Seg Revenue Recognition Slides

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Seg Revenue Recognition Slides

  1. 1. Extreme Makeover -Revenue Recognition Joint Project of the FASB and IASB Revenue from contracts with customers
  2. 2. Learning Objectives• Provide history behind and current status of the new revenue accounting rules• Review the new five-step recognition model• Illustrate key concepts through examples• Impact considerations and next steps
  3. 3. History – Why the Shift to a New Framework?Objectives of the FASB & IASB…• One global standard for revenue accounting and reporting• Currently IFRS guidance is not extensive – users often refer to US GAAP for specific guidance• Currently US GAAP guidance is comprised of 1) over- riding guidelines established by the SEC, and 2) industry specific bright line rules• Inconsistencies exist between industries• New standard designed to promote consistency and comparability across industries and capital markets
  4. 4. Timeline & Current Status• Project began in 2006• Initial Exposure Draft Issued 2010• Revised Exposure Draft Issued November 14, 2011• Final Standard Expected in early 2013• Effective Date – fiscal years beginning on or after January 1, 2015• Full Retrospective Application – therefore public companies must start complying in 2013 to facilitate on time adoption
  5. 5. 5 Step Revenue Recognition ModelStep 1 Identify the contract(s) with the customerStep 2 Identify separate performance obligations in the contract Determine transaction price and amounts not expected toStep 3 be collected Allocate transaction price to the separate performanceStep 4 obligations Recognize revenue when goods and services are transferredStep 5 to the customer and performance obligations are complete
  6. 6. Step 1 Identify the contract(s) with the customer Issue Key ConsiderationsCombining  If separate contracts were negotiated togetherContracts for one purpose  If price interdependence exists between two otherwise separate contractual arrangements  If performance links exist between two separate contracts – one combined performance obligation may existModifications  Combine with initial contract, unless…  Modification creates new and separate performance obligation  The price = stand-alone selling price for that performance obligation
  7. 7. Modification – Illustrative Example• On January 1, Company A contracts to  Modification was made in close sell 20 truck bodies to Company B at a proximity to original contract price of $9,000 per unit for a total transaction value of $180,000  Unfulfilled performance obligation (standard price is $10,000 per unit). remained from original contract• Truck bodies will be delivered in 2 equal shipments on January 31 and  No price interdependence – March 31. modification sold at list price• On March 1, Company A modifies the contract to add an additional 10 truck  The March 1st modification bodies to Company B for $100,000. represents a stand alone performance obligation Combine or Separate? Answer: Separate
  8. 8. Modification – Illustrative Example• On January 1, Company A contracts to  Modification was made in close sell 20 truck bodies to Company B at a proximity to original contract price of $9,000 per unit for a total transaction value of $180,000  Unfulfilled performance obligation (standard price is $10,000 per unit). remained from original contract• Contract defines discount structure for future purchases  Price interdependence does exist – original contract defines discount• On March 1, Company A modifies the structure contract to add 10 additional truck bodies to Company B for $80,000 to be delivered June 30th (pursuant to the defined discount structure). Answer: Combine Combine or Separate?
