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©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Brian Marshall, Partner, McGladrey & Pullen, LLP
December 2011
Lates...
2 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
McGladrey overview
 5th largest accounting firm in the U.S.
 Provi...
3 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Agenda
 Revised revenue recognition Exposure Draft
 Updated multip...
4 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Revised revenue recognition
Exposure Draft - “Revenue from
Contracts...
5 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Overview
 Preliminary Views document issued in
December 2008
 Expo...
6 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Overview
 Scope
- Applicable to all industries & entities
- Specifi...
7 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Overview
 Core principle
- Recognize revenue to depict the transfer...
8 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Overview
 Approach to comply with this core principle
1. Identify t...
9 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
1. Identify the contract with a customer
 Contract is an enforceabl...
10 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
2. Identify separate performance obligations
 Promise in a contrac...
11 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
3. Determine the transaction price
 Amount of consideration to whi...
12 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
3. Determine the transaction price
 Noncash consideration
- Measur...
13 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
4. Allocate the transaction price
 Generally based on relative sta...
14 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
5. Recognize revenue
 Recognize revenue as performance obligations...
15 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
5. Recognize revenue
 If prior criteria not met then satisfied at ...
16 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Onerous performance obligations
 Only applicable to performance ob...
17 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Contract costs
 Capitalize direct costs of fulfilling a contract o...
18 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Return rights
 Defer revenue and record refund liability for
goods...
19 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Warranties
 Customer option to purchase separately
- Separate perf...
20 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Optional goods or services
 Considered a performance obligation if...
21 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Other issues
 Customers’ unexercised rights (“Breakage”)
- Relativ...
22 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Treatment similar to current US GAAP
 Nonrefundable upfront fees
...
23 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Balance sheet presentation
 Asset/liability based on comparison of...
24 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Disclosures / transition / effective date
 Disclosure objective:
-...
25 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
Updated multiple deliverable
arrangements guidance
(ASU 2009-13 & 1...
26 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-13 (EITF 08-1), “Revenue
Arrangements with Multiple Delive...
27 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-13 - Separation guidance
 Delivered item is a separate un...
28 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-13 - Allocation guidance
 Allocate consideration using re...
29 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-13 - Estimating standalone
selling price
 No specific met...
30 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-13 - Disclosures
 Ongoing disclosures
- Quantitative and ...
31 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-14 (EITF 09-3), “Certain Revenue
Arrangements that Include...
32 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-14 - Overview
 EITF agreed to amend scope of ASC 985-605
...
33 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-14 - Determining “Function Together to
Deliver the Product...
34 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
ASU 2009-14 - Determining “Function Together to
Deliver the Product...
35 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
McGladrey thought leadership
Accounting publications and resource s...
36 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
McGladrey thought leadership
Publications subscription site:
http:/...
37 ©2011 McGladrey & Pullen, LLP. All Rights Reserved.
QUESTIONS?
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Latest issues in revenue recognition - presented by McGladrey at December 2011 EEI Conference on Advanced SEC/FASB Reporting and Compliance Conference

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McGladrey & Pullen presentation on revised revenue recognition exposure draft at December 2011 Executive Enterprise Institute Advanced SEC/FASB Reporting and Compliance Conference

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Transcript of "Latest issues in revenue recognition - presented by McGladrey at December 2011 EEI Conference on Advanced SEC/FASB Reporting and Compliance Conference"

  1. 1. 1 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Brian Marshall, Partner, McGladrey & Pullen, LLP December 2011 Latest issues in revenue recognition
  2. 2. 2 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. McGladrey overview  5th largest accounting firm in the U.S.  Provide assurance, tax and consulting services  7,000 professionals in more than 80 offices nationwide  $1.3 billion in total revenue and more than 50,000 clients  US member of RSM International (RSMI) – 6th largest global network of accounting and consulting firms with $3.9 billion in total revenue - 700 offices in 83 countries with more than 32,500 professionals
  3. 3. 3 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Agenda  Revised revenue recognition Exposure Draft  Updated multiple deliverable arrangements guidance
  4. 4. 4 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Revised revenue recognition Exposure Draft - “Revenue from Contracts with Customers”
