Original air date: July 24, 2017 Rebroadcast and recording info at http://www.mhmcpa.com During this presentation, we will review the key aspects of the new revenue recognition financial reporting standards as well as the income tax regulations for revenue recognition. We will explore inconsistencies between these two frameworks and analyze possible compliance measures to which businesses may be subject in order to adopt a new method of accounting for tax purposes.

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CBIZ & MHM
Executive Education Series™
The Taxing Element of the New
Revenue Recognition Guidance
Presenters: Nate Smith and Mark Winiarski
July 24 and 31

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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Disclaimer
The information in this Executive Education Series
course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further
discuss the impact on your business.

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Nathan Smith is a Director in the CBIZ National Tax Office, bringing over
19 years of experience in public accounting to provide technical support
and strategic solutions for the firm’s tax practice. Nathan leads the
development of practice aids and tactical approaches used in
responding to industry and Federal tax developments in a variety of
subject matter areas. Nathan also consults nationally to facilitate
delivery of client service opportunities and solutions, contributes as an
author and editor to the firm's tax thought leadership publications and
assists with the development and implementation of national tax
policies and procedures.
727.572.1400 • nate.smith@cbiz.com
Nathan Smith, CPA
Director
Presenters

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Located in our Kansas City office, Mark is a member of our Professional
Standards Group (PSG). Mark's role includes instructing in our national
training program, presenting as a subject matter expert at webinars and
conferences, and preparing MHM publications on accounting and
auditing issues.
As a PSG member, Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • mwiniarski@cbiz.com • @KCWini
MARK WINIARSKI, CPA
MHM Shareholder

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Agenda
Revenue recognition rules for tax purposes01
02 The new revenue recognition standards
03
Inconsistencies between select areas of new revenue recognition rules
and existing tax rules
04 Applications to change accounting methods for tax purposes

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REVENUE RECOGNITION RULES FOR TAX PURPOSES

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Revenue Recognition Rules for Tax Purposes
• When is revenue recognized under the accrual
method
• The all events test
• Application of the test in the case of
• Goods
• Services

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Revenue Recognition Rules for Tax Purposes
• Inclusion of amounts due
• Time of payment
• Legally enforceable right not required
• Substantial contingencies may invalidate right to revenue
• Inclusion of amounts earned through performance of
services
• When is a service complete
• Severability of services
• Benefits and burdens of ownership
• Passage of title under UCC
• Look to contract terms

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Revenue Recognition Rules for Tax Purposes
• Bundled Goods and Services Contracts
• Bundled contracts respected
• Contract terms are binding
• Only IRS can challenge contract price allocation

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Revenue Recognition Rules for Tax Purposes
• Probability of collection from buyer
• Assessed using a reasonable basis at the time of recognition
• Uncertainty
• Performance
• Delays in payment
• Qualified services and certain other taxpayers allowed to
use nonaccrual-experience method
• Allows nonaccrual for amounts unlikely to be collected

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Revenue Recognition Rules for Tax Purposes
• Tax accounting for advance payments
• Default is all events test
• Under Rev. Proc. 2004-34, a limited deferral is permitted
• Must match financial reporting
• Revenue must be recognized by the tax year subsequent to the tax
year of receipt
• Deferrals continuing beyond period for financial reporting recognized
for tax purposes
• Covers advance payments for goods and services; certain other
prepayments ineligible

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Revenue Recognition Rules for Tax Purposes
• Tax accounting for advance payments (continued)
• May occur by 2nd tax year subsequent to the year of receipt
• To the extent of overlap with Rev. Proc. 2004-34, either
method is permissible
• Deferred amounts may not be reported later than reported for
financial reporting purposes, but may otherwise be limited by
certain reporting requirements
• Taxpayer must have inventoriable goods on hand (no
attribution is permitted from related parties)
• Other rules available for certain industries

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OVERVIEW OF NEW REVENUE RECOGNITION
STANDARDS

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Overview of New Revenue Recognition Standards
• When were the new standards unveiled
• What is the core principal behind the standard
• When is the deadline for adopting the standards
• Publicly traded entities, certain not-for-profits, and
certain employee benefit plans
• All other entities

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Overview of New Revenue Recognition Standards
• Five steps under new standards:
• Identify the contract with a customer
• Identify the performance obligations (promises)
• Determine the transaction price
• Allocate this price to the performance obligations
• Recognize revenue as seller satisfies these obligations
• New standards also specify accounting for costs to obtain or
fulfill a contract

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Overview of New Revenue Recognition Standards
• Step 1: Identify the contract with the customer
• A “contract” must contain certain elements
• These elements focus on:
• Approval and commitment of the parties
• Identification of rights and payment terms
• Commercial substance
• Probable collection

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Overview of New Revenue Recognition Standards
• Step 2: Identify the contracted performance
obligations
• What is the promise
• Are goods and services distinct or should they be
bundled
• Identifying when a good or service is “distinct”
• When is bundling most often appropriate