  9. 9. Step 2 Identify separate performance obligations in the contract Issue Key ConsiderationsHow do we identify  If goods and services are “distinct”performanceobligations?  Distinct means…  Good or service is sold separately  Good or service has stand alone value to customerWhen should goods  If both of the following criteria are met…and services bebundled together?  Goods and services are highly interrelated and seller provides significant service of integrating goods and services on customer’s behalf  Seller is engaged by buyer to significantly modify or customize the goods or services for buyer’s use
  10. 10. Step 2 Identify separate performance obligations in the contract Issue Key ConsiderationsHow are warranties  Current accounting guidance calls for costaccounted forunder the new accruals for all warrantiesstandard?  Under new guidance, warranties that are sold separately represent a separate performance obligation  Warranties that meet the definition of performance obligation will be subject to an allocated portion of the transaction price based upon relative stand-alone sales prices
  11. 11. Determine transaction price and amounts not expected toStep 3 be collected Issue Key ConsiderationsWhat is the impact  Examples include rebates, credits, performanceof variableconsideration on bonuses, contingent consideration (royalties)revenue  Generally, current US GAAP defers recognitionrecognition? until contingency is fulfilled  The new standard will require management to estimate variable consideration  As a result, many organizations will recognize revenue related to variable consideration sooner Aspect of the new standard that will generally increase revenue Aspect of the new standard that will generally decrease revenue
  12. 12. Variable Consideration – Illustrative Example• Company A provides an outsourced  Probability weighted estimate service to its customers. Typical approach is utilized contracts include a scaled performance bonus related to  Under current US GAAP, Company efficiency metrics achieved within a A would not recognize any revenue defined timeframe. related to the performance bonus• Management estimates its until the precise amount earned performance bonus under a new becomes known (fixed and contract as follows: determinable fee requirement)50% Chance of $100,000 = $50,00025% Chance of $50,000 = $12,500  Under the new standard, Company25% Chance of $0 = $0 A will include $62,500 in the total transaction value to be allocated to the performance obligations
  13. 13. Determine transaction price and amounts not expected toStep 3 be collected Issue Key ConsiderationsHow is collection  Under current US GAAP collectibility is a pre-risk accounted forunder the new requisite for revenue recognitionstandard?  Under the new standard, collectibility risk will not preclude revenue recognition  Management will estimate impairment loss on receivables and deduct from gross revenue on face of income statement  Under current US GAAP bad debt expense does not reduce gross margin  Under the new standard, recorded impairment losses will reduce gross margin Aspect of the new standard that will generally increase revenue Aspect of the new standard that will generally decrease revenue
  14. 14. Collectibility– Illustrative Example• Company A operates as a business to • Cost of sales per transaction is $3,000 consumer products seller. • Historic bad debt write-offs at 10%• Typical customer sales transactions total $5,000 Current Accounting New StandardRevenue $5,000 Revenue $5,000Cost of Sales $3,000 Impairment Loss (500)Gross Margin $2,000 Net Revenue $4,500Gross Margin % 40% Cost of Sales $3,000Bad Debt Expense $500 Gross Margin $1,500 Gross Margin % 30% Bad Debt Expense $0
  15. 15. Allocate transaction price to the separate performanceStep 4 obligations Issue Key ConsiderationsHow do we allocate  Based on relative stand alone sales pricesthe transactionprice?  If a stand-alone sales price is not available then management must estimate the price at which it would sell that good or service  Under current US GAAP (in particular in the software sector), absence of VSOE of fair value generally results in revenue deferrals  Estimation methods can include…  Cost plus a reasonable margin  Market prices for similar goods and services  Residual method Aspect of the new standard that will generally increase revenue Aspect of the new standard that will generally decrease revenue
  16. 16. Transaction Price Allocation – Illustrative Example• Company A is a electronics products • 100 Hours of Design Service – Stand- and services company. alone price is $500 per hour ($50,000)• It has entered into a contract with a • Extended warranty – Stand-alone customer that includes multiple price is $10,000 performance obligations including: • Contract value is $150,000• Electronic component products – Stand-alone price is $100,000 Performance Stand-alone Discount Factor Allocated Obligation price ($150,000 / $160,000) Price Electronic components $100,000 93.8% $93,750 Design services $50,000 93.8% $46,875 Extended warranty $10,000 93.8% $9,375 Totals $160,000 $150,000
  17. 17. Residual Method Example – Illustrative Example• Assume the same fact pattern as in the previous example• In addition to the 3 electronic components noted previously, Company A will also manufacture and deliver a custom component built to the customer’s specifications that it has never before built nor sold separately• Assume contract value is $175,000 Performance Obligation Stand-alone Discount Factor Allocated price ($175,000 / $175,000) PriceElectronic components $100,000 100% $100,000Design services $50,000 100% $50,000Extended warranty $10,000 100% $10,000NEW special component $15,000 100% $15,000Totals $175,000 $175,000
