Presentation made by Jennifer Goodman at the 19th Annual Decosimo Accounting Forum, hosted by the University of North Alabama.

1. A Global Reach with a Local Perspective
University of North Alabama
19th Annual Decosimo Accounting Forum
July 22, 2011
www.decosimo.com
Revenue Recognition Exposure Draft
JENNIFER GOODMAN, CPA
Assurance Principal

2. Agenda
 Overview and scope of the exposure draft
 Current revenue recognition standards
 Five steps to the revenue recognition process in the
exposure draft
 Overview of key provision of each step
 Comparisons to current GAAP
 Examples
 Other items in proposal
 Preparing for new revenue recognition standard

3. Exposure draft overview
 June 2010 FASB and IASB each issued exposure drafts
entitled “Revenue from Contracts with Customers”
 Benefits:
 Remove inconsistencies in existing standards
 Provides a more robust framework
 Improve comparability across companies, industries and
capital markets
 Simplify the preparation of financial statements by
reducing the number of requirements
 Applies to ALL entities except for rate-regulated entities
 Comment period June 24 – October 22, 2010, almost
1,000 letters received

4. Exposure draft status
 Redeliberations were substantially completed at the
June 13-15, 2011 meeting
 Numerous revised tentative decisions
 Announced IASB and FASB will re-expose proposals
in Q3 2011 for 120 day comment period
 Effective date – not yet determined
 Why are we talking about the exposure draft now? It
will affect EVERYBODY
 Currently the standard would be applied on a
retrospective basis. The board is allowing certain
relief provisions

5. Current GAAP: core principles
Core principle: Revenue is recognized when earned
and realized or realizable.
Primary criteria:
 Persuasive evidence of an arrangement exists,
 Delivery has occurred or services have been
rendered,
 The seller's price to the buyer is fixed or
determinable, and
 Collectability is reasonably assured.

6. Exposure draft: core principles
Core principle: An entity will recognize revenue to
depict the transfer of goods or services to
customers in an amount that reflects the
consideration that it receives, or expects to receive,
in exchange for those goods or services.
Primary criteria:
 Identification of contract
 Identification of performance obligations
 Determine transaction price
 Allocate transaction price to performance obligations
 Recognition of revenue on satisfaction of
performance obligation(s)

7. 5 Distinct revenue recognition steps
1. Identify the contract or contracts with the customer.
2. Identify the separate performance obligations in the
contract.
3. Determine the transaction price.
4. Allocate transaction price to the separate
performance obligations.
5. Recognize the allocated revenue when the entity
satisfies each performance obligation.

8. Step 1 – Identify the contract(s) with the
customer
Key provision: An entity should apply the proposed
guidance to each contract identified.
Contract definition – an agreement between two or
more parties that creates enforceable rights.

9. Step 1 – Contract existence
For a contract to exist:
 It must have commercial substance
 The parties must approve the contract and be committed
to satisfying respective obligations
 The entity must be able to identify each party’s rights
regarding the goods or services to be transferred, and
 The entity must be able to identify the terms and manner
of payment for the goods or services.
Additional points:
 Contracts need not be written
 If party can terminate contract before performance occurs,
contract does not exist for revenue recognition purposes

10. Step 1 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative
decisions thru June 15 2011)
Persuasive evidence of an Contract An entity obtains rights to receive
arrangement must exist existence consideration from the customer
and assumes obligations to
transfer goods or services to the
customer
Presumption that separate Combining Contracts entered into at or near
contracts with the same contracts the same time with the same
entity or related parties customer (or related entity) shall
entered into at or near the be combined if certain criteria are
same time should be met
evaluated as a single
arrangement

11. Step 1 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative
decisions thru June 15 2011)
Components of one contract Segmenting No requirement to segment
should be accounted for contracts contracts into two or more.
separately if each is
proposed and negotiated
separately and cost and
revenues with each can be
identified.
GAAP provides very little Contract Determine if modification
guidance on modifications modifications results in separate
with the result being that performance obligation
diversity in practice as to
when modifications are
recognized.

