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© 2013 McGladrey LLP. All Rights Reserved.
© 2013 McGladrey LLP. All Rights Reserved.
July 30, 2013
Joint revenue recognit...
© 2013 McGladrey LLP. All Rights Reserved.
Brian Marshall Biography
brian.marshall@mcgladrey.com
Brian is a partner in the...
© 2013 McGladrey LLP. All Rights Reserved.
Richard Stuart Biography
richard.stuart@mcgladrey.com
Richard is a partner in t...
© 2013 McGladrey LLP. All Rights Reserved.
McGladrey overview
 Largest U.S. provider of assurance, tax and
consulting ser...
© 2013 McGladrey LLP. All Rights Reserved.
Agenda
 Overview
 Proposed five-step revenue model
 Other changes as a resul...
© 2013 McGladrey LLP. All Rights Reserved.
Objective
 Help finance leaders gain an understanding of the
significant chang...
© 2013 McGladrey LLP. All Rights Reserved.
Overview
© 2013 McGladrey LLP. All Rights Reserved.
Background and status
 Preliminary views document issued in Dec. 2008
 Exposu...
© 2013 McGladrey LLP. All Rights Reserved.
Core principle
 Recognize revenue to depict the transfer of
promised goods or ...
© 2013 McGladrey LLP. All Rights Reserved.
Scope
 Applies to all contracts with customers except those
for:
- Financial i...
© 2013 McGladrey LLP. All Rights Reserved.
Proposed five-step revenue model
© 2013 McGladrey LLP. All Rights Reserved.
Overview
 Five-step model to comply with core principle
Identify the
contract ...
© 2013 McGladrey LLP. All Rights Reserved.
1. Identify the contract with a customer
 Customer
- A party that has contract...
© 2013 McGladrey LLP. All Rights Reserved.
2. Identify separate performance obligations
 Promise in a contract to transfe...
© 2013 McGladrey LLP. All Rights Reserved.
3. Determine the transaction price
 Amount of consideration to which an entity...
© 2013 McGladrey LLP. All Rights Reserved.
3. Determine the transaction price
 Noncash consideration
- Measure at fair va...
© 2013 McGladrey LLP. All Rights Reserved.
4. Allocate the transaction price
 Generally based on relative standalone sell...
© 2013 McGladrey LLP. All Rights Reserved.
5. Recognize revenue
 Recognize revenue as performance obligations are
satisfi...
© 2013 McGladrey LLP. All Rights Reserved.
5. Recognize revenue
 If prior criteria not met, then satisfied at a point in ...
© 2013 McGladrey LLP. All Rights Reserved.
Other changes as a result of the
model
© 2013 McGladrey LLP. All Rights Reserved.
Contract costs
 Capitalize direct costs of fulfilling a contract or
anticipate...
© 2013 McGladrey LLP. All Rights Reserved.
Return rights
 Defer revenue by recording a refund liability for
goods expecte...
© 2013 McGladrey LLP. All Rights Reserved.
Warranties
 Customer option to purchase separately or
warranty provides an add...
© 2013 McGladrey LLP. All Rights Reserved.
Optional goods or services
 Considered a performance obligation if provides a
...
© 2013 McGladrey LLP. All Rights Reserved.
Onerous performance obligations
 Removed from model during redeliberations
 F...
© 2013 McGladrey LLP. All Rights Reserved.
Other changes
 Licensing and rights to use
- Revenue recognized at either a po...
© 2013 McGladrey LLP. All Rights Reserved.
Treatment similar to current U.S. GAAP
 Customers’ unexercised rights (“Breaka...
© 2013 McGladrey LLP. All Rights Reserved.
Balance sheet presentation
 Contract asset/contract liability based on
compari...
© 2013 McGladrey LLP. All Rights Reserved.
Disclosures, effective date and
transition
© 2013 McGladrey LLP. All Rights Reserved.
Disclosures
 Disclosure objective:
- Quantitative and qualitative information ...
© 2013 McGladrey LLP. All Rights Reserved.
Effective date
 Public companies
- Annual reporting periods beginning after De...
© 2013 McGladrey LLP. All Rights Reserved.
Transition
 Transition options
- Retrospective
• Apply new revenue guidance to...
© 2013 McGladrey LLP. All Rights Reserved.
Closing / Questions
© 2013 McGladrey LLP. All Rights Reserved.
Questions?
© 2013 McGladrey LLP. All Rights Reserved.
For more information, please contact:
Brian Marshall
 brian.marshall@mcgladrey...
© 2013 McGladrey LLP. All Rights Reserved.
McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of i...
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AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

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The overall objective is to help finance leaders gain an understanding of the significant changes that will result from the joint revenue recognition project to enable them to gauge the impact these changes will have on their company. The discussion will cover:

• Project overview
• Proposed five-step revenue model
• Other changes as a result of the model
• Disclosures, effective date and transition

Published in: Business, Economy & Finance
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AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

