This webcast provides an overview of the new revenue recognition standard and will discuss how to prepare for the transition to the converged standard. This webcast will also outline current and planned AICPA resources to help companies transition to the new standard as it has the potential to reverberate through company processes and systems in significant ways. http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Accounting/PRDOVR~PC-WBC14031N/PC-WBC14031N.jsp#.U58-xpRdWuo

1. Understanding the New Revenue
Recognition Standard
June 16, 2014

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Today’s presenters

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Brian Marshall
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.

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Richard Stuart
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.

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Kim is a senior technical manager of the accounting
standards team of the AICPA. In her role she is
responsible for:
• Managing the AICPA Insurance Expert Panel and
AICPA NAIC Task Force
• Preparing comment letters and member
communications related to Revenue Recognition
• Serving as a liaison with FASB, IASB, NAIC and SEC
Staff on insurance issues
• Staying abreast of CPA technical issues, and IASB
and FASB Standards in order to educate and address
member needs
Prior to joining the AICPA, Kim started her career in the
Short Hills, NJ office of KPMG LLP with a concentration
in financial services. She then worked at Metropolitan
Life Insurance Company as a Manager in Institutional
Business – Finance.
Kim Kushmerick
kkushmerick@aicpa.org

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Agenda
Overview
Five-Step Revenue Model
Other Issues
Disclosures, Effective Date and Transition
Post Standard Activities

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Overview

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Overview
FASB/IASB joint project on revenue recognition
completed last month resulting in substantially
converged standards
FASB issued ASU 2014-09, Revenue from
Contracts with Customers (Topic 606)
Single revenue recognition model for contracts
with customers that will impact almost all
entities

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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

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Scope
Applies to all contracts with customers except
those for:
• Financial instruments
• Guarantees other than warranties
• Insurance
• Leases
• Certain nonmonetary exchanges
Recognition and measurement principles also
apply to most sales of nonfinancial assets that
are not classified as revenue

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Five-step revenue model

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Five-step revenue model

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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
• Agreement between two or more parties that creates
enforceable rights and obligations
Contract combination
• Required for contracts entered into at or near the same time with
same customer or related parties if meet certain criteria
Contract modifications
• Specific guidance addresses whether to treat modification as a
separate contract, termination of the existing contract and
creation of a new contract, or as part of the existing contract

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2. Identify performance obligations
Performance obligation is a promise in a
contract to transfer a distinct good or
service (or a series of distinct goods or
services)
Account for good or service separately if it
is distinct, which includes 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 separately identifiable from
other goods or services

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3. Determine the transaction price
Amount of consideration to which an entity expects
to be entitled to from a customer
Variable consideration
• Examples: Bonuses, penalties, price concessions
• Estimate based on expected value or the most-likely
amount, whichever is more predictive
• Subject to a constraint
- Only include amount for which it is probable that a
significant reversal in cumulative revenue recognized
will not occur
- Exception for sales-based or usage-based royalties on
licenses of intellectual property
Significant financing component
Other considerations

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4. Allocate the transaction price
Generally based on relative standalone selling
prices of performance obligations
• Best evidence of standalone selling price is observable
price when sold separately
- If no directly observable price, use techniques such as
cost plus margin or adjusted market assessment
- Residual or reverse residual methods may be used if
price is highly variable or uncertain and other
performance obligations have observable standalone
selling prices
• Exceptions to relative standalone selling price allocation
- Discounts and variable consideration allocated to
specific performance obligations under certain
circumstances

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5. Recognize revenue
Recognize revenue as performance obligations are
satisfied by transferring control to customer
• Determine if satisfied (and revenue recognized) over time based
on meeting any of the following criteria:
- Customer simultaneously receives and consumes benefits
as the entity performs
- Entity’s performance creates or enhances an asset that
customer controls as it is created or enhanced
- Entity’s performance does not create an asset with an
alternative use to the entity and there is an enforceable right
to payment for performance completed to date
• If satisfied over time, select method of progress toward
completion (e.g., output or input method)

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5. Recognize revenue
Recognize revenue as performance obligations are
satisfied by transferring control to customer (cont.)
• If not satisfied over time, performance obligation is considered to
be satisfied (and revenue recognized) at a point in time
- Recognize revenue when customer obtains control based on
consideration of several indicators, including when customer
has:
• Present obligation to pay
• Legal title
• Physical possession
• Significant risks and rewards of ownership
• Accepted the asset

