Revenue recognition-auto-industry

October 2010

Revenue recognition and
the automotive industry: shifting into a new gear

At a glance
An Exposure Draft (ED), Revenue We believe that companies will The changes resulting from the
from Contracts with Customers, likely need to fundamentally ED would reach beyond financial
was issued in June 2010. The change their approach to the reporting with impact to entity-
ED proposes a single, contract- revenue process as the ED wide functions (e.g., IT systems),
based asset and liability model represents a new way of thinking key financial statement metrics,
in which revenue is recognized about revenue recognition. and legal contracts (e.g., debt
upon the satisfaction of covenants and contracts with
performance obligations. customers).

pwc

Revenue recognition and the automotive industry

“The revenue recognition exposure draft is not just
a facelift of the same old standards; the FASB and
IASB have unveiled a redesign of the guidance
that will likely impact every player in the global
automotive industry.”

Shifting into a new gear The Boards released an Exposure A new model rolls into the
Draft (ED), Revenue from Contracts
The automotive industry can expect
with Customers, on June 24, 2010
showroom
significant changes to the current The proposed standard employs
which proposes a single, contract-
revenue recognition models under an asset and liability approach,
based asset and liability model in
U.S. GAAP and IFRS. That is certain. the cornerstone of the Boards’
which revenue is recognized upon
The revenue recognition exposure conceptual framework. Inherent in
the satisfaction of performance
draft is not just a facelift of the any contract is the right to receive
obligations. Satisfaction of a
same old standards; the FASB and consideration (i.e., a contract asset)
performance obligation occurs
IASB have unveiled a redesign and an obligation to provide goods
when control of an asset (either a
of the guidance that will likely or perform services (i.e., a contract
good or service) transfers to the
impact every player in the global liability). If an entity transfers goods
customer. The proposed balance
automotive industry. or services to a customer before
sheet approach to revenue
recognition is a significant shift the customer pays consideration,
Current U.S. GAAP contains
from current revenue models that the entity will present a net contract
more than one hundred revenue
are based on the culmination of asset. A net contract liability is
recognition standards and is
an earnings process. This change recorded when the entity has
often criticized as being too rules-
introduces a new way of thinking received consideration prior to
driven, burdensome to apply and
about revenue recognition and we transferring goods or services to the
inconsistent with the economics
believe that companies will need customer. Revenue is recognized
of certain transactions. Current
to fundamentally change the way when contract assets increase or
IFRS, on the other hand, has only
they approach the revenue process contract liabilities decrease as a
two revenue recognition standards.
throughout their organization. result of satisfying performance
While these standards provide a
obligations. A performance
solid foundation, they have been
The following discussion will obligation is a promise to transfer an
viewed as being difficult to apply
introduce the primary steps in asset (either a good or service) to a
to complex transactions. The
the proposed revenue recognition customer. For example, a supplier
Boards’ objective is to create
model and will explore the potential typically satisfies its contract
a single standard to address
impact on key areas affecting the obligation with an OEM through
these challenges.
automotive industry. the delivery of parts, resulting in