  5. 5. 5 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Overview  Preliminary Views document issued in December 2008  Exposure Draft issued in June 2010  Revised Exposure Draft issued in November 2011  Final standard expected in late 2012
  6. 6. 6 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Overview  Scope - Applicable to all industries & entities - Specific contracts with customers outside of scope: • Financial instruments • Guarantees (other than warranties) • Insurance • Leases • Certain nonmonetary exchanges - Contracts with performance obligations in multiple standards
  7. 7. 7 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Overview  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
  8. 8. 8 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Overview  Approach to comply with this core principle 1. Identify the contract with a customer 2. Identify the separate performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when (or as) each separate performance obligation is satisfied
  9. 9. 9 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 1. Identify the contract with a customer  Contract is an 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 other criteria are met  Contract modifications - Treat separately if separate performance obligation is added with consideration consistent with standalone selling price - Otherwise combine with original contract
  10. 10. 10 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 2. Identify separate performance obligations  Promise in a contract to transfer a good or service  Account for separately if distinct based on meeting either of the following criteria: - Good or service is regularly sold separately by the entity; or - Customer can benefit from good or service on its own or together with other readily available resources  However, bundle of promised goods or services is accounted for as one performance obligation if: - Highly interrelated and require significant integration service; and - Significantly modified or customized to fulfill contract
  11. 11. 11 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 3. Determine the transaction price  Amount of consideration to which an entity expects to be entitled to from a customer  Variable consideration - Estimate based on probability-weighted or most- likely amount  Time value of money - Only affects transaction price if significant financing component - Can ignore if time between payment and transfer of goods or services is one year or less
  12. 12. 12 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 3. Determine the transaction price  Noncash consideration - Measure at fair value 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 considered in transaction price - Record allowance adjacent to revenue
  13. 13. 13 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 4. Allocate the transaction price  Generally based on relative standalone selling price of performance obligations  Standalone selling price - Observable price when sold separately (best) - Otherwise estimate: • Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?  Subsequent changes allocated on a relative standalone selling price basis unless certain criteria are met
  14. 14. 14 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 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 - Does not create an asset with an alternative use and one of following criteria is met: • Customer receives a benefit as entity performs tasks • Another entity would not need to reperform tasks performed to date • Vendor has right to payment for performance to date  Select method of progress toward completion (output or input)
  15. 15. 15 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 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 and risks and rewards of ownership - Customer has accepted goods or services  Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: - Experience with similar performance obligations - Whether that experience is predictive of outcome
  16. 16. 16 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Onerous performance obligations  Only applicable to performance obligations satisfied over period > 1 year  Recognize liability if allocated transaction price is less than lower of: - Direct costs to satisfy performance obligation; or - Amount to be paid to exit the performance obligation  Direct costs include: - Direct labor & materials - Allocated costs directly related to contract - Costs explicitly chargeable to the customer - Other costs incurred only because contract entered into
  17. 17. 17 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 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 contract if expected to be recovered  Practical expedient to expense costs as incurred if amortization period would have been less than one year
  18. 18. 18 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Return rights  Defer revenue and record refund liability for goods expected to be returned  Adjust refund liability (and revenue) for changes in return expectations  Record asset (rather than cost of sales) for right to recover products at former carrying amount less costs of recovery
  19. 19. 19 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Warranties  Customer option to purchase separately - Separate performance obligation (warranty service)  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
  20. 20. 20 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. 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
  21. 21. 21 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Other issues  Customers’ unexercised rights (“Breakage”) - Relatively consistent with current US GAAP  Licensing and rights to use - Same guidance as for other goods or services - Revenue recognized at point in time if separate performance obligation  Repurchase agreements - Entity obligation (forward) or right (call option) to repurchase asset - Customer right to require entity to repurchase (put option)
  22. 22. 22 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Treatment similar to current US GAAP  Nonrefundable upfront fees  Principal vs. agent considerations  Consignment arrangements  Bill-and-hold arrangements  Customer acceptance