12. Step 1 – Combining contracts
An entity would combine and account for as single
contract, multiple contracts entered into at or near the
same time with same customer (or related entity) if one
or more criteria are met:
 The contracts are negotiated as a package with a
single commercial objective
 The amount of consideration in one contract depends
on the other contract, or
 The goods or services in the contracts are interrelated
in terms of design, technology or function.

13. Step 1 – Contract modifications
Contract modifications are any change in the scope or price
of a contract. A contract can be modified by either party.
Treatment of contract modifications:
 Account for as separate contract if modification results in
the addition of a separate performance obligation at a
price that is commensurate with that additional
performance obligation.
OR
 Combine the modification with the contract and reevaluate
the performance obligation and reallocate the transaction
price to each separate performance obligation.

14. Step 2 – Identify the separate performance
obligations
Key provision: An entity shall evaluate the terms of the
contract and its customary business practice to
identify all promised goods or services and
determine whether to account for each as a separate
performance obligation.
 What is a performance obligation?
 A performance obligation is a promise whether explicit
or implicit in a contract with a customer to transfer a
good or service to the customer. Can be implied by an
entity's business practices, published policies or
specific statements.

15. Step 2 – What are goods and services?
Goods and services include:
 Goods produced by an entity for sale (manufacturer)
 Goods purchased by an entity for resale (retailer)
 Arranging for another party to transfer goods or
services
 Standing ready to provide goods or services
 Constructing or developing an asset on behalf of a
customer
 Granting licenses, rights to use and options, and
 Performing a contractually agreed task.

16. Step 2 – Separate vs. bundle
 If more than one good or service is provided, the
entity will need to make a determination whether to
bundle or separate the performance obligation.
 Account for each promised good or service as a
separate performance obligation only if it is
distinct.
 If not distinct, combine good or service with other
promised goods or services until the entity identifies
a bundle of goods or services that is distinct.
 In some cases, that would result in an entity
accounting for all the goods or services promised
in the contract as a single performance obligation.

17. Step 2 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative
decisions through June
15, 2011)
Different models several places in Bundling Bundle if entity provides a
GAAP where separating performance service of integrating them
deliverables in a multiple- obligations into a single item that the
deliverable arrangement is entity provides to the
discussed. For example, for customer
construction-type contracts
combine as one unit and apply
percentage completion or
completed contract method

18. Step 2 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative
decisions through June
15, 2011)
Within the Scope of ASC 605-25, Separating The pattern of transfer of
separate if both 1) delivered item performance the good or service is
has standalone value to customer, obligations different from the pattern of
and 2) if arrangement includes transfer of other promised
general right of return related to goods or services in the
the delivered item, delivery or contract, AND the good or
performance of the undelivered service has a distinct
item(s) is considered probable function
and substantially in the control of
the vendor.

19. Step 2 – Distinct performance obligations
Distinct if either:
1. The entity regularly sells the good or service separately,
or
2. The customer can use the good or service either on its
own or together with resources that are readily available
to the customer.
Exception: If entity transfers goods or services at the same time,
it is not necessary to apply the proposed requirements to
each performance obligation separately if accounting for
those obligations together would result in the same
amount and timing of revenue recognition as if they were
accounted for separately.

20. Step 3 – Determine the transaction price
Key provision: The transaction price is the amount of
consideration an entity expects to receive in exchange
for transferring goods or services to a customer.
To meet that objective, an entity would estimate the
transaction price using one of the following methods
depending of which is most predictive of the amount of
entitled consideration:
 The probability-weighted amount; or
 The most likely amount.
This amount would be allocated to the separate
performance obligations.

21. Step 3 – Variable consideration
Many times the transaction price is readily determinable because
the customer promises to pay a fixed amount of consideration
and it is made near the time of transfer of good or service,
however in some cases, there is variable consideration.
Follow these steps when a contract has variable consideration.
1. Determine the transaction price
2. Allocate the transaction price to the separate performance
obligations in the contract, and
3. Limit the amount of revenue that may be recognized
cumulatively on a contract to amounts that the entity is
reasonable assured of being entitled to receive.