  1. 1. © 2013 McGladrey LLP. All Rights Reserved. © 2013 McGladrey LLP. All Rights Reserved. July 30, 2013 Joint revenue recognition project update for finance leaders
  2. 2. © 2013 McGladrey LLP. All Rights Reserved. Brian Marshall Biography brian.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 and PCC, 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 the accounting practices group of a Fortune 50 company, serving as a resource on complex technical accounting matters for the company’s global accounting community. Brian also was employed by a Big 4 firm 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. Brian is a certified public accountant in the states of Connecticut and New York, and is a member of the AICPA.
  3. 3. © 2013 McGladrey LLP. All Rights Reserved. Richard Stuart Biography richard.stuart@mcgladrey.com Richard is a partner in the National Professional Standards Group of McGladrey LLP. His primary areas of expertise are revenue recognition, leasing, variable interest entities and International Financial Reporting Standards. Richard’s primary responsibilities are consulting with clients and engagement teams on complex accounting issues, facilitating training events and writing interpretive guidance for McGladrey publications. Richard also monitors standard-setting activities domestic and internationally, and assists in developing Firm positions on proposed accounting standards. He is a former member of the FASB’s Valuation Resource Group and the AICPA’s Financial Reporting Executive Committee, and has also served on various EITF and AICPA working groups. Before joining McGladrey, Richard worked for two large multinational companies in their Accounting Practices Groups, and also spent time on the staff of the AICPA and FASB developing accounting standards. He started his career with Coopers and Lybrand, including a rotation in the Firm’s National Technical Accounting Group. Richard is a certified public accountant in the state of Connecticut, and is a member of the AICPA.
  4. 4. © 2013 McGladrey LLP. All Rights Reserved. McGladrey overview  Largest U.S. provider of assurance, tax and consulting services focused on the middle market  Nearly 6,500 professionals and associates in more than 75 offices nationwide  US member of RSM International (RSMI) – a network of independent accounting, tax and consulting firms worldwide - Offices in more than 100 countries with over 32,500 people
  5. 5. © 2013 McGladrey LLP. All Rights Reserved. Agenda  Overview  Proposed five-step revenue model  Other changes as a result of the model  Disclosures, effective date and transition  Closing / Questions The information in this presentation is based on our understanding of the FASB and IASB decisions to date and our expectations of what will be in the final standard when published. The information in the final standard could be different from that being presented today.
  6. 6. © 2013 McGladrey LLP. All Rights Reserved. Objective  Help finance leaders gain an understanding of the significant changes that will result from the joint revenue recognition project to enable them to gauge the impact these changes will have on their company
  7. 7. © 2013 McGladrey LLP. All Rights Reserved. Overview
  8. 8. © 2013 McGladrey LLP. All Rights Reserved. Background and status  Preliminary views document issued in Dec. 2008  Exposure draft issued in June 2010  Revised exposure draft issued in Nov. 2011  Redeliberations began in July 2012  Final standard expected in the third quarter of 2013
  9. 9. © 2013 McGladrey LLP. All Rights Reserved. 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
  10. 10. © 2013 McGladrey LLP. All Rights Reserved. Scope  Applies to all contracts with customers except those for: - 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
  11. 11. © 2013 McGladrey LLP. All Rights Reserved. Proposed five-step revenue model
  12. 12. © 2013 McGladrey LLP. All Rights Reserved. Overview  Five-step model to comply with core principle Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5) © 2013 McGladrey LLP. All Rights Reserved.
  13. 13. © 2013 McGladrey LLP. All Rights Reserved. 1. Identify the contract with a customer  Customer - A party that has contracted to obtain goods or services that are an output of an entity’s ordinary activities  Contract - Enforceable agreement between parties - Can be written, oral or implied  Contract combination - Required for contracts entered into at or near the same time if certain criteria are met  Contract modifications - Treat separately if distinct performance obligation is added and the price is consistent with its standalone selling price - Otherwise combine with remaining goods or services
  14. 14. © 2013 McGladrey LLP. All Rights Reserved. 2. Identify separate performance obligations  Promise in a contract to transfer a good or service  Account for good or service separately if it is both: - Capable of being distinct because the customer can benefit from the good or service on its own or together with other resources readily available to the customer - Distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract  Indicators of a distinct good or service within contract context: - No significant integration or modification services - Can be purchased without significantly affecting other promised goods or services in the contract - Not part of certain consecutively delivered goods or services
  15. 15. © 2013 McGladrey LLP. All Rights Reserved. 3. Determine the transaction price  Amount of consideration to which an entity expects to be entitled to receive from a customer  Variable / contingent consideration - Estimate based on probability-weighted or most-likely amount - However, only include in transaction price if not subject to a risk of significant revenue reversal • Evaluate based on experience with similar performance obligations among other factors  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
  16. 16. © 2013 McGladrey LLP. All Rights Reserved. 3. Determine the transaction price  Noncash consideration - Measure at fair value if reasonably estimable 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 directly considered in transaction price - Impairment from credit losses (bad debt expense) presented as a separate line item
  17. 17. © 2013 McGladrey LLP. All Rights Reserved. 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 that are not contract modifications are allocated on a relative standalone selling price basis unless certain criteria are met
