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McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project
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McGladrey presentation at June 2012 EEI Public Filers Symposium - Update on Joint Revenue Recognition Project

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Update on Joint Revenue Recognition Project …

Update on Joint Revenue Recognition Project

Speaker - Brian Marshall

This session focuses on the FASB and IASB's second joint exposure draft on Revenue Recognition issued in November 2011, a key step in the Board's efforts to finalize converged guidance.

Published in: Business
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  • 1. Update on Joint Revenue Recognition ProjectEEi Public Filers Symposium - June 21, 2012 © 2012 McGladrey LLP. All Rights Reserved. © 2012 McGladrey LLP. All Rights Reserved.
  • 2. Brian Marshall Biographybrian.marshall@mcgladrey.com 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, 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 IBM’s Accounting Practices Group, serving as a resource on complex technical accounting matters for the Company’s global accounting community. Brian also was employed by Deloitte 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. 2 © 2012 McGladrey LLP. All Rights Reserved.
  • 3. McGladrey overview 5th largest accounting firm in the U.S. Provide assurance, tax and consulting services Nearly 6,500 professionals and associates in more than 70 offices nationwide US member of RSM International (RSMI) – 6th largest network of independent accounting, tax and consulting firms worldwide - More than 700 offices in 86 countries with over 32,000 people 3 © 2012 McGladrey LLP. All Rights Reserved.
  • 4. Agenda Background and scope Revised proposed revenue model Other revenue issues Closing 4 © 2012 McGladrey LLP. All Rights Reserved.
  • 5. Background and scope © 2012 McGladrey LLP. All Rights Reserved.
  • 6. Overview Preliminary views document issued in Dec. 2008 Exposure draft issued in June 2010 Revised exposure draft issued in Nov. 2011 with comments due March 2012 Redeliberations began in June 2012 Final standard expected in early 2013 6 © 2012 McGladrey LLP. All Rights Reserved.
  • 7. Scope Applicable to all industries and 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 Recognition and measurement principles also applicable to sales of nonfinancial assets that are not classified as revenue 7 © 2012 McGladrey LLP. All Rights Reserved.
  • 8. 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 © 2012 McGladrey LLP. All Rights Reserved.
  • 9. Revised proposed revenue model © 2012 McGladrey LLP. All Rights Reserved.
  • 10. Overview  Approach to comply with core principle Identify the Identify the Determine Allocate the Recognizecontract with separate the transaction revenue when a customer performance transaction price to the (or as) each (Step 1) obligations in price separate performance the contract (Step 3) performance obligation is (Step 2) obligations satisfied (Step 4) (Step 5) 10 © 2012 McGladrey & Pullen, LLP. All Rights Reserved. © 2012 McGladrey LLP. All Rights Reserved.
  • 11. 1. Identify the contract with a customer Enforceable agreement between parties Can be written, oral or implied Combination - Required for contracts entered into at or near the same time if certain criteria are met Modifications - Treat separately if separate performance obligation is added and the consideration is consistent with its standalone selling price - Otherwise combine with remaining goods or services 11 © 2012 McGladrey LLP. All Rights Reserved.
  • 12. 2. Identify separate performance obligations Promise in a contract to transfer a good or service Account for separately if distinct because either of the following criteria are met: - 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 both: - Highly interrelated and require significant integration service; and - Significantly modified or customized to fulfill contract 12 © 2012 McGladrey LLP. All Rights Reserved.
  • 13. 3. Determine the transaction price Amount of consideration to which an entity expects to be entitled 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 exists - Can ignore if time between payment and transfer of goods or services is one year or less 13 © 2012 McGladrey LLP. All Rights Reserved.
  • 14. 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 uncollectible amounts adjacent to revenue 14 © 2012 McGladrey LLP. All Rights Reserved.
  • 15. 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 are allocated on a relative standalone selling price basis unless certain criteria are met 15 © 2012 McGladrey LLP. All Rights Reserved.
  • 16. 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 • Another entity would not need to reperform work completed to date • Vendor has right to payment for performance to date Select method of progress toward completion (output or input) 16 © 2012 McGladrey LLP. All Rights Reserved.
  • 17. 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 17 © 2012 McGladrey LLP. All Rights Reserved.
  • 18. Other revenue issues © 2012 McGladrey LLP. All Rights Reserved.
  • 19. Onerous performance obligations Only applicable to performance obligations satisfied over a period greater than one 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 and materials - Allocated costs directly related to contract - Costs explicitly chargeable to the customer - Other costs incurred only because contract entered into 19 © 2012 McGladrey LLP. All Rights Reserved.
  • 20. 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 Practical expedient to expense costs to obtain a contract as incurred if amortization period would have been one year or less 20 © 2012 McGladrey LLP. All Rights Reserved.
  • 21. 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 21 © 2012 McGladrey LLP. All Rights Reserved.
  • 22. Warranties Customer option to purchase separately - Separate performance obligation recognized over time (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 22 © 2012 McGladrey LLP. All Rights Reserved.
  • 23. 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 23 © 2012 McGladrey LLP. All Rights Reserved.
  • 24. Other issues Customers’ unexercised rights (“Breakage”) - Relatively consistent with current U.S. GAAP practice Licensing and rights to use - Same guidance as for other goods or services - Revenue recognized at point in time when control transfers 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) 24 © 2012 McGladrey LLP. All Rights Reserved.
  • 25. Treatment similar to current US GAAP Nonrefundable upfront fees Principal vs. agent considerations Consignment arrangements Bill-and-hold arrangements Customer acceptance 25 © 2012 McGladrey LLP. All Rights Reserved.
  • 26. 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 26 © 2012 McGladrey LLP. All Rights Reserved.
  • 27. 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 27 © 2012 McGladrey LLP. All Rights Reserved.
  • 28. Closing © 2012 McGladrey LLP. All Rights Reserved.
  • 29. McGladrey thought leadership FASB and IASB Issue Revised Exposure Draft on Revenue Recognition Revised Revenue Recognition Exposure Draft – What Does It Mean For You? http://mcgladrey.com/Assurance/Accounting- Resources http://mcgladrey.com/Publications/Publication- Subscription © 2012 McGladrey LLP. All Rights Reserved.
  • 30. Questions? 30 © 2012 McGladrey LLP. All Rights Reserved.
  • 31. For more information, please contact:Brian Marshall* brian.marshall@mcgladrey.com( 203.312.9329 31 © 2012 McGladrey LLP. All Rights Reserved.
  • 32. McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting, tax and McGladrey LLPconsulting firms. The member firms of RSMI collaborate to provide services to global clients, but are separate anddistinct legal entities which cannot obligate each other. Each member firm is responsible only for its own acts and 800.274.3978omissions, and not those of any other party. www.mcgladrey.comMcGladrey, the McGladrey signature, The McGladrey Classic logo, The power of being understood, Power comesfrom being understood and Experience the power of being understood are trademarks of McGladrey LLP.© 2012 McGladrey LLP. All Rights Reserved. © 2012 McGladrey LLP. All Rights Reserved.

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