Seg Revenue Recognition Slides

Extreme Makeover -
Revenue Recognition
Joint Project of the
FASB and IASB

Revenue from contracts
with customers

Learning Objectives

• Provide history behind and current status of
the new revenue accounting rules

• Review the new five-step recognition model

• Illustrate key concepts through examples

• Impact considerations and next steps

History – Why the Shift to a New Framework?

Objectives of the FASB & IASB…
• One global standard for revenue accounting and
reporting
• Currently IFRS guidance is not extensive – users often
refer to US GAAP for specific guidance
• Currently US GAAP guidance is comprised of 1) over-
riding guidelines established by the SEC, and 2) industry
specific bright line rules
• Inconsistencies exist between industries
• New standard designed to promote consistency and
comparability across industries and capital markets

Timeline & Current Status

• Project began in 2006
• Initial Exposure Draft Issued 2010
• Revised Exposure Draft Issued November 14, 2011
• Final Standard Expected in early 2013
• Effective Date – fiscal years beginning on or after January
1, 2015
• Full Retrospective Application – therefore public
companies must start complying in 2013 to facilitate on
time adoption

5 Step Revenue Recognition Model

Step 1 Identify the contract(s) with the customer

Step 2 Identify separate performance obligations in the contract

Determine transaction price and amounts not expected to
Step 3
be collected

Allocate transaction price to the separate performance
Step 4
obligations

Recognize revenue when goods and services are transferred
Step 5
to the customer and performance obligations are complete

Step 1 Identify the contract(s) with the customer

Issue Key Considerations
Combining  If separate contracts were negotiated together
Contracts
for one purpose
 If price interdependence exists between two
otherwise separate contractual arrangements
 If performance links exist between two separate
contracts – one combined performance
obligation may exist
Modifications  Combine with initial contract, unless…
 Modification creates new and separate
performance obligation
 The price = stand-alone selling price for that

Modification – Illustrative Example

• On January 1, Company A contracts to  Modification was made in close
sell 20 truck bodies to Company B at a proximity to original contract
price of $9,000 per unit for a total
transaction value of $180,000  Unfulfilled performance obligation
(standard price is $10,000 per unit).
remained from original contract
• Truck bodies will be delivered in 2
equal shipments on January 31 and  No price interdependence –
March 31. modification sold at list price
• On March 1, Company A modifies the
contract to add an additional 10 truck
 The March 1st modification
bodies to Company B for $100,000. represents a stand alone
Combine or Separate?
Answer: Separate

Modification – Illustrative Example

• On January 1, Company A contracts to  Modification was made in close
sell 20 truck bodies to Company B at a proximity to original contract
price of $9,000 per unit for a total
transaction value of $180,000  Unfulfilled performance obligation
(standard price is $10,000 per unit).
remained from original contract
• Contract defines discount structure
for future purchases  Price interdependence does exist –
original contract defines discount
• On March 1, Company A modifies the
structure
contract to add 10 additional truck
bodies to Company B for $80,000 to
be delivered June 30th (pursuant to
the defined discount structure). Answer: Combine
Combine or Separate?


How do we identify  If goods and services are “distinct”
performance
obligations?  Distinct means…
 Good or service is sold separately
 Good or service has stand alone value to
customer
When should goods  If both of the following criteria are met…
and services be
bundled together?  Goods and services are highly interrelated
and seller provides significant service of
integrating goods and services on customer’s
behalf
 Seller is engaged by buyer to significantly
modify or customize the goods or services for
buyer’s use


How are warranties  Current accounting guidance calls for cost
accounted for
under the new accruals for all warranties
standard?  Under new guidance, warranties that are sold
separately represent a separate performance
obligation
 Warranties that meet the definition of
performance obligation will be subject to an
allocated portion of the transaction price based
upon relative stand-alone sales prices

Step 3
be collected

What is the impact  Examples include rebates, credits, performance
of variable
consideration on bonuses, contingent consideration (royalties)
revenue  Generally, current US GAAP defers recognition
recognition? until contingency is fulfilled
 The new standard will require management to
estimate variable consideration
 As a result, many organizations will recognize
revenue related to variable consideration sooner