  18. 18. © 2013 McGladrey LLP. All Rights Reserved. 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 - Benefits customer as entity performs and another entity would not need to reperform work completed to date (for pure services contracts); or - Does not create an asset with an alternative use and vendor has right to payment for performance to date  Select method of progress toward completion (output or input)
  19. 19. © 2013 McGladrey LLP. All Rights Reserved. 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 - Customer has risks and rewards of ownership - Customer has accepted goods or services
  20. 20. © 2013 McGladrey LLP. All Rights Reserved. Other changes as a result of the model
  21. 21. © 2013 McGladrey LLP. All Rights Reserved. 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 - Unless amortization period would have been one year or less in which case have the option to immediately expense
  22. 22. © 2013 McGladrey LLP. All Rights Reserved. Return rights  Defer revenue by recording a refund liability for goods expected to be returned  Adjust refund liability (and revenue) for changes in return expectations  Record asset for right to recover products at former carrying amount less costs of recovery
  23. 23. © 2013 McGladrey LLP. All Rights Reserved. Warranties  Customer option to purchase separately or warranty provides an additional service - Separate performance obligation recognized over time  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
  24. 24. © 2013 McGladrey LLP. All Rights Reserved. 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  Allocate portion of transaction price to option based on relative standalone selling prices  Recognize allocated revenue on transfer of control of optional goods or services or when option expires
  25. 25. © 2013 McGladrey LLP. All Rights Reserved. Onerous performance obligations  Removed from model during redeliberations  FASB decided to retain existing guidance regarding the recognition of losses from contracts with customers, including that within ASC 605-35
  26. 26. © 2013 McGladrey LLP. All Rights Reserved. Other changes  Licensing and rights to use - Revenue recognized at either a point in time or over time depending on the characteristics of the license • If considered the provision of a right to intellectual property, recognize at a point in time • If considered the provision of a service or access to intellectual property, recognize over time  Repurchase agreements - Entity obligation (forward) or right (call option) to repurchase asset - Customer right to require entity to repurchase asset (put option)  Shipments with risk of loss
  27. 27. © 2013 McGladrey LLP. All Rights Reserved. Treatment similar to current U.S. GAAP  Customers’ unexercised rights (“Breakage”)  Nonrefundable upfront fees  Principal vs. agent considerations  Consignment arrangements  Bill-and-hold arrangements  Customer acceptance
  28. 28. © 2013 McGladrey LLP. All Rights Reserved. Balance sheet presentation  Contract asset/contract liability based on comparison of entity’s performance to customer’s performance  Entity > customer = contract asset  Entity < customer = contract liability  Receivables are classified separately from other asset - Unconditional right to receive consideration
  29. 29. © 2013 McGladrey LLP. All Rights Reserved. Disclosures, effective date and transition
  30. 30. © 2013 McGladrey LLP. All Rights Reserved. Disclosures  Disclosure objective: - Quantitative and qualitative information regarding nature, amount, timing and uncertainty of revenue and related cash flows  Annual disclosures for public companies include: - Disaggregation of revenue - Opening and closing balances of contract assets and liabilities and related information - Transaction price allocated to remaining performance obligations - Contract costs - Description of performance obligations - Significant judgments made including methods and inputs used to determine transaction price and standalone selling price - Many more  Interim disclosures for public companies are greatly expanded as well  Private company annual and interim disclosure requirements are substantially less than those of public companies
  31. 31. © 2013 McGladrey LLP. All Rights Reserved. Effective date  Public companies - Annual reporting periods beginning after December 15, 2016, including related interim periods - Early application is prohibited (FASB only)  Private companies (FASB only) - Annual reporting periods beginning after December 15, 2017, and interim periods in years thereafter - Early application is allowed (earliest would be date that public companies are required to adopt)
  32. 32. © 2013 McGladrey LLP. All Rights Reserved. Transition  Transition options - Retrospective • Apply new revenue guidance to all prior periods • Certain practical expedients are allowed - Modified retrospective • No restatement of prior periods • Apply new revenue guidance to in-progress contracts as of the adoption date going forward and subsequent contracts • Recognize a cumulative effect adjustment to retained earnings for application of the new revenue guidance to in-progress contracts • Disclose in the year of adoption the effect on each line item in the financial statements as a result of adoption
  33. 33. © 2013 McGladrey LLP. All Rights Reserved. Closing / Questions
  34. 34. © 2013 McGladrey LLP. All Rights Reserved. Questions?
  35. 35. © 2013 McGladrey LLP. All Rights Reserved. For more information, please contact: Brian Marshall  brian.marshall@mcgladrey.com  203.312.9329 Richard Stuart  richard.stuart@mcgladrey.com  203.905.5027
  36. 36. © 2013 McGladrey LLP. All Rights Reserved. McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting, tax and consulting firms. The member firms of RSMI collaborate to provide services to global clients, but are separate and distinct legal entities which cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. McGladrey, the McGladrey signature, The McGladrey Classic logo, The power of being understood, Power comes from being understood and Experience the power of being understood are trademarks of McGladrey LLP. © 2013 McGladrey LLP. All Rights Reserved. McGladrey LLP 800.274.3978 www.mcgladrey.com

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