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Other issues

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Contract costs
Guidance only applies if costs not in scope of other ASC
Topics
Capitalize costs to fulfill a contract or anticipated
contract if those costs:
• Directly relate to the contract or anticipated contract;
• Generate or enhance resources that will be used to satisfy
performance obligations in the future; and
• Are expected to be recovered
Capitalize incremental costs to obtain a contract if
expected to be recovered
• Practical expedient to expense when amortization period would
have been one year or less

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Warranties
Customer has option to purchase separately or
warranty provides an additional service
• Treat as a performance obligation
Customer does not have an option to purchase
separately and warranty does not provide an
additional service
• No revenue impact but must accrue expected costs
• Consider the following in determining whether warranty
provides an additional service:
- Whether warranty is required by law
- Length of warranty period
- Nature of tasks to be performed under warranty

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Licensing
Evaluate whether license is distinct from other
goods or services
If distinct, recognize revenue at either a point in
time or over time, depending on the nature of
the license
• If considered a right to use intellectual property as it exists
at license grant date, recognize revenue at a point in time
• If considered a right to access intellectual property as it
exists throughout license period, recognize over time

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Treatment similar to current U.S. GAAP
Return rights
Loss contracts
Customers’ unexercised rights (“Breakage”)
Gross vs. net
Consignment arrangements
Bill-and-hold arrangements
Customer acceptance

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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 presented separately from
other assets
• Unconditional right to receive consideration

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Disclosures, effective date
and transition

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Disclosures
Disclosure objective:
• Sufficient information regarding nature, amount, timing
and uncertainty of revenue and related cash flows
Annual and interim disclosures for public
business entities greatly expanded
Private company disclosure requirements are
extensive as well, but substantially less than
those of public business entities

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Effective date
Effective date for public business entities and
certain not-for-profit entities and employee
benefit plans
• Annual reporting periods beginning after December 15,
2016, including related interim periods
• Early application is prohibited
Effective date for all other entities
• Annual reporting periods beginning after December 15,
2017, and interim periods in years thereafter
• Early application is allowed (earliest would be for interim
reporting periods in annual reporting periods beginning
after December 15, 2016)

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Transition options
Retrospective transition method
• Apply ASU 2014-09 to all prior periods
• Certain practical expedients are allowed
Cumulative catch-up transition method
• No restatement of prior periods
• Apply ASU 2014-09 to in-progress contracts as of the adoption
date going forward and subsequent contracts
• Recognize a cumulative effect adjustment at adoption date for
effects of applying ASU 2014-09 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

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Post standard activities

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What to do now?
Develop an implementation plan
Training
Evaluate accounting changes
Determine transition method
• Interim disclosures before effective
Potential IT system/software application changes
Educate key stakeholders

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Joint Transition Resource Group for Revenue
Recognition
Responsible for informing the FASB and the IASB
about potential issues that could arise when
implementing the new standard
Group will solicit, analyze, and discuss stakeholder
issues that apply to common transactions that could
reasonably create diversity in practice
Provide information to help the Boards determine
what, if any, action will be needed to resolve diversity
in practice
Will not issue guidance

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AICPA Financial Reporting Center:
Revenue Recognition
Provides up to date information on the new Revenue
Recognition standard, plus FASB and AICPA activities:
www.aicpa.org/revenuerecognition
Resources will include:
• Business Brief/Roadmap
• Learning and Implementation Plan
• Audit Committee Primer
• Financial Reporting Alert
• Conferences
• CPE Products
• Journal of Accountancy Articles
• Blog Posts
• Webcasts
• NEW Accounting Guide on Considerations for Applying the new
Revenue Recognition Standard

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Aerospace and Defense
Airlines
Broker Dealers
Construction
Contractors
Depository Institutions
Energy and Utilities
Gaming
HealthCare
Hospitality
Insurance
Investment Companies
Not-for-Profit
Oil and Gas
Software
Telecommunications
Timeshares
AICPA Revenue Recognition Industry Task
Forces
www.aicpa.org/revenuerecognition

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Questions