2 PricewaterhouseCoopers


also need to determine if a single the modification are interdependent.
contract needs to be segmented or Contract modifications come in a
divided into two or more contracts. variety of forms, including changes
Contracts are combined when in the nature or amount of goods
contract prices are interdependent. to be transferred and changes
Conversely, a contract is segmented in the previously agreed pricing.
if goods or services within the Management must consider the
contract are priced independently factors described above (i.e.,
from other goods or services in when the contracts were entered
that same contract. Identifying the into, whether the objective of
appropriate unit of accounting is the contracts is related, and
critical to ensuring that the model is whether performance under the
properly applied. contracts occurs at the same time
or successively) in determining
Consider an example where whether the modification is priced
separate contracts may require interdependently or independently
combining and accounting as of the existing contract. If the
a single contract. Automotive determination is made that the
a decrease in its gross contract suppliers often incur costs related contract modification should
liability and, therefore, an increase in to tooling prior to production. In be combined with the existing
the amount of revenue recognized. some cases, the tooling is built by contract, the entity will recognize
the supplier for sale to the OEM the cumulative effect of the contract
The proposal includes a five-step (i.e., the tooling is or will be owned
process to apply the new model: modification in the period in which
by the OEM) and consideration the modification occurs.
1. Identify the contract(s) with for the tooling is received through
a customer an increase in the sales price of
the eventual output from the tool. Key Takeaway
2. Identify the separate Generally, there is a separate
While the identification of
performance obligations in contract for this production output.
contracts is not expected to be
the contract Determining if the tooling contract
particularly difficult, this step
and the production contract should
3. Determine the transaction price in the process could result in
be considered separately or as a
changes within the automotive
single contract requires judgment.
4. Allocate the transaction industry. We anticipate that
When two contracts are entered into
price to the separate there will be certain contractual
at or near the same time, negotiated
performance obligations arrangements (e.g., contracts
with a single commercial objective,
for pre-production activities
5. Recognize revenue when and performed either concurrently
related to long-term supply
performance obligations or consecutively, they would likely
arrangements and certain
are satisfied be considered price interdependent
contract modifications) that
and combined as a single contract
may need to be considered
for accounting purposes. This would
Step 1: Identify the contract(s) together, as a single contract,
likely change the pattern of revenue
with a customer for accounting purposes. This
recognition as discussed later in
determination could result in
The proposal applies only to this paper.
earlier revenue recognition
contracts with customers. Entities
A contract modification is combined under the proposed standard
will need to determine whether they
with the existing contract if the compared to today’s accounting.
should account for two or more
contracts together. Entities will prices of the existing contract and

PricewaterhouseCoopers 3


Step 2: Identify the separate sells (or could sell) an identical or
performance obligations in similar good or service separately.
the contract An OEM’s agreement to transfer
a vehicle and to provide free
The objective of identifying maintenance on the vehicle, for
and separating performance example, would require separation
obligations is to ensure revenue is if the vehicle was delivered at a
recognized when the performance different time than the performance
obligations are satisfied (i.e., goods of the free maintenance services
and services are transferred and the vehicle and services were
to the customer). Contracts distinct. We expect that entities will
must be evaluated to ensure be required to separately account
that all performance obligations for more performance obligations
are identified. than today.
An enforceable promise to transfer The following areas, while not
an asset to a customer, whether all inclusive, are likely to be
explicit, implicit, or created impacted by the new model and
constructively through past practice, the requirement to indentify, and
is a performance obligation. The potentially separate, performance
concept is similar to today’s obligations.
concept of an element or deliverable.
Most contracts will explicitly identify Product Warranties
performance obligations. However, The proposed accounting for
performance obligations may arise revenue related to product
in other ways. For example, legal
“This may result in a or statutory requirements may
warranties will arguably have the
most significant impact across
greater number of create performance obligations. A the industry. Revenue recognition
performance obligation may also
obligations within be created through customary
differs under the proposed standard
depending on the objective of
an arrangement business practices, such as an the warranty. The Boards’ current
entity’s practice of providing
being identified customer support or warranty
proposal draws a distinction
between warranties that protect
compared to current service for normal wear and tear. against latent defects in the
This may result in a greater number
practice, resulting of obligations within an arrangement
product (i.e., those that exist when
the product is transferred to the
in more revenue being identified compared to current customer but are not yet apparent),
practice, resulting in more revenue
being deferred.” being deferred.
and warranties that protect against
faults that arise after the product
Multiple performance obligations is transferred to the customer (i.e.,
(i.e., deliverables) in a contract normal wear and tear).
should be accounted for separately Identifying the objective of a
if the promised goods or services product warranty may be difficult
are transferred at different times in many cases. A standard
and are distinct from other goods or warranty provided by an OEM
services promised in the contract. today (e.g., coverage for a certain
Delivery of goods or services at number of years or a specified
different times might indicate that mileage), for example, might have
they are distinct. Another indicator both objectives. When this is the
that a good or service is distinct case and a repair is expected, the
is if the entity, or another entity, requirement to determine whether



“The proposed accounting for revenue related to
product warranties will arguably have the most
significant impact across the industry.”