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Overview of New Revenue Recognition Standards
• Step 3: Determine the transaction price
• Consideration
• Adjustments for time-value of money
• Fixed or variable consideration
• Recognition in the case of variable consideration
• Changes in estimates updated at each reporting date

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Overview of New Revenue Recognition Standards
• Step 3: Determine the transaction price
• What does variable consideration include
• Incentives and bonuses
• Discounts, credits, rebates, and refunds
• How are implied price concessions treated
• Two methods for estimating
• Expected value
• Most likely amount
• Applying the constraint

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Overview of New Revenue Recognition Standards
• Step 4: Allocate price to performance obligations
• Seller’s relative standalone selling price for each
distinct Standalone selling prices
• Estimate if not observable
• Allocation may be required if there is a discount or
variable consideration

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Overview of New Revenue Recognition Standards
• Step 5: Recognize revenue as obligations are satisfied
• Depends on transfer of control
• All at once or over time
• Over time
 Simultaneous receipt and consumption
 Customer controlled assets
 Lack of alternative uses and enforceable right to payment

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Overview of New Revenue Recognition Standards
• Step 5: Recognize revenue as obligations are satisfied
• When over time, incremental progress equals
satisfaction using either output or input measures
• Output measures
• Input measures

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Overview of New Revenue Recognition Standards
• Step 5: Recognize revenue as obligations are satisfied
• Control
• Indications seller has control
• Indications buyer has control

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Overview of New Revenue Recognition Standards
• Other changes under new standards
• Capitalization of costs to obtain a contract
• Capitalization required in some cases
• Capitalization of costs to fulfill a contract
• Does not supersede existing standards
• May be required in some cases

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INCONSISTENCIES BETWEEN NEW STANDARDS AND
TAX RULES

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Inconsistencies Between New Standards and Tax Rules
• Probable collection
• Probable chance of collection required to recognize revenue (GAAP)
• Probability threshold generally 70-80%
• Recognition of “non-probable” amounts
• Reasonable basis standard (Tax)
• Determination made using evidence in existence at time of accrual
• Level of uncertainty must be “significant”
• Nonaccrual experience method (if eligible) could achieve similar results

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Inconsistencies Between New Standards and Tax Rules
• Time Value of Money
• Time value of money concepts exist for tax purposes in
most situations, but apparently not for the use of
services
 IRS never implemented regulations to articulate such a
requirement, and apparently does not enforce it
 Price adjustments for service contracts under new standards to
account for time value of money have no counterpart for tax
purposes, resulting in different timing of revenue recognition

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Inconsistencies Between New Standards and Tax Rules
• Bundled Goods and Services Contracts
• Delineation of performance obligations required
• Former standard generally used the same requirement with exceptions for
certain industries
• Based in part on whether the customer can benefit from the good or service on
its own or together with other readily available resources
• Sales price is allocated among each separate performance obligation using
relative stand-alone selling prices
• Under tax rules separate elements identified in the contract and their
contracted must be respected by both seller and buyer
• As a result allocation of sales price in bundled contracts can be different for
either or both reasons

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Inconsistencies Between New Standards and Tax Rules
• Variable consideration
• Bonuses or incentives, or seller’s concession for discounts, refunds, etc.
estimated under new standards
• Former standards did not permit estimation
• Implied price concession from seller also treated as variable
consideration
• Under tax rules, all events test controls
• Estimation requirements under new standards create fundamental
inconsistency
• Expected to be the first of two major inconsistencies

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Inconsistencies Between New Standards and Tax Rules
• Measuring Satisfaction of Performance Obligations
• Under new standards control is defining factor in
revenue recognition
• Incremental recognition over time
• Recognition at a single point requires consideration of
non-exclusive factors

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Inconsistencies Between New Standards and Tax Rules
• Measuring Satisfaction of Performance Obligations
• Partial recognition may occur when control has transferred
• Under tax rules performance must be complete
• Expected to be second major inconsistency
• When the all events test requires recognition before performance, an alternative for tax
deferral often is permitted only to the extent of financial conformity generally is required
• Incremental progress measurements expected to accelerate recognition
• Ability to delineate performance obligations under bundled contracts in more industries
may also accelerate recognition
• Financial conformity requirement is expected to impact timing of tax revenue recognition

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APPLICATIONS TO CHANGE TAX ACCOUNTING
METHODS

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Applications to Change Tax Accounting Methods
• Computation of taxable income must match financial
reporting
• Exceptions
• Book-tax differences
• IRS consent required via Form 3115

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Applications to Change Tax Accounting Methods
• IRS Consent may be required to move to new
standards
• May continue with current standards for tax purposes
• Would require second set of books
• Deferral opportunity for advance payments lost

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Applications to Change Tax Accounting Methods
• Businesses should begin planning to secure IRS
consent, if necessary
• IRS seeking comments on consent procedures
• Automatic consent under consideration
• Generally indicates a large volume of applications
anticipated
• Could indicate that many businesses will be affected

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QUESTIONS

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