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Revenue Recognition is
Changing
General Principals of Revenue Recognition
Your Logo
.
Persuasive evidence of arrangement exists
EXAMPLE
To ensure that the
understanding
between parties
about the specific
nature and terms of a
transaction has been
finalized.
To account for a
transaction depends on
evidence of the final
understanding between
parties; changes can
result in different
methods of recognizing
revenue
Persuasive
evidence of
arrangement is
based on an
entity’s customary
business practices
Determining If Delivery Has Occurred or Services Have Been
Performed
.
Delivery and Service Terms
should be explicit in the
contract
Revenue is generally recognized
on the delivery of the product and
when the service rendered is
performed
Delivery and Service accidental
delays or postponement should
be explicit for in the contract of
recognizing revenue based on
those stipulation
Entity A is a maid service which
customary practices are for
customers to sign a written
contract. Entity A states in the
contract that revenue is
recognized once services are
performed and the customer is
(reasonably) satisfied. Entity A
performed services at Entity B,
however Entity B stated Entity A
job was poor which Entity A
agreed. Entity A cannot recognize
revenue until the customer is
satisfied even though the services
was already performed.
Fixed or Determinable Fees
Sales price must be fixed or determinable however there is a regard to the amount of
consideration the seller will receive due to existence of uncertainties. In addition,
evaluation of whether an arrangement fee is fixed or determinable can be flexible.
An example is portion of the fee can be fixed or determinable while
the remaining becoming fixed or determinable over time
Factors that impact fixed or determinable fees include cancellation
provisions, estimates of future returns and contingent income
Collectability is reasonably assured
.
To assess if an entity
can collect
receivables or cash
when revenue is
earned, it is usually
applied the same way
as determining
whether a receivable
has become a bad
debt
If collectability from
the customer is
questionable, the
vendor should not
recognize revenue
until it receives the
amount due or
conditions change
The customer
financial
condition is an
indicator of both
its ability to pay
and to
determine if
revenue is
realizable.
If collectability
reasonable assure
from the customer
but changes due to
customer
circumstances and
the vendor
determines collection
from the customer is
no longer probable,
the amount should be
recorded as a bad
debt
The FASB and IASB
issued a converged
guidance on
recognizing revenue
in contracts with
customers
Why Did The FASB Issue A New
Standard on Revenue Recognition?
The objective of the new
guidance is to establish the
principles to report useful
information to users of
financial statements about
the nature, timing, and
uncertainty of revenue from
contracts with customers
Revenue recognition
differs in (GAAP) and
International Financial
Reporting Standards
(IFRS) (both need
improvement)
.
.
01
02
03
04
05
The New Guidance
Removes inconsistencies and
weaknesses in existing
revenue requirements
Provides a more robust
framework for addressing
revenue issues
Improves comparability of
revenue recognition practices
across entities, industries,
jurisdictions, and capital
markets
Provides more useful
information to users of
financial statements through
improved disclosure
requirements
Simplifies the preparation
of financial statements by
reducing the number of
requirements to which an
organization must refer
Step 5: Recognize
revenue when (or
as) the entity
satisfies a
performance
obligation
Step1: Identify the
contract(s) with a
customer.
.
Step 2: Identify
the performance
obligations in
the contract.
Step 4:
Allocate the
transaction
price to the
performance
obligations in
the contract.
Core Principle
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
Step 3: Determine the transaction price
Identify the Contract with a
Customer
A contract is an agreement between two or more parties that
creates enforceable rights and obligations. A Entity should
ensure that the contract meets the following criteria:
Approval and
commitment of the
parties
Identification of the
rights of the parties
Identification of the
payment terms
The contract has
commercial
substance
It is probable that the
entity will collect the
consideration to which
it will be entitled in
exchange
Identify the Performance Obligations in the Contract
A performance obligation is a promise in a contract with
a customer to transfer a good or service to the customer.
A good or service is
distinct when
It is Capable of
being distinct
It is distinct within
the context of the
contract
The customer can benefit
the good or service either
on its own or together
with other resources that
are readily available to
the customer.
The promise to
transfer the good or
service is separately
identifiable from
other promises in
the contract.
Determine the Transaction Price
For a contract that has more than
one performance obligation, an
entity should allocate the
transaction price to each
performance obligation in an
amount that depicts the amount of
consideration to which the entity
expects to be entitled in exchange
for satisfying each performance
obligation
Amounts allocated to a
satisfied performance
obligation should be
recognized as revenue, or as a
reduction of revenue, in the
period in which the transaction
price changes.
Allocate the Transaction Price to the
Performance Obligations in the Contract
All reporting entities will allocate the
transaction price to the good or
service underlying each performance
obligation on a relative stand-alone
selling price basis
There will be consistent
principles for recognizing
revenue regardless of industry
and/or geography
The new guidance includes a cohesive
set of disclosure requirements that will
provide users of financial statements
with useful information about the
organization’s contract with customers.
The new guidance introduces a
constraint on revenue that applies
to variable consideration
Collectability is no longer a
recognition threshold and does
not affect the measurement of
transaction price
Top Changes to
Expect with the
New Standard
• Company A’s has to enter a contract
with the customer regardless of
industry practices and has to identify
the contract and terms with a
customer
• Company A would not use
collectability as a criterion to recognize
revenue. The transaction price will be
equal to the amount of consideration
to which the reporting entity is
entitled- not the amount that the
reporting entity expects to receive.
• Company A would recognize revenue
once it satisfies a performance
obligation which could be at the point
time or over time. The new guidance
put emphasis on the transfer of
control.