the repair is the result of a latent of revenue to be allocated to those The Boards indicated that warranties
defect or normal wear and tear will components at contract inception. required by statutory law should not
add another layer of complexity in Revenue associated with latent give rise to a separate performance
determining the proper accounting defects will be deferred under the obligation. The law might require
for product warranties under the proposed standard. A liability will be a company to repair or replace
proposed standard. recorded for the deferred revenue products that develop defects within
and an asset will be recorded for a specified period from the time of
Warranties for latent defects the cost of each product for which sale. While statutory warranties may
do not give rise to a separate revenue has been deferred. The appear to be insurance warranties
performance obligation. Instead, asset represents the inventory that cover faults arising after the
the warranty requires an evaluation that has not yet transferred to the time of sale, the Boards concluded
of whether the entity has satisfied customer in the condition promised. that the law can be viewed as
its performance obligation to Revenue will be recognized protecting the consumer from
transfer the product to the customer. when control transfers, which will purchasing a defective product.
An entity recognizes revenue generally be the earlier of when the Rather than requiring companies
for products (or components of products are replaced or repaired or to determine if a product was
products) transferred to customers when the warranty period expires. defective at the time of sale, the
in the condition promised. Thus, law presumes that if a defect arises
entities that provide warranties Warranties for defects that are not within a specified period that the
for latent defects may not latent defects and arise after the product was defective at the time of
recognize revenue to the extent product has been transferred to the sale.
they expect products to be customer are considered a separate
defective. Management will need performance obligation. A portion
to determine the likelihood and of the transaction price is allocated
extent of defective products sold to the promised warranty service at
to customers at each reporting contract inception. Deferred revenue
date. This estimate should include will be recorded for the portion
products that will require full of the transaction price allocated
replacement (e.g., the entire vehicle) to the promised warranty service.
and products that will require repair Revenue will be recognized as the
(e.g., a component of the vehicle). performance obligation is satisfied.
For components expected to be
repaired or replaced, management
will need to determine the amount



Free maintenance periods times the customer can bring the
Key Takeaway vehicle in for service, then it is
Some customers are offered free
The proposed guidance vehicle maintenance for a specified likely that there would be a single
on accounting for product period of time or mileage (5 years performance obligation for the free
warranties is an area that or 50,000 miles for example) after maintenance. In this example, the
will have substantial impact taking delivery of a new vehicle. The OEM would recognize revenue
for OEMs and suppliers that maintenance is typically performed based on a systematic and rationale
provide warranties. Accounting by certified dealers or other method over the free maintenance
for warranty costs has authorized service providers. The period. In another example, the
historically required estimates, service providers typically incur the OEM might agree to provide free
but the proposed standard initial cost of maintenance, but are maintenance every 5,000 miles (or 6
may create more subjectivity subsequently reimbursed by OEMs. months, whichever comes first) for
by requiring companies Therefore, these arrangements the first 15,000 miles (or 18 months,
to determine the objective would likely be considered separate whichever comes first). It is likely
of product warranties and performance obligations of the that there are three performance
to allocate a portion of the OEM as the contract to provide obligations for the free maintenance
transaction price to those maintenance is effectively between in this example. The OEM
warranties. These requirements the OEM and the end customer. would recognize revenue as the
add to the complexity involved maintenance is performed or when
in warranty estimates. The OEM’s performance obligation the time period lapses, whichever
related to free maintenance will comes first. We do not believe the
Revenue associated with depend upon the structure of the pattern of revenue recognition will
products with latent defects will agreement between the OEM change significantly from current
be deferred under the proposed and the customer. For example, if practice, as revenue is generally
standard. An asset representing the OEM agrees to provide free recognized today based on a
the inventory that has not yet maintenance for the first two systematic and rationale method
transferred to the customer in years of the vehicle’s life and there that is aligned with the terms of the
the condition promised will be are no restrictions on how many maintenance agreement.
recorded to reflect the cost of
each product for which revenue
has been deferred. Companies
will need to consider the value
of the defective products when
measuring and recording the
asset. For example, if the
defective product would be
scrapped and has little or no
value, then the asset would be
impaired. There is generally
a matching between the
recognition of revenue and the
accrual of warranty expense
under existing guidance. When
there is a latent defect, however,
the proposal’s requirement to
defer revenue results in the
margin related to providing the
warranty being deferred until
the earlier of when the warranty
obligation is fulfilled (i.e., the
products are replaced or
repaired) or when the warranty
period expires.



