiring, installation of equipment, and
finishing.

14. Step 3: Determine the Transaction Price
• The transaction price is the amount of
consideration to which an entity expects to be
entitled in exchange for transferring promised
goods or services to a customer
• Must consider:
– Variable consideration
• Expected value or most likely amount approach
• Constraint
– Time value of money
– Noncash consideration
– Consideration paid to a customer

15. Example – Determining the
Transaction Price
• Sale with right of return: A company sells 100
products for $100 each. The company allows the
customer to return any unused product within 30
days and receive a full refund. The cost of each
product is $60. The company estimates that 3
products will be returned.
– Revenue = $9,700 (97 x $100)
– Return liability = $300 (3 x $100)
– COGS = $5,820 (97 x $60)
– Return asset = $180 (3 x $60)

16. Step 4: Allocate the Transaction Price
• Determine the standalone selling price of each
performance obligation
– Best evidence → Observable price
– Use best estimate if observable price is not available
• Adjusted market assessment approach
• Cost plus a margin approach
• Residual approach
• Allocate transaction price to separate performance
obligations based on the relative standalone selling price
• Any subsequent changes in transaction price are allocated
to separate performance obligations on the same basis as
at contract inception
– Amounts allocated to satisfied performance obligations are
recognized as an adjustment to revenue in the period of the
change

17. Step 5: Recognize Revenue When
Performance Obligations are Satisfied
• Performance obligations are satisfied when
control of goods or services (assets) are
transferred to a customer
• Control of an asset refers to the ability to direct
the use of and obtain substantially all of the
remaining benefits from the asset.
• Example:
– Consignment arrangements
– Bill-and-hold arrangements
• Key Question: Are performance obligations
satisfied over time or at a point in time?

18. Performance Obligations Satisfied
Over Time
• Three criteria (must meet only one):
– The customer simultaneously receives and consumes
the benefits of the seller’s performance as the seller
performs
– The seller’s performance creates or enhances an asset
that the customer controls OR
– The seller’s performance does not create an asset
with alternative use to the seller and the seller has a
right to payment for the work completed to date.
• Appropriate measure of progress must be
selected - output or input methods allowed

19. Example – Performance Obligation
Satisfied Over Time
• A company enters into a contract to construct a
cruise ship. The ship is designed and
manufactured to the customer’s specifications.
Physical possession of and title to the ship remain
with the seller during construction. The
customer agrees to make periodic payments
throughout the construction of the ship that are
intended to at least compensate the company for
performance to date. If the contract is canceled
by the customer, there would be significant
rework costs to make it useful to another
customer.

20. Performance Obligations Satisfied
At A Point in Time
• Indicators of a transfer of control:
– The seller has the right to payment
– The customer has legal title to the asset
– The seller has transferred physical possession of
the asset
– The customer has the significant risks and rewards
of ownership of the asset
– The customer has accepted the asset.

21. Presentation and Disclosures
• Objective: To help users understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising
from contracts with customers
• Presentation:
– Receivables, contract assets, contract liabilities
– Revenue from contracts vs other revenues
• Disclosure:
– Disaggregation of revenue
– Reconciliation of contract asset and liability balances
– Information about performance obligations
– Significant judgments
• Overall, Disclosures will be more extensive

22. Conclusion
• Principles-based standard which provides
student with a more general framework
• Effect on the classroom
– The results are often consistent with current
practice
– Presentation of the 5-step model in lieu of
“earned” and “realized or realizable” discussion
– Increased complexity of the discussion?

23. Questions?
• Contact any of the authors if you have
additional questions
• Jim Wahlen 1-812-855-2658
– jwahlen@Indiana.edu
• Jeff Jones 1-334-844-6223
– jjones@business.auburn.edu
• Don Pagach 1-919-515-4447
– Don@NCSU.edu