Aspect of the new standard that will generally increase revenue

Aspect of the new standard that will generally decrease revenue

Variable Consideration – Illustrative Example

• Company A provides an outsourced  Probability weighted estimate
service to its customers. Typical approach is utilized
contracts include a scaled
performance bonus related to  Under current US GAAP, Company
efficiency metrics achieved within a
A would not recognize any revenue
defined timeframe.
related to the performance bonus
• Management estimates its until the precise amount earned
performance bonus under a new becomes known (fixed and
contract as follows: determinable fee requirement)
50% Chance of $100,000 = $50,000
25% Chance of $50,000 = $12,500  Under the new standard, Company
25% Chance of $0 = $0 A will include $62,500 in the total
transaction value to be allocated to
the performance obligations

Step 3
be collected

How is collection  Under current US GAAP collectibility is a pre-
risk accounted for
under the new requisite for revenue recognition
standard?  Under the new standard, collectibility risk will not
preclude revenue recognition
 Management will estimate impairment loss on
receivables and deduct from gross revenue on
face of income statement
 Under current US GAAP bad debt expense does
not reduce gross margin
 Under the new standard, recorded impairment
losses will reduce gross margin


Collectibility– Illustrative Example

• Company A operates as a business to • Cost of sales per transaction is $3,000
consumer products seller.
• Historic bad debt write-offs at 10%
• Typical customer sales transactions
total $5,000

Current Accounting New Standard
Revenue $5,000 Revenue $5,000
Cost of Sales $3,000 Impairment Loss (500)
Gross Margin $2,000 Net Revenue $4,500
Gross Margin % 40% Cost of Sales $3,000
Bad Debt Expense $500 Gross Margin $1,500
Gross Margin % 30%
Bad Debt Expense $0

Allocate transaction price to the separate performance
Step 4
obligations

How do we allocate  Based on relative stand alone sales prices
the transaction
price?  If a stand-alone sales price is not available then
management must estimate the price at which it
would sell that good or service
 Under current US GAAP (in particular in the
software sector), absence of VSOE of fair value
generally results in revenue deferrals
 Estimation methods can include…
 Cost plus a reasonable margin
 Market prices for similar goods and services
 Residual method


Transaction Price Allocation – Illustrative Example

• Company A is a electronics products • 100 Hours of Design Service – Stand-
and services company. alone price is $500 per hour ($50,000)
• It has entered into a contract with a • Extended warranty – Stand-alone
customer that includes multiple price is $10,000
performance obligations including: • Contract value is $150,000
• Electronic component products –
Stand-alone price is $100,000
Performance Stand-alone Discount Factor Allocated
Obligation price ($150,000 / $160,000) Price
Electronic components $100,000 93.8% $93,750
Design services $50,000 93.8% $46,875
Extended warranty $10,000 93.8% $9,375
Totals $160,000 $150,000

Residual Method Example – Illustrative Example

• Assume the same fact pattern as in the previous example
• In addition to the 3 electronic components noted previously, Company A will
also manufacture and deliver a custom component built to the customer’s
specifications that it has never before built nor sold separately
• Assume contract value is $175,000

Performance Obligation Stand-alone Discount Factor Allocated
price ($175,000 / $175,000) Price
Electronic components $100,000 100% $100,000
Design services $50,000 100% $50,000
Extended warranty $10,000 100% $10,000
NEW special component $15,000 100% $15,000
Totals $175,000 $175,000

Modification / Price Allocation – Illustrative Example

• On January 1, Company A contracts to
sell 20 truck bodies to Company B at a Date Revenue Note
price of $9,000 per unit for a total January 31st $90,000 Delivery of first 10 truck
transaction value of $180,000 bodies

(standard price is $10,000 per unit). March 31st $83,333 Second 10 trucks delivered
(cumulative catch up)

• Contract defines discount structure June 30th $86,667 Last 10 trucks delivered

for future purchases Totals $260,000 Combined transaction
value now fully recognized
• On March 1, Company A modifies the Impact
contract to add 10 additional truck
bodies to Company B for $80,000 to Unlike current US GAAP, the new standard’s
be delivered June 30th (pursuant to contract modification feature is likely to result
in adjustments to revenue recorded on
the defined discount structure).
performance obligations that have already
been recognized