Technological amenities is likely that this obligation will
It is common for vehicles to be be considered part of the OEM’s
equipped with various technological overall performance obligation to
‘amenities’, such as satellite radio, deliver a working vehicle as part of
navigation capabilities or roadside a company’s accounting for product
assistance functionality. These warranties, whereas the third party
amenities may be provided by third- satellite radio service provider will
parties or directly by OEMs. need to separately consider their
obligation to provide service to
In some cases, revenue is the end customer. As highlighted
recognized when vehicles are sold by this example, determining the
from the OEM to the dealer. In appropriate revenue recognition for
other cases, these services might these amenities will depend on the
be considered a separate element OEM’s performance obligation.
resulting in the deferral of revenue

“Revenue associated with tooling will likely be recognized before the transfer
of parts assuming the construction and transfer of tooling is considered a
separate performance obligation.”

over some period of time (e.g., over Tooling arrangements
the period that roadside assistance
Tooling arrangements are common
is provided free of charge). Under
between OEMs and suppliers.
the proposed standard, it is
Take the example discussed in
important to consider whether the
step 1 where the price of tooling
OEM has a performance obligation,
constructed by a supplier for an
either explicit or implicit, to provide
OEM is recovered through the sales
the amenities to the end customer.
price of parts supplied to the OEMs.
Consider satellite radio service,
There are likely two performance
for example. OEMs often provide
obligations in this situation. The
satellite radio service for free for
supplier has a performance
a trial period (e.g., three months)
obligation to construct and transfer
when a consumer purchases a
tooling to the OEM. The supplier
new vehicle. Generally OEMs
also has a performance obligation
enter into separate contracts with
to provide parts to the OEM. Today
third party satellite radio providers
revenue is generally recognized
who are responsible for providing
under these arrangements as the
the satellite radio service to the
parts are delivered by the supplier
end customer during the trial
to the OEM. Under the proposed
period. The OEM’s obligation to
standard, revenue associated with
the end customer is to provide a
tooling will likely be recognized
working radio with the ability to
before the transfer of parts
receive satellite radio stations. It
assuming the construction and
transfer of tooling is considered a
separate performance obligation.



“The OEM’s historical practice of providing
marketing incentives may result in a reduction to
revenue earlier than under today’s guidance.”

‘Try before you buy’ incentive Product liability Determining the expected
Return rights, such as 30 day trial The Boards have concluded that consideration will require an
periods whereby a customer can product liability obligations (e.g., assessment of collectibility and an
purchase a vehicle and return it for when an entity is legally obligated assessment of the impact of the
a refund up to 30 days from the to pay consideration if its products time value of money, if material.
date of purchase, require careful cause harm or damage), are not Expected consideration may also
consideration. The Boards have performance obligations as no include variable consideration or
proposed that revenue should not good or service is being provided even noncash consideration. All
be recognized for goods expected in an exchange transaction. The of these elements could affect
to be returned; rather a liability for accounting for product liability revenue recognition and may
the expected amount of refunds to claims will continue to be covered result in a significant change as
customers should be recognized. by existing guidance for loss compared to today’s accounting.
This refund liability will be updated contingencies (provisions). Perhaps the most impactful of
each reporting period for changes these elements for the automotive
in expectations. An asset and industry are collectibility and
Step 3: Determine the
corresponding adjustment to cost variable consideration.
transaction price
of sales should also be recognized
Initial measurement Collectibility refers to the
for the right to recover goods from
customer’s ability to pay the
customers on settling the refund Once an entity identifies and
contractual consideration. Existing
liability. The asset will initially be determines the separate
literature requires that payment be
measured at the original cost of performance obligations in a
reasonably assured (or probable)
the goods (that is, the former contract, it must determine the
for revenue to be recognized.
carrying amount of inventory). We transaction price. The transaction
The proposed standard requires
believe that the proposed model to price is the amount of consideration
that the transaction price be
account for return rights is similar expected to be received for
adjusted to reflect the customer’s
to today’s ‘failed sale’ model (i.e., delivering a good or performing
credit risk by recognizing the
revenue is not recognized for goods a service. The transaction price
consideration expected to be
expected to be returned). Under is readily determinable in most
received on a probability-weighted
today’s guidance the asset and contracts because the customer
basis. Subsequent changes to the
liability are recorded net, while promises to pay a fixed amount of
assessment of collectibility will be
they will be grossed up under the cash, due when the entity transfers
recognized as income or expense,
proposed model. the promised goods or services
separately from revenue.
(e.g., when a supplier sells parts to
an OEM for a specified price when
the parts are delivered). In other
contracts, however, determining
the transaction price can be
more complex.



