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.