Step 5

When is a  Promised good or service is transferred to the
performance
obligation satisfied? customer
 Control is the key concept to understand
 Control is the ability to direct the use of and
receive the benefit from the good and service

Practice Aid – Indicators that control has passed to customer
• Customer has unconditional • Customer bears the risks and rewards
obligation to pay of ownership
• Customer has legal title to goods • Customer formally accepts goods or
• Customer has physical possession of service
the goods

Step 5

How is the passage  Original exposure draft did not make a distinction
of control viewed
for service on passage of control for service companies
companies?  Now the new standard includes the concept of
“continuous” passage of control
 A performance obligation is satisfied continuously
if…
 Seller’s performance creates or enhances an
asset that the customer controls, or
 Seller’s performance does not create an asset
with alternative use

Other Important Highlights of the New Standard

Unlike current US GAAP, the new standard
requires the capitalization of incremental
Contract Costs
costs incurred to obtain a contract if they are
expected to be recovered

• Applies to performance obligations
Onerous satisfied over 1 year or more
Performance • Assessed at performance obligation level
Obligations – not contract level
• Onerous = lowest cost of settling the
performance obligation exceeds the
amount of the transaction price allocated

Financial Statement Disclosures

• The disaggregation of revenue into primary categories that depict the
nature, amount, timing and uncertainty of revenue and cash flows
• A tabular reconciliation of the movements of the assets recognized
from the costs to obtain or fulfill a contract with a customer
• An analysis of the entity's remaining performance obligations
including the nature of the goods and services to be provided, timing of
satisfaction, and significant payment terms
• Information on onerous performance obligations and a tabular
reconciliation of the movements in the corresponding liability for the
current reporting period
• Significant judgments and changes in judgments that affect the
determination of the amount and timing of revenue from contracts
with customers

Comparison to Staff Accounting Bulletin Topic 13
(formerly SAB No. 104)

SAB Topic 13 Impact of IASB / FASB Exposure Draft

 Contracts may be combined if highly interrelated or price
Persuasive interdependent
evidence of
arrangement  Identify performance obligations for distinct goods or
services (distinct generally means “sold separately”)

 Satisfaction of performance obligations triggers recognition
 Customer must obtain control of the promised good or
Delivery has service
occurred or  Distinction between goods and services now added in new
services have exposure draft – services subject to continuous control
been rendered passage guidance
 Warranties (that can be purchased) are now treated as a
performance obligation not as a liability

Comparison to Staff Accounting Bulletin Topic 13
(formerly SAB No. 104)
SAB Topic 13 Impact of IASB / FASB Exposure Draft

 Transaction price is the amount of consideration expected to
be received from the customer
 Allocate the transaction price to all distinct performance
The seller’s price obligations proportionally based on stand alone selling price
to the buyer is
fixed or  Estimates of selling prices for distinct goods or services not
determinable sold separately will replace vendor specific objective
evidence criterion
 Estimates will be incorporated when variable consideration
exists

 Collection risk reflected as reduction of revenue rather than
Collectibility is bad debt – gross margins will be reduced
reasonably
assured  Transactions falling short of SAB Topic 13 threshold may no
longer result in revenue deferrals

Next Steps

• The accounting and disclosure requirements of the new revenue
standard are significant
• The impact will be greatest for companies with complex revenue
arrangements, bundled contracts and long term engagements
• Stay up to date on the evolving standard requirements and seek
out training opportunities
• Conduct an impact assessment in order to prepare for the
transition
• The retrospective transition provision means compliance may
need to start as soon as 2013

SolomonEdwards At a Glance

 SolomonEdwardsGroup, LLC (SolomonEdwards or SEG) is a national
business advisory and professional staffing firm. Our customized solutions
provide our clients with the right combination of talent and expertise to
achieve their business objectives.

 With practices specialized in Accounting & Finance and Banking &
Financial Services, our strength lies in our ability to tactically assist clients
with special projects, transaction support & integration, business process
optimization initiatives, and regulatory compliance requirements.

