All entities will have to reevaluate their revenue recognition processes when the Financial Accounting Standard Board (FASB)’s Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) is adopted, beginning with those early adopting in 2017.

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customer specifications may recognize revenue over
time under Topic 606 if the good manufactured does
not have an alternate use for the manufacturer and
the manufacturer has a right to payment. The new
standard specifics that entities can recognize revenue
over time if one of the following are present:
• Customer receives and consumes the benefit as
the performance occurs;
• The performance creates or enhances an asset
the customer controls; or
• The performance creates an asset without an
alternative use to the entity, and the entity has a
right to payment for performance completed to
date.
A manufacturer recognizing revenue over time will
be required to determine an appropriate method of
recognition, which may include a method based on
cost (similar to the percentage of completion method
under existing standards) or based on time, milestones
or other relevant metrics.
Point in Time: Revenue that does not meet the
criteria for over-time revenue recognition must be
recognized at a point in time. Unlike existing guidance
that emphasizes an analysis based on the transfer of
risk and rewards, Topic 606 provides multiple, evenly
weighted indicators to use when evaluating if control
has transferred at a point in time including:
All entities will have to reevaluate their revenue
recognition processes when the Financial Accounting
Standard Board (FASB)’s Accounting Standard
Update (ASU) 2014-09, Revenue from Contracts with
Customers (Topic 606) is adopted, beginning with
those early adopting in 2017.
Manufacturing companies face unique considerations
with the new revenue recognition guidance. They
should consider how the following situations and
scenarios may be affected by the ASU now in order to
prepare for the guidance’s effective date.
Revenue Recognition Methods That Could
Change
Over-Time Recognition: Under existing guidance,
manufacturers generally recognize revenue at a
point in time, such as when a product is shipped or
delivered. The new guidance will require consideration
if point in time recognition continues to be appropriate.
Under Topic 606, the reporting entity recognizes
revenue when it transfers control of the contracted
good or service to the customer. The guidance for
when control is transferred over-time may result in
more performance obligations being recognized over
time. For instance, certain types of manufacturers
such as “job shops” that create unique products to
November 2015
Revenue Recognition Considerations for the Manufacturing Industry

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• The reporting entity has a right to payment,
• The customer has taken legal title,
• The customer has physical possession,
• The customer has significant risks and rewards,
and
• The customer has accepted the good or service.
Sell-Through Method: In current guidance,
manufacturers may recognize revenue using the sell-
through method if a price is not fixed or determinable
when a sale occurs to a distributor. Under the sell-
through method, the manufacturer recognizes revenue
when the product is sold to the end user. The new
guidance will require manufacturers to estimate the
amount of consideration and recognize revenue when
they have transferred control of a good or service to a
distributor. The estimation process will be complicated
by the application of the constraint on variable
consideration. To the extent that consideration is
variable, such as due to a potential price concession,
the manufacturer may only recognize revenue at the
time control is transferred to the extent it is probable
a significant reversal of revenue due to reductions in
the estimate of variable consideration will not occur.
BillandHold-Non-publicentitieshavenothadguidance
on the accounting for bill and hold transactions and
have often referred to strict rules-based interpretation
from the Securities and Exchange Commission
(SEC). The SEC guidance currently has seven criteria
an entity must meet to use the bill and hold method of
revenue recognition. Among the criteria are a fixed-
delivery schedule and that the buyer requested a
deferral for a “substantive” reason. The new guidance
provides explicit guidance that is applicable to all
entities and focuses on meeting only four criteria:
• The reason is substantive,
• The product is separately identified,
• The product is ready for physical transfer, and
• The entity cannot be able to use or redirect the
product.
Complex Areas in the New Guidance
A number of principles in the new guidance may be
complicated for manufacturers to implement. Examine
these areas of the revenue recognition standard now
to determine how the process of recognizing revenue
may change under Topic 606:
Variable Consideration- In determining the purchase
price for the contracted transaction, entities may have
to estimate variable consideration. Forms of variable
consideration that will be common for manufacturers
include: coupons, rebates, volume discounts, price
protection, rights of return and price concessions.
Manufacturers will have to estimate the variable
consideration using either the most likely amount
or the expected value of the consideration. Entities
recognize variable consideration only to the extent
that it is not probable that a significant reversal will
occur, and they must update the estimate of variable
consideration each reporting period.
Time-Value of Money- Payments for goods and
services may come before or after control of the good
is transferred to the customer. If the period between
transfer of control and receipt of payment exceeds
a year, entities must consider whether a significant
financing component exists as part of their revenue
recognition process. Financing exists when there is
an explicit or implicit significant benefit to financing.
It does not exist if:
• Payment was received in advance and transfer

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
was at the discretion of the customer;
• Consideration is variable based on a future event
not controlled by the customer or the manufacturer;
or,
• There is a timing difference for reasons other than
financing, and the timing difference is proportional
to those reasons.
Manufacturers that have contracts that include
significant financing will be required to recognize
interest income or expense to properly account for the
financing aspect of the transaction.
Multiple Performance Obligations- A manufacturer is
required under the new guidance to determine if it has
promised to deliver more than one distinct good or
service (or bundle of goods and services) in a contract.
Determining the distinct performance obligations
within a contract under the new guidance may be
challenging to manufacturers. In some instances,
services, free products, or other offerings that are
currently not accounted for separately for revenue
recognition may now be recognized separately based
on an allocation of the transaction price.
Under the new guidance, warranty provisions must be
reevaluated. Extended warranties and warranties that
provide services other than assurance that a product
complies with its specifications are accounted for as
separate performance obligations within a contract
under Topic 606. Offers of significant discounts,
loyalty programs and other options may also be
accounted for as separate performance obligations in
the new guidance.
More Changes to Topic 606 Expected
Since the announcement of the new revenue
recognition guidance, the FASB has made several
modifications to the ASU. It deferred the revenue
recognition standard by one year and has also
proposed changes to identifying performance
obligations, evaluating licenses, and principal versus
agent considerations. Several practical expedients
have also been proposed to make the guidance
easier to apply. A sales tax practical expedient similar
to existing guidance has been proposed that would
permit all sales taxes to be presented net. The FASB
also proposed a clarification that would cause shipping
to generally not be a distinct performance obligation.
Proposed practical expedients for transition to the
new guidance would simplify the transition for long-
term and completed contracts. More information
about the finalized and proposed changes to revenue
recognition can be found on the MHM Revenue
Recognition Resources page.
MHM will keep you up-to-date as further guidance
and changes are released. For specific comments,
questions or concerns about the revenue recognition
standard, please contact James Comito, Brad
Hale or Mark Winiarski of the MHM Professional
Standards Group. James can be reached at
jcomito@cbiz.com or 858.795.2029. Brad can
be reached at bhale@cbiz.com or 727.572.1400.
Mark can be reached at mwiniarski@cbiz.com or
816.945.5614.