22. Step 3 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative
decisions through June 15,
2011)
Recognize revenue when Uncertainty Recognize revenue at
the fee is fixed/determinable satisfaction of performance
- There is no definition of obligation unless the vendor is
fixed or determinable fees, not reasonably assured to be
instead, literature provides entitled to that amount
examples.
In past, entities may have
recognized revenue when
contingency was met…more
restrictive.

23. Step 3 – Reasonably Assured DETAIL
 Indications in which the entity is not reasonable
assured of payment:
 Lack of experience with similar type contracts, or
 The entity has experience but experience is not predictive
of the outcome of the contract.
 Factors that reduce the relevance of an entity’s
experience include:
 Consideration is highly susceptible to factors outside the
influence of the entity
 Uncertainty not expected to be resolved for long time
 Limited experience with similar types of contracts
 The contact has a large number of possible consideration
amounts

24. Step 3 – Transaction price other considerations
When determining the transaction price, an entity shall
consider the effects of:
 collectability,
 the time value of money,
 noncash consideration, and
 consideration payable to the customer.

25. Step 3 – Collectability
 Do not consider effects of credit risk in
measurement of transaction price.
 Standard will not include a requirement to assess
the customer’s ability to pay.
 Recognize an allowance for expected impairment
loss from contracts with customers. Present as a
contra-revenue account adjacent to revenue line
item.
Current GAAP: Revenue should not be recognized until
collection becomes reasonably assured.

26. Step 3 – Time value of money
An entity should adjust the promised amount of
consideration to reflect the time value of money if
the contract includes a financing component that is
significant to the contract.
An entity would not be required to assess whether a
contract has a significant financing component if the
period between payment by the customer and the
transfer of the goods or services is one year or less.

27. Step 3 – Time value of money example
3 year $30,000 service contract whereby services are
performed monthly assuming interest rate is 5%
 Inception
 Debit cash, credit contract liability for $30,000
 Month 1
 Debit interest expense, credit contract liability for
$125
 Debit contract liability, credit revenue $775

28. Example of variable consideration
 Jan 1, entity enters into contract to provide fund
management services for one year
 Customer pays fixed quarterly amounts plus 10% of
any increase in the fund’s value relative to an
observable index at the end of the year
 The entity has entered into many similar contracts,
however circumstances surrounding these types of
contracts can change significantly

29. Example of variable consideration
 The variable consideration is highly susceptible to
external factors i.e. market risk
 The uncertainty cannot be resolved until the end of
the year
 There are a large number of possible outcomes
Conclusion – transaction price would be limited to
fixed amount until the end of the year.

30. Step 4 – Allocate the transaction price
 Key provision: An entity should allocate the
transaction price to all separate performance
obligations in proportion to the standalone selling
price of the good or service underlying each
performance obligation at contract inception.
 The best evidence of a standalone selling price
would be the observable price of a good or service
when the vendor sells it separately.

31. Step 4 – Allocate the transaction price
 When estimating standalone prices, maximize the
use of observable inputs and apply estimation
methods consistently for goods or services and
customers with similar characteristics. Suitable
methods:
 Expected cost plus a margin (forecast), and
 Adjusted market assessment approach (evaluate
market).