  23. 23. 23 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Balance sheet presentation  Asset/liability based on comparison of entity’s performance to customer’s performance  Entity > customer = asset  Entity < customer = liability  Receivables are classified separately from other asset - Unconditional right to receive consideration
  24. 24. 24 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Disclosures / transition / effective date  Disclosure objective: - Quantitative and qualitative information regarding nature, amount, timing and uncertainty of revenue and related cash flows  Retrospective transition with certain practical expedients  Effective date no earlier than 2015 for public entities and 2016 for nonpublic entities.  Comments due by March 13
  25. 25. 25 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. Updated multiple deliverable arrangements guidance (ASU 2009-13 & 14)
  26. 26. 26 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-13 (EITF 08-1), “Revenue Arrangements with Multiple Deliverables”  Response to criticisms of EITF 00-21 (ASC 605- 25) - Often unable to separate into multiple units of accounting (lack of fair value of the undelivered items) - Accounting often did not match economics  Allows more flexibility in determining values of separate elements  Effective for arrangements entered into or materially modified in fiscal years beginning on or after 6/15/2010
  27. 27. 27 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-13 - Separation guidance  Delivered item is a separate unit of accounting if the following criteria are met: - The delivered item has value to the customer on a standalone basis • Does vendor sell the item separately? • Can customer resell item on a standalone basis? - There is objective and reliable evidence of the fair value of the undelivered item(s) - If the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is probable and within control of vendor
  28. 28. 28 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-13 - Allocation guidance  Allocate consideration using relative selling price method - Eliminates requirement for objective and reliable evidence of FV of undelivered items - Eliminates use of residual method; probably results in earlier recognition  Hierarchy of evidence to use for allocation - Vendor specific objective evidence (VSOE) of selling price - Third-party evidence (TPE) of selling price - Best estimate of standalone selling price • No practicality exception provided
  29. 29. 29 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-13 - Estimating standalone selling price  No specific methodology prescribed  Gather all reasonably available data points  Adjust based on: - Market conditions - Entity-specific factors  Consider all information that is reasonably available without undue cost or effort to determine estimated selling price
  30. 30. 30 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-13 - Disclosures  Ongoing disclosures - Quantitative and qualitative information about significant judgments used in applying ASU 2009-13 and changes in those judgments or in the application that may significantly affect the allocation of revenue - Inputs, methods, and significant assumptions used in evaluating arrangements and the significant deliverables in those arrangements  Transition disclosures (if adopt prospectively) - Qualitative description of how the ASU was adopted - Supplement with quantitative disclosures if material
  31. 31. 31 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-14 (EITF 09-3), “Certain Revenue Arrangements that Include Software Elements”  EITF consensus in ASU 2009-13 (EITF 08-1) led to this Issue  Effective date mirrors ASU 2009-13  Should scope of ASC 985-605 (SOP 97-2) and/or criteria be eased? - ASC 985-605 seen as very conservative • No VSOE = no separation; defer until established or delivered - Does scope capture more arrangements than intended? • Are underlying economics being distorted as a result?
  32. 32. 32 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-14 - Overview  EITF agreed to amend scope of ASC 985-605 - Tangible products containing software components and non- software components that function together to deliver the product's essential functionality should be considered non- software deliverables  The following are excluded from ASC 985-605 scope: - Non-software components of software-reliant tangible products - Software components bundled with tangible products if the software components and non-software components function together to deliver the product’s essential functionality - Undelivered elements that relate to software that is essential to the above described tangible product’s functionality
  33. 33. 33 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-14 - Determining “Function Together to Deliver the Product’s Essential Functionality”  Rebuttable presumption that software elements are essential to the functionality of the tangible product if sales of the tangible product without the software elements are infrequent  The evaluation to determine whether or not the tangible product and software are functioning together is done at the product level, not the model level  The separate standalone sale of the software does not cause a presumption that the software is not essential to the functionality of the tangible product
  34. 34. 34 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. ASU 2009-14 - Determining “Function Together to Deliver the Product’s Essential Functionality”  Software elements do not need to be embedded on a device to be considered essential to the device’s functionality  The non-software elements of the tangible product must substantively contribute to the tangible product’s essential functionality Entities will need to evaluate existing product lines to determine which software stays within the scope of ASC 985-605 and which does not
  35. 35. 35 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. McGladrey thought leadership Accounting publications and resource site: http://mcgladrey.com/Assurance/Accounting-Resources
  36. 36. 36 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. McGladrey thought leadership Publications subscription site: http://mcgladrey.com/Publications/Publication-Subscription
  37. 37. 37 ©2011 McGladrey & Pullen, LLP. All Rights Reserved. QUESTIONS?
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