  18. 18. Modification / Price Allocation – Illustrative Example• On January 1, Company A contracts to sell 20 truck bodies to Company B at a Date Revenue Note price of $9,000 per unit for a total January 31st $90,000 Delivery of first 10 truck transaction value of $180,000 bodies (standard price is $10,000 per unit). March 31st $83,333 Second 10 trucks delivered (cumulative catch up)• Contract defines discount structure June 30th $86,667 Last 10 trucks delivered for future purchases Totals $260,000 Combined transaction value now fully recognized• On March 1, Company A modifies the Impact contract to add 10 additional truck bodies to Company B for $80,000 to Unlike current US GAAP, the new standard’s be delivered June 30th (pursuant to contract modification feature is likely to result in adjustments to revenue recorded on the defined discount structure). performance obligations that have already been recognized Aspect of the new standard that will generally decrease revenue
  19. 19. Recognize revenue when goods and services are transferredStep 5 to the customer and performance obligations are complete Issue Key ConsiderationsWhen is a  Promised good or service is transferred to theperformanceobligation satisfied? customer  Control is the key concept to understand  Control is the ability to direct the use of and receive the benefit from the good and service Practice Aid – Indicators that control has passed to customer• Customer has unconditional • Customer bears the risks and rewards obligation to pay of ownership• Customer has legal title to goods • Customer formally accepts goods or• Customer has physical possession of service the goods
  20. 20. Recognize revenue when goods and services are transferredStep 5 to the customer and performance obligations are complete Issue Key ConsiderationsHow is the passage  Original exposure draft did not make a distinctionof control viewedfor service on passage of control for service companiescompanies?  Now the new standard includes the concept of “continuous” passage of control  A performance obligation is satisfied continuously if…  Seller’s performance creates or enhances an asset that the customer controls, or  Seller’s performance does not create an asset with alternative use
  21. 21. Other Important Highlights of the New Standard Unlike current US GAAP, the new standard requires the capitalization of incrementalContract Costs costs incurred to obtain a contract if they are expected to be recovered • Applies to performance obligations Onerous satisfied over 1 year or morePerformance • Assessed at performance obligation level Obligations – not contract level • Onerous = lowest cost of settling the performance obligation exceeds the amount of the transaction price allocated
  22. 22. Financial Statement Disclosures• The disaggregation of revenue into primary categories that depict the nature, amount, timing and uncertainty of revenue and cash flows• A tabular reconciliation of the movements of the assets recognized from the costs to obtain or fulfill a contract with a customer• An analysis of the entitys remaining performance obligations including the nature of the goods and services to be provided, timing of satisfaction, and significant payment terms• Information on onerous performance obligations and a tabular reconciliation of the movements in the corresponding liability for the current reporting period• Significant judgments and changes in judgments that affect the determination of the amount and timing of revenue from contracts with customers
  23. 23. Comparison to Staff Accounting Bulletin Topic 13 (formerly SAB No. 104) SAB Topic 13 Impact of IASB / FASB Exposure Draft  Contracts may be combined if highly interrelated or pricePersuasive interdependentevidence ofarrangement  Identify performance obligations for distinct goods or services (distinct generally means “sold separately”)  Satisfaction of performance obligations triggers recognition  Customer must obtain control of the promised good orDelivery has serviceoccurred or  Distinction between goods and services now added in newservices have exposure draft – services subject to continuous controlbeen rendered passage guidance  Warranties (that can be purchased) are now treated as a performance obligation not as a liability
  24. 24. Comparison to Staff Accounting Bulletin Topic 13 (formerly SAB No. 104) SAB Topic 13 Impact of IASB / FASB Exposure Draft  Transaction price is the amount of consideration expected to be received from the customer  Allocate the transaction price to all distinct performanceThe seller’s price obligations proportionally based on stand alone selling priceto the buyer isfixed or  Estimates of selling prices for distinct goods or services notdeterminable sold separately will replace vendor specific objective evidence criterion  Estimates will be incorporated when variable consideration exists  Collection risk reflected as reduction of revenue rather thanCollectibility is bad debt – gross margins will be reducedreasonablyassured  Transactions falling short of SAB Topic 13 threshold may no longer result in revenue deferrals
  25. 25. Next Steps• The accounting and disclosure requirements of the new revenue standard are significant• The impact will be greatest for companies with complex revenue arrangements, bundled contracts and long term engagements• Stay up to date on the evolving standard requirements and seek out training opportunities• Conduct an impact assessment in order to prepare for the transition• The retrospective transition provision means compliance may need to start as soon as 2013
  26. 26. SolomonEdwards At a Glance SolomonEdwardsGroup, LLC (SolomonEdwards or SEG) is a national business advisory and professional staffing firm. Our customized solutions provide our clients with the right combination of talent and expertise to achieve their business objectives. With practices specialized in Accounting & Finance and Banking & Financial Services, our strength lies in our ability to tactically assist clients with special projects, transaction support & integration, business process optimization initiatives, and regulatory compliance requirements. Because we provide both business advisory and staffing services, SEG can customize a solution for each client we serve. If you need an individual to fill a role on an interim or permanent basis, a large team to execute a project initiative, or expert consultation on a technical issue, we can help. We operate from seven offices in major cities throughout the country and maintain a global network of partners to serve multinational clients.