The proposed standard indicates For suppliers, a common example
Key Takeaway that consideration paid (or expected of an incentive that might introduce
to be paid) to a customer that is a variability into the transaction price
The assessment of collectibility
reduction of the transaction price is a volume rebate. When a contract
of amounts due from customers
is recognized at the later of when includes variable consideration,
will impact the measurement of
the entity transfers the promised the transaction price includes the
revenue at contract inception
goods or services to the customer probability-weighted estimate of
under the proposed standard.
or when the entity promises to pay variable consideration receivable
Revenue may be recognized
the consideration, even if payment which requires management to
earlier than current practice,
is conditional on a future event. assess the probability of each
as collectibility is no longer a
The promise to pay consideration possible outcome. Revenue is
recognition threshold under
might be implied based on an recognized based upon variable
the proposed standard.
entity’s customary business practice. consideration that management
Rather, collectibility affects
Compared to existing practice, can reasonably estimate.
the measurement of revenue
variable consideration might be Otherwise, revenue is limited to
as credit risk is reflected as a
accounted for at an earlier point the amount of consideration that
reduction of the transaction
in time based on the proposal’s can be reasonably estimated.
price at contract inception
requirement to consider customary The assessment of variable
(with subsequent changes to
business practice. consideration is updated
this assessment recognized as
each reporting period. As a
income or expense, separately
result, an entity may recognize
from revenue). Key Takeaway revenue earlier than currently
allowed if the consideration is
Variable consideration can take Accounting for incentive
reasonably estimable.
several forms and might be created arrangements is important to
by the introduction of incentives many OEMs who frequently Subsequent measurement
that reduce the transaction price. provide various marketing
Performance obligations are
A common example for OEMs is incentives through their
assessed at contract inception and
a cash rebate incentive provided dealer networks. We believe
at each reporting date to determine
to end customers through their such marketing incentives
whether the obligation has become
dealer network. These incentives will be accounted for as a
onerous. A performance obligation
are currently accounted for as a reduction of revenue under the
is onerous when the present
reduction of revenue at the later proposed guidance, similar to
value of direct costs to satisfy a
of when the related revenue is today. However, we believe
performance obligation exceeds the
recognized by the vendor or when that the timing of the revenue
consideration allocated to it. The
the sale incentive is offered. In reduction may be affected by
excess should be recognized as a
practice, therefore, these incentives the proposed standard. For
contract loss with a corresponding
are accounted for upon either the example, the OEM’s historical
liability that is remeasured at each
sale of a vehicle from the OEM to practice of providing marketing
reporting period. This accounting
a dealer or at the time the OEM incentives may result in a
may be relevant for contracts with
announces the incentives to its reduction to revenue earlier than
multiple performance obligations
dealer network. under today’s guidance.
that on an overall basis may have



narrow profit margins but could Step 4: Allocate the transaction performance obligation in a
result in the recognition of an price to the separate contract. Control may transfer at a
onerous provision obligation. The performance obligations point in time or continuously over
assessment of onerous contracts time. Indicators that control has
Consideration is allocated to transferred include whether the
at the performance obligation level
separate performance obligations in customer has an unconditional
may lead an entity to recognize
a contract on a relative standalone obligation to pay, the customer has
a liability even though the overall
selling price basis. The best legal title, the customer has physical
contract is profitable. One case
evidence of standalone selling price possession, or the customer
where a performance obligation
is the observable price of a good specifies the design or function
might be considered onerous relates
or service when the entity sells of the good or service. None of
to tooling. Suppliers might enter into
that good or service separately. the indicators are individually
a contract to construct and deliver
An estimate of the selling price determinative and some indicators
tooling to an OEM at a loss as part
will need to be made if an actual may not be relevant to a particular
of a contract that includes a supply
standalone selling price is not contract. Further, other indicators
agreement for the production of
available. The Boards do not plan may exist and require consideration.
the parts the tool was created for
to prescribe or preclude any
(presumably at a price that would
estimation method. The estimate If transfer of control occurs
result in the overall contract being
should be based on observable continuously, management will need
profitable). This will likely depend
inputs where possible. For example, to apply either an input (e.g., labor
on the allocation of consideration
if management is required to hours) or output (e.g., delivered
based on the relative standalone
allocate a portion of the transaction services) method on a consistent
selling price.
price to a component as a result basis depending on which best
of a product warranty and no depicts the transfer of goods or
Key Takeaway standalone selling price is available services to the customer. Revenue
for that component, management may also be recognized on a
The accounting for onerous might develop an estimate for the straight-line basis when the pattern
contracts is generally done selling price based on cost plus a of transfer of goods or services
at the contract level today. reasonable margin. over a specified period-of-time
Therefore, the proposal to is constant.
account for onerous contracts Step 5: Recognize revenue
at the performance obligation when performance obligations
level will likely result in more
are satisfied
liabilities. Management may
be reluctant to enter into Revenue is recognized when
contracts that include loss- performance obligations are
making performance obligations satisfied, which occurs when the
with the expectation of overall customer has obtained control
profitability in light of this of the promised good or service.
proposed guidance. Transfer of control will need to
be assessed for each separate