 Because we provide both business advisory and staffing services, SEG can
customize a solution for each client we serve. If you need an individual to
fill a role on an interim or permanent basis, a large team to execute a
project initiative, or expert consultation on a technical issue, we can help.

 We operate from seven offices in major cities throughout the country and
maintain a global network of partners to serve multinational clients.

Our Services & Solutions

Our core service capabilities encompass business advisory, project
management, interim staffing and professional search. We deliver our
services to our clients across a spectrum of functional and industry verticals
that enables us to provide the specific expertise and methodologies required
to deliver outstanding results.

Our Services & Solutions

 Interim CFO & Controller  Business Process Improvement
 General Ledger Accounting &  Policy & Procedure Development
Reporting  Business Intelligence Tools
 Financial Modeling  Financial Planning & Analysis
 Financial System Assessment &  Budgeting & Forecasting
Optimization Business
Accounting  Shared Service Center Support
Process
& Finance
Optimization

 Project Management Office Transaction  Technical Accounting
Regulatory
 Due Diligence Support &  US GAAP & IFRS Advisory
Compliance
 Merger Integration
Integration  SEC Reporting & Compliance
 Financial Carve-out  Sarbanes-Oxley
 IPO Readiness  Internal Audit Services
 Bankruptcy & Turnaround  Technology Risk

The Value of SEG

Client Need Defined… SEG’s Value…

Ownership Change Delivering the talent and know-how to execute due
 Mergers & Acquisitions diligence, merger integration, technical accounting,
SEC reporting, IPO readiness, SOX compliance and
 IPO’s more. SEG can mobilize and manage resources for
 Leveraged Buyout special projects, provide professionals to back-fill
positions during the change process or recruit talent
 Private Equity investment to fill roles on a permanent basis.

Representative Clients…
Acqura Loan Services, Inc. Exelon Power Hexion Specialty Chemicals Talk America

Comcast Corporation Frontier Telecommunications PanAmSat Corporation Terra Nova Financial Group

Electro-Motive Diesel, Inc. Graftech, Inc. Olympus Power, LLC Verso Paper, Inc.

The Value of SEG

Compliance Delivering the talent and know-how to enable our
 SEC Reporting clients to comply with applicable regulations across of
broad spectrum of issues. SEG can serve as a
 Financial Restatements technical advisor, mobilize and manage resources
 US GAAP / IFRS for compliance initiatives, provide professionals to
 Sarbanes - Oxley augment client teams during peak compliance
periods, or recruit talent to fill permanent roles.
 Bank Compliance

ABN AMRO E.ON Climate & Renewables Franklin Bank Leo Burnett USA, Inc.

Amerisafe, Inc. FIMAT USA, Inc. GMH Communities Parsons Brinckerhoff

Cambridge Display Tech Foote, Cone & Belding Integra Life Sciences Whitney Bank

The Value of SEG

Business Growth / Downturn - Delivering the talent and know-how to enable an
 Start-up Operations organization to evolve with changing business and
economic circumstances. SEG can quickly provide
 New Management
resources with the right experience to deliver results
 Resource Constraints on an interim basis, back-fill vacant positions, or
 Employee Turnover recruit talent to fill permanent positions from staff to
 Bankruptcy / Turnaround senior executive levels.

Airtricity Corporation Children’s Network, LLC Gamesa Technology Corp. Sandler O’Neill

Ascend Acquisition Corp. CHI-X / Instinet Greatwide Logistics Services Symmetry Holdings

Alaron Futures/Options Foamex International Newtek Business Services Vantium Capital

For More Information

Richard A. Lavinski, CPA Brian G. Markley, CPA
Partner Partner
rlavinski@solomonedwards.com bmarkley@solomonedwards.com
Office Phone: 972-505-2002 Office: 610-902-0440
Mobile: 214-733-6103 Mobile: 484-557-0933

SolomonEdwardsGroup, LLC
14755 Preston Road, Suite 400
Dallas, Texas 75254

Seg Revenue Recognition Slides

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to Seg Revenue Recognition Slides

Similar to Seg Revenue Recognition Slides (20)

Recently uploaded

Recently uploaded (20)

Seg Revenue Recognition Slides