• Company A would consider how much
of the amount is variable and estimate
the total consideration to which it is
entitled and update that estimate at
each reporting date.
• Company A’s persuasive evidence of
arrangement to recognize revenue can
be dictated by entity’s customary
business practices.
• Company A would consider
collectability of revenue and if it
determined the customer’s financial
standing is questionable, Company A
would only recognize revenue when
its receives the amount due
• Company A would recognize revenue
once the product or service has been
implemented and the customer is
“satisfied”. (Transfer of risks and
rewards)
• Company A would recognize revenue
in consideration that the price is fixed
or determinable which doesn’t
include variable amounts in the
transaction price until the variability is
resolved.

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Revenue Recognition Is Changing(Funkadelic)

  • 2. General Principals of Revenue Recognition Your Logo
  • 3. . Persuasive evidence of arrangement exists EXAMPLE To ensure that the understanding between parties about the specific nature and terms of a transaction has been finalized. To account for a transaction depends on evidence of the final understanding between parties; changes can result in different methods of recognizing revenue Persuasive evidence of arrangement is based on an entity’s customary business practices
  • 4. Determining If Delivery Has Occurred or Services Have Been Performed . Delivery and Service Terms should be explicit in the contract Revenue is generally recognized on the delivery of the product and when the service rendered is performed Delivery and Service accidental delays or postponement should be explicit for in the contract of recognizing revenue based on those stipulation Entity A is a maid service which customary practices are for customers to sign a written contract. Entity A states in the contract that revenue is recognized once services are performed and the customer is (reasonably) satisfied. Entity A performed services at Entity B, however Entity B stated Entity A job was poor which Entity A agreed. Entity A cannot recognize revenue until the customer is satisfied even though the services was already performed.
  • 5. Fixed or Determinable Fees Sales price must be fixed or determinable however there is a regard to the amount of consideration the seller will receive due to existence of uncertainties. In addition, evaluation of whether an arrangement fee is fixed or determinable can be flexible. An example is portion of the fee can be fixed or determinable while the remaining becoming fixed or determinable over time Factors that impact fixed or determinable fees include cancellation provisions, estimates of future returns and contingent income
  • 6. Collectability is reasonably assured . To assess if an entity can collect receivables or cash when revenue is earned, it is usually applied the same way as determining whether a receivable has become a bad debt If collectability from the customer is questionable, the vendor should not recognize revenue until it receives the amount due or conditions change The customer financial condition is an indicator of both its ability to pay and to determine if revenue is realizable. If collectability reasonable assure from the customer but changes due to customer circumstances and the vendor determines collection from the customer is no longer probable, the amount should be recorded as a bad debt
  • 7.
  • 8. The FASB and IASB issued a converged guidance on recognizing revenue in contracts with customers Why Did The FASB Issue A New Standard on Revenue Recognition? The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers Revenue recognition differs in (GAAP) and International Financial Reporting Standards (IFRS) (both need improvement)
  • 9. . . 01 02 03 04 05 The New Guidance Removes inconsistencies and weaknesses in existing revenue requirements Provides a more robust framework for addressing revenue issues Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets Provides more useful information to users of financial statements through improved disclosure requirements Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer
  • 10. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation Step1: Identify the contract(s) with a customer. . Step 2: Identify the performance obligations in the contract. Step 4: Allocate the transaction price to the performance obligations in the contract. Core Principle 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 Step 3: Determine the transaction price
  • 11. Identify the Contract with a Customer A contract is an agreement between two or more parties that creates enforceable rights and obligations. A Entity should ensure that the contract meets the following criteria: Approval and commitment of the parties Identification of the rights of the parties Identification of the payment terms The contract has commercial substance It is probable that the entity will collect the consideration to which it will be entitled in exchange
  • 12. Identify the Performance Obligations in the Contract A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. A good or service is distinct when It is Capable of being distinct It is distinct within the context of the contract The customer can benefit the good or service either on its own or together with other resources that are readily available to the customer. The promise to transfer the good or service is separately identifiable from other promises in the contract.
  • 14. For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation Amounts allocated to a satisfied performance obligation should be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes. Allocate the Transaction Price to the Performance Obligations in the Contract
  • 15. All reporting entities will allocate the transaction price to the good or service underlying each performance obligation on a relative stand-alone selling price basis There will be consistent principles for recognizing revenue regardless of industry and/or geography The new guidance includes a cohesive set of disclosure requirements that will provide users of financial statements with useful information about the organization’s contract with customers. The new guidance introduces a constraint on revenue that applies to variable consideration Collectability is no longer a recognition threshold and does not affect the measurement of transaction price Top Changes to Expect with the New Standard
  • 16. • Company A’s has to enter a contract with the customer regardless of industry practices and has to identify the contract and terms with a customer • Company A would not use collectability as a criterion to recognize revenue. The transaction price will be equal to the amount of consideration to which the reporting entity is entitled- not the amount that the reporting entity expects to receive. • Company A would recognize revenue once it satisfies a performance obligation which could be at the point time or over time. The new guidance put emphasis on the transfer of control. • Company A would consider how much of the amount is variable and estimate the total consideration to which it is entitled and update that estimate at each reporting date. • Company A’s persuasive evidence of arrangement to recognize revenue can be dictated by entity’s customary business practices. • Company A would consider collectability of revenue and if it determined the customer’s financial standing is questionable, Company A would only recognize revenue when its receives the amount due • Company A would recognize revenue once the product or service has been implemented and the customer is “satisfied”. (Transfer of risks and rewards) • Company A would recognize revenue in consideration that the price is fixed or determinable which doesn’t include variable amounts in the transaction price until the variability is resolved.