Insights 2014

1. REVENUE
RECOGNITION
Dealing With The
Changes
Chris Rouse, CPA
November 13, 2014

2. Revenue Recognition
The New Revenue Recognition Standard
• Issued in May 2014, effective for publics beginning 2017
and for non-publics ending 2018
– Eliminates all industry and transaction guidance in
current standards
– Largest impact on service business, but potentially
will impact all businesses
– Prior periods presented may be either recast or
disclose the effect on prior financials
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3. Revenue Recognition
Overarching Principles
• Defines revenues as inflows or other enhancements of
assets of an entity or settlements of its liabilities (or a
combination of both) from delivering or producing goods,
rendering services, or other activities that constitute the
entity's ongoing major or central operations
• 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 and services
– In effect, revenue is recognized as changes in assets
and liabilities are recognized
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4. Revenue Recognition
Overarching Principles
• Compare to Concept Statement #5 – “Revenues are
considered to have been earned when the entity has
substantially accomplished what it must do to be
entitled to the benefits represented by the revenues”
• Compare to current recognition principles (1) persuasive
evidence of transaction, (2) delivery has occurred,
(3) fee is fixed or determinable and (4) collectability is
assured
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5. Revenue Recognition
The following steps are used to apply the core
principle
• Identify the contract with a customer
• Identify the separate performance obligations in the
contract
• Determine the transaction price
• Allocate the transaction price to the separate
performance obligations
• Recognize revenue when performance obligations
satisfied
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6. Revenue Recognition
Identify the contract with a customer
• May be in writing or oral, but must be documented
• Identify rights and obligations, payment terms
• Must have commercial substance and be probable of
collection
• Not a contract if either party can cancel a wholly
unperformed contract without compensating the other
party
– Becomes recordable when either party performs
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7. Identify the separate performance obligations
in the contract
• A performance obligation is a promise to transfer a good
or service to the customer
• At contract inception, the seller must identify each
distinct good or service promised in a contract
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Revenue Recognition

8. Identify the separate performance obligations
in the contract
• This is a key element in the new standard, and while it is
similar to the current “multiple deliverables” Standard,
there are important differences
– Entities not currently applying the multiple
deliverable standard may have multiple performance
obligations
– Entities currently applying the multiple deliverables
standard may experience different performance
obligations
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Revenue Recognition

9. Revenue Recognition
Determine the transaction price
• Transaction price is the amount of consideration
expected to be received
• Must consider the effect of …
– Variable consideration (discounts, rebates, etc.)
– Financing component
– Noncash consideration
– Consideration payable to the customer
• Consider the terms of the contract and the seller’s
customary business practices
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10. Allocate the transaction price to the separate
performance obligations
• Allocated in proportion to the standalone selling price
– If not directly observable, estimate it
– Standard includes guidance for different situations
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Revenue Recognition

11. Recognize revenue when performance
obligations satisfied
• May be a point in time or over time, depending on how
the obligation is satisfied
– If over time, would be either the input or output
method, whichever is most appropriate
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Revenue Recognition

12. Revenue Recognition
New standard also covers related matters
• Contract modification, additional goods and services
• Right of return, bill and hold, consignments, repurchase
agreements
• Product warranties
• Licenses, rights of use, upfront fees
• Principal vs. agent
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13. Revenue Recognition
Disclosures
• Categories of revenue based on economic factors
effecting nature, amount, timing and uncertainty of
revenues and cash flows
– e.g., product line, geography, market or type
customer, contract type or duration, sales channel,
etc.
– Non-publics can just disclose qualitative info on the
above, but must disclose quantitative revenue info
based on timing (i.e., point of time vs. over time)
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14. Revenue Recognition
Disclosures
• Publics must present in tabular form an analysis of
contract assets and contract liabilities (illustration in
Standard)
• Information about performance obligations, e.g.
– Goods or services involved
– When satisfied
– Payment terms
– Obligations for returns, warranties, etc.
• Judgments, and changes in judgments, made in applying
the Standard
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15. Revenue Recognition
Getting ready for the new standard
• Study the parts of the new standard that apply to you,
and review the implementation guidance on the FASB
and AICPA websites
• Evaluate current contracts with customers
– Identify performance obligations and information
systems
– Identify transaction prices
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16. Revenue Recognition
Getting ready for the new standard
• Evaluate current revenue recognition practices and
compare to requirements of new standard
– Communication of completion of performance
obligations
• Consider necessary changes in contract to achieve
desired revenue recognition timing
– Transfer of risks and rewards of ownership
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17. Revenue Recognition
Getting ready for the new standard
• Consider effect on compensation arrangements, income
taxes, etc.
– May effect timing of compensation based on revenue
or net income
– Some tax revenues are determined by GAAP
• Consider changes to information system to capture
necessary info
– Much of the information necessary to implement the
new standard does not exist in the accounting
department
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18. Revenue Recognition
Getting ready for the new standard
• Point: This is a complicated standard
– the first time
– after that it’s a snap
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19. Revenue Recognition
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In Conclusion….
Bon Auditpetite!
Questions??
Contact any WB professional, or contact Chris
Rouse
crouse@windhambrannon.com
404-898-2000