32. Step 4 – Comparison to current GAAP
EXPOSURE DRAFT
CURRENT GAAP TOPIC (incorporates tentative decisions
through June 15, 2011)
1) Entity-specific Standalone selling Best: observable price of a good or
objective evidence 2) price service when the vendor sells it
third-party evidence separately OK: estimate.
3) estimate
New guidance is more flexible.
Generally not Residual method Allowed
allowed

33. Example – Allocating Transaction Price
 An entity enters into a contract to sell Product A for
$100
 Entity gives customer a 40% discount voucher for
future purchases in next 30 days up to $100
 Entity intends to offer a 10% discount on all sales
during the next 30 days as part of seasonal
promotion
 Discount voucher is a separate performance
obligation
 The standalone price of Product A is $100

34. Example – Allocating Transaction Price
 Entity estimates an 80% likelihood that customer will
redeem the voucher and purchase on average $50 of
additional products.
 Because the entity intends to offer a 10% discount to all
customers as part of seasonal promotion, the 40%
discount needs to be reduced by 10% to 30% to reflect
the incremental value of the discount to the customer.
Conclusion: the entity’s estimated standalone selling price
of the voucher is $12 ($50 x 30% X 80%). The entity
allocates $10.7 ($100 x (12/ ($12 + $100)) of the $100
transaction price to the discount voucher.

35. Step 5 – Recognize revenue when performance
obligation satisfied
 Key provision: Recognize revenue when a
performance obligation is satisfied.
 In order to transfer a good or service, the customer
must obtain control.
 Indications the customer has taken control:
 Customer has unconditional obligation to pay
 Customer has legal title
 Customer has physical possession; exceptions
allowed for consignments and bill and holds.
 Risks and rewards of ownership has passed

36. Step 5 – Bill and holds
 Still allowed but will now be a part of the guidance
 Very similar to current SEC guidance
 Fixed schedule of delivery requirement probably
eliminated
 Reduce requirements to 4 rules

37. Step 5 – Performance obligation satisfied
EXPOSURE DRAFT (incorporates tentative decisions
TOPIC through June 15, 2011)
Satisfaction of Determine if satisfaction occurs at a point in time or over
performance time.
obligations
Control is Board will describe rather than define. See examples.
transferred
Continuous model Output, input and passage of time methods should be
methods used to recognize revenue over time.

38. Step 5 – Point in time or over time
 Identify each performance obligation within a contract
and determine if performance obligation is satisfied:
 At a point in time, or
 Recognize revenue when control is asset is transferred
to customer.
 Over time.
 Recognize revenue as performance obligation is
satisfied.

39. Step 5 – Recognize over time
Recognize a performance obligation over time if:
 The entity’s performance creates or enhances an asset that the
customer controls as the asset is being created, or
 The entity’s performance does not create an asset with an
alternative use to the entity and at least one of the following:
 Customer receives a benefit as the entity performs each
task;
 Another entity would not need to re-perform the tasks
performed to date by the entity if that other entity where to
fulfill the remaining obligation to the customer, or
 The entity has a right to payment for performance to date
even if the customer could cancel the contract for
convenience.

40. Step 5 – Three continuous transfer methods
1. Output methods – Recognize revenue of the basis of
units produced or delivered, contract milestones or
surveys of goods or services transferred to date relative
to the total.
 Often result in most faithful depiction.
2. Input methods – Recognize revenue on basis of efforts
expended to date (cost of resources consumed, labor
hours expended, machine hours used) relative total
efforts to be expended.
 Entity has to exclude effects of any inputs that do not
depict the transfer of a good or service (abnormal wasted
material, labor or other resources).

41. Step 5 – Three continuous transfer methods
3. Passage of time method – An entity would recognize
revenue on a straight-line basis over the expected
duration of the contract if services are transferred
evenly over time (licenses).
 Passage of time method by itself is not appropriate but
may be used as a practical way to apply input and output
measures.

42. Construction contract changes
 Variable consideration - use most likely amount
 Continuous transfer over time - performance
obligations can be estimated using input methods
 Change orders – determine if entity must account for
as separate contract
 Separate performance obligation – if distinct and has
separate pattern of transfer

43. Example – Construction contract
 An entity enters into a contract to construct a
facility for a customer
 Requires engineering (design), procurement and
construction activities
 Design is specific to the customer’s requirements
and they are involved in specifying major elements
 The entity procures materials and equipment as
they are needed during construction
 Customer obtains control of materials and
equipment as they are installed
 Construction is expected to take 3 years

44. Example – Construction contract
How would the entity recognize revenue?
(Under current GAAP, combine all activities and apply
percentage of completion or completed contract.)