Constructing tools to be sold to Repurchase options guidance would apply based on
the vehicle manufacturer OEMs sell vehicles to customers our understanding of the revenue
Contracts between suppliers and (e.g., rental car companies) and recognition and lease exposure
OEMs for the sale of tooling (i.e., often include various repurchase drafts as they are currently written.
where ownership of the tooling or reimbursement options as part
The economics of these
transfers from the supplier to the of the contract. These options
arrangements are similar to how one
OEM) are organized in several generally provide some form of a
might structure a lease, however,
different forms. One type of guaranteed residual value to the
and arrangements containing
arrangement between suppliers and customer at the point in time the
repurchase options could be
OEMs is where the supplier receives customer sells the vehicle. Two
structured in a manner that results
a lump-sum payment from the OEM common options are when OEMs
in lease accounting. As a result,
or is reimbursed periodically as either agree to (a) reacquire the
some might argue that these
certain milestones are met in the vehicle at a guaranteed price or
arrangements should be accounted
completion of the pre-production (b) reimburse customers for any
for under the proposed lease
tooling activities. When accounting deficiency between the sales
model. We believe the determination
for these types of contracts under proceeds received for the vehicle
of whether arrangements with
the proposed standard, suppliers and the guaranteed minimum
repurchase options will be treated
will have to assess the terms of resale value.
as lease or revenue transactions
the contract to determine if control
Under today’s accounting, there requires further deliberation
of the tooling transfers at a point
is specific U.S. GAAP guidance and clarification.
in time or continuously over the
contract life. Considerations may that requires these contracts to
include: (a) when title passes; (b) be treated as lease transactions
Key Takeaway
when physical possession passes; today. The Boards have also
(c) whether there are interim, non- issued an exposure draft on lease Contracts containing
refundable payment terms; (d) if the accounting, however, which will repurchase options are common
OEM has the ability to specify the substantially change the accounting for certain OEMs. Based on the
design of the tool; and (e) if the OEM for lease transactions. The exposure current wording in the revenue
can seize the tool at will. We expect draft on leases would replace the and lease exposure drafts, we
that many contracts to construct existing authoritative guidance believe these contracts will
tooling to the specification of the on leases, thereby eliminating the be accounted for under the
OEM might result in continuous requirement for these arrangements revenue guidance going forward.
transfer of control, thereby to be treated as leases. We do not This will represent a significant
permitting revenue to be recognized believe contracts with repurchase change for OEMs, who generally
over the contract period. options would generally meet the account for these arrangements
definition of a lease, and therefore, as leases today.
the proposed revenue recognition

“We believe the determination of whether
arrangements with repurchase options will be
treated as lease or revenue transactions requires
further deliberation and clarification.”