  27. 27. Our Services & SolutionsOur core service capabilities encompass business advisory, projectmanagement, interim staffing and professional search. We deliver ourservices to our clients across a spectrum of functional and industry verticalsthat enables us to provide the specific expertise and methodologies requiredto deliver outstanding results.
  28. 28. Our Services & Solutions Interim CFO & Controller  Business Process Improvement General Ledger Accounting &  Policy & Procedure Development Reporting  Business Intelligence Tools Financial Modeling  Financial Planning & Analysis Financial System Assessment &  Budgeting & Forecasting Optimization Business Accounting  Shared Service Center Support Process & Finance Optimization Project Management Office Transaction  Technical Accounting Regulatory Due Diligence Support &  US GAAP & IFRS Advisory Compliance Merger Integration Integration  SEC Reporting & Compliance Financial Carve-out  Sarbanes-Oxley IPO Readiness  Internal Audit Services Bankruptcy & Turnaround  Technology Risk
  29. 29. The Value of SEGClient Need Defined… SEG’s Value…Ownership Change Delivering the talent and know-how to execute due Mergers & Acquisitions diligence, merger integration, technical accounting, SEC reporting, IPO readiness, SOX compliance and IPO’s more. SEG can mobilize and manage resources for Leveraged Buyout special projects, provide professionals to back-fill positions during the change process or recruit talent Private Equity investment to fill roles on a permanent basis.Representative Clients…Acqura Loan Services, Inc. Exelon Power Hexion Specialty Chemicals Talk AmericaComcast Corporation Frontier Telecommunications PanAmSat Corporation Terra Nova Financial GroupElectro-Motive Diesel, Inc. Graftech, Inc. Olympus Power, LLC Verso Paper, Inc.
  30. 30. The Value of SEGClient Need Defined… SEG’s Value…Compliance Delivering the talent and know-how to enable our SEC Reporting clients to comply with applicable regulations across of broad spectrum of issues. SEG can serve as a Financial Restatements technical advisor, mobilize and manage resources US GAAP / IFRS for compliance initiatives, provide professionals to Sarbanes - Oxley augment client teams during peak compliance periods, or recruit talent to fill permanent roles. Bank ComplianceRepresentative Clients…ABN AMRO E.ON Climate & Renewables Franklin Bank Leo Burnett USA, Inc.Amerisafe, Inc. FIMAT USA, Inc. GMH Communities Parsons BrinckerhoffCambridge Display Tech Foote, Cone & Belding Integra Life Sciences Whitney Bank
  31. 31. The Value of SEGClient Need Defined… SEG’s Value…Business Growth / Downturn - Delivering the talent and know-how to enable an Start-up Operations organization to evolve with changing business and economic circumstances. SEG can quickly provide New Management resources with the right experience to deliver results Resource Constraints on an interim basis, back-fill vacant positions, or Employee Turnover recruit talent to fill permanent positions from staff to Bankruptcy / Turnaround senior executive levels.Representative Clients…Airtricity Corporation Children’s Network, LLC Gamesa Technology Corp. Sandler O’NeillAscend Acquisition Corp. CHI-X / Instinet Greatwide Logistics Services Symmetry HoldingsAlaron Futures/Options Foamex International Newtek Business Services Vantium Capital
  32. 32. For More Information Richard A. Lavinski, CPA Brian G. Markley, CPA Partner Partnerrlavinski@solomonedwards.com bmarkley@solomonedwards.com Office Phone: 972-505-2002 Office: 610-902-0440 Mobile: 214-733-6103 Mobile: 484-557-0933 SolomonEdwardsGroup, LLC 14755 Preston Road, Suite 400 Dallas, Texas 75254

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