45. Example – Construction contract
Design services:
Distinct? Yes, construction company regularly sells
design services separately.
When do you recognize? Over time as service is
performed - The vendor’s performance does not
create an asset with an alternative use to the vendor
AND the vendor has a right to payment for
performance to date even if the customer could
cancel the contract for convenience.

46. Example – Construction contract
Procurement service:
Distinct? No, construction company doesn’t
regularly provide procurement services.
Procurement is an activity that is necessary for the
entity to obtain control of the promised materials
and equipment.
When do you recognize? N/A

47. Example – Construction contract
Materials and equipment:
Distinct? Yes, the customer can use the good or service
either on its own or together with resources that are
readily available to the customer.
When do you recognize? At a point in time, recognize
revenue when control is asset is transferred to
customer.

48. Example – Construction Contract
Construction:
Distinct? Divide into separate performance obligations if
the pattern of transfer of the good or service is different
from the pattern of transfer of other promised goods or
services in the contract, and the good or service has a
distinct function.
When do you recognize? Recognize revenue for each
performance obligation over time or with the passage of
time when it is satisfied.

49. Other significant items in exposure draft
 Onerous contracts
 If the costs outweigh the contract price at any time
during the contract then the contract is considered
onerous.
 Once an entity determines a contract is onerous, a
liability should be recorded for the onerous portion.

50. Other significant items in exposure draft
 Contract costs
 Obtainment – recognize asset for the incremental
costs of obtaining a long-term contract that is
expected to be recovered.
 Recognize separately on the balance sheet
 Fulfillment – cost incurred in fulfilling a contract do not
give rise to an asset unless:
 Recoverable
 Generate or enhance resources
 Related directly to the contract

51. Other significant items in exposure draft
 Warranties
 If purchased separately, the warranty is considered its
own performance obligation.
 If not purchased separately, the warranty considered
a cost accrual.

52. Other significant items in exposure draft
 Breakage revenue
 When a pattern of breakage can be estimated
recognize revenue on a proportionate basis.
 When a pattern cannot be estimated, recognize
revenue only when the customer’s likelihood of
exercise becomes remote.

53. Presentation and Disclosure
 Presentation: When either party to a contract has
performed, the entity shall present the contract as a
contract asset or a contract liability depending on the
relationship between the entity’s performance and the
customer’s performance.
 Disclosure: To help users of financial statements
understand the amount, timing, and uncertainty of
revenue and cash flows arising from contracts, an entity
shall disclose qualitative and quantitative information
about:
 its contracts with customers; and
 the significant judgments, and changes in judgments,
made in applying the proposed

54. WHAT YOU NEED TO DO
 Apply the proposed standard to your specific
customer contracts to determine the impact.
 It will be challenging to truly know the impact of this
proposed guidance without applying it directly to your
contracts and working through each of the principles.
 Are your current internal controls and operating
systems sufficient?
 Remember retroactive application
 Will the new standard impact debt covenants?
 Discuss with your tax preparer.

55. RESOURCES
 FASB Proposed Accounting Standards Update –
Revenue Recognition (Topic 605)
 FASB In Focus –short 2-page summary of proposal
 FASB website – technical plan and project updates
tab
 AICPA Accounting and Auditing Brief June 16, 2011 -
good information on redeliberation impact on
exposure draft
 Revenue Recognition Guide – Chapter 13 Future
Expectations – Short 13-page summary of exposure
draft however redeliberation impact is not
incorporated

56. CONNECT WITH ME
Jennifer Goodman, CPA
Assurance Principal
423.756.7100
jennifergoodman@decosimo.com
On LinkedIn:
http://www.linkedin.com/pub/jennife
r-goodman/25/7b1/49a
Disclaimer: The contents of this presentation are for informational purposes only. The information is not intended to be a substitute for
professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have
regarding your financial goals or specific situations.