Other areas to consider Direct costs in fulfilling a contract
will be expensed as incurred Key Takeaway
Contract costs
under the proposed standard,
The proposed standard includes The accounting for contract
unless they are within the scope
guidance related to contract costs. costs will shift under the
of other standards (i.e., inventory,
While there are several potential proposal, which requires costs
intangibles, or fixed assets) in which
areas of impact to the automotive of obtaining a contract to be
case the entity should account
industry, costs associated with expensed as incurred. Direct
for such costs in accordance with
tooling contracts and contract costs to fulfill a contract that are
the relevant standard. The entity
acquisition costs are likely top of not within the scope of another
should recognize an asset for
mind for automotive suppliers. The standard may be capitalized
costs not within the scope of those
proposed guidance delineates and amortized only if they
standards only if the costs relate
between costs of obtaining a meet certain criteria included in
directly to a contract, relate to future
contract and costs incurred to fulfill the proposal.
performance, and are probable of
a contract. recovery under a contract. These
costs are amortized as control of
Contract acquisition costs may be
the goods or services to which the
capitalized and amortized over the
asset relates is transferred to the “The accounting for
contract life under today’s guidance.
Companies that are able to
customer. Cost guidance currently contract costs will shift
exists related to tooling contracts
capitalize and amortize such costs
under both frameworks. Companies under the proposal...”
today will experience a significant
generally expense costs to design
change in the accounting, as all
and develop tooling that they will
costs of obtaining a contract will
not own as incurred under existing
be expensed as incurred under the
guidance. We do not expect a
proposed standard.
significant change in the accounting
for contract costs associated
with tooling.



Financing arrangements Next steps & conclusion contracts (e.g., debt covenants
Many OEMs have finance arms and contracts with customers).
Comments on the ED are due by
that, among other things, serve as We encourage management to
October, 22, 2010. The Boards
a potential source of financing for be engaged in understanding
expect to issue a final standard in
end customers. Where vehicles sold the proposed standard and to
2011 with an anticipated effective
to dealers are eventually financed consider providing feedback to
date no earlier than 2014. The
through the OEM’s own financing the Boards, their external auditors
proposed standard will significantly
division, the OEM must meet certain and other relevant stakeholders, as
impact the rules of the road
conditions under current U.S. GAAP appropriate. As the ED is assessed
related to revenue recognition. The
to recognize revenue at the time of further and thinking evolves, we
proposed standard introduces
vehicle delivery to the dealer. The will continue to provide updates of
a new way of thinking about
proposed standard does not carry significant changes and our point
revenue recognition that we believe
forward these same criteria. Instead, of view about them. Questions or
creates a need for companies
the proposed standard introduces comments on this topic can be
to fundamentally change their
the notion that revenue should be directed to your local PwC contact
approach to the revenue process.
recognized when control transfers or the authors of this article.
The changes will reach far beyond
to the customer. We do not expect financial reporting. The proposals
a significant change in the timing of will impact entity-wide functions
revenue recognition as a result of (e.g., IT systems), key financial
the elimination of these criteria. statement metrics, and legal



To have a deeper conversation about any of
the issues in this paper, please contact the
primary authors or the other contacts listed,
who focus on the automotive sector and/
or accounting matters related to revenue
recognition:

Primary authors: Other contacts:

Lawrence Dodyk Richard Hanna
Partner, National Professional Services Group Partner, Global Sector & Assurance Leader
lawrence.dodyk@us.pwc.com richard.hanna@us.pwc.com
Phone +1 (973) 236 7213 Phone +1 (313) 394 3450

Eric Kahrl Tony Debell
Senior Manager Partner, Global Accounting Consulting Services
eric.a.kahrl@us.pwc.com tony.m.debell@uk.pwc.com
Phone +1 (216) 875 3440 Phone +44 (0) 20 721 35336

Garth Leggett François Jaumain
Senior Manager, National Professional Services Group Partner
garth.s.leggett@us.pwc.com francois.jaumain@fr.pwc.com
Phone +1 (973) 236 5585 Phone +33 (0) 01 56 57 8030

Michael Sobolewski Mark Lohmann
Senior Manager Partner, Global Accounting Consulting Services
michael.sobolewski@us.pwc.com mark.lohmann@uk.pwc.com
Phone +1 (313) 394 3299 Phone +44 (0) 20 721 24482

Dusty Stallings
Partner, National Professional Services Group
dusty.stallings@us.pwc.com
Phone +1 (973) 236 4062

Guilaine Saroul
Director, National Professional Services Group
guilaine.saroul@us.pwc.com
Phone +1 (973) 236 7138

Isabelle Mollat
Senior Manager
isabelle.mollat@fr.pwc.com
Phone +33 (0) 01 56 57 8328


pwc.com/auto

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the
PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and
should not be used as a substitute for consultation with professional advisors. DT-11-0026

Revenue recognition-auto-industry

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