McGladrey Revised Revenue Recognition Exposure Draft Webcast – What Does It Mean for You?

Revised Revenue Recognition Exposure Draft
– What Does It Mean for You?
January 25 2012
25,

1

Today’s presenters

Rick Day, Partner, National Director of Accounting

Richard Stuart, Partner, National Accounting
Standards Group

Brian Marshall, Partner, National Accounting
Standards Group

2 © 2012 McGladrey & Pullen, LLP. All Rights Reserved.

Agenda

 Background and scope 10 min.
 Revised
R i d proposed revenue model
d d l 30 min.
i
 Other revenue issues 15 min.
 Closing remarks 5 min.


Objective

By the end of this webcast, you will be able to
understand the key accounting concepts included
in the revised exposure draft on revenue
recognition and what it means for you.


Background and scope


Overview

 Preliminary views document issued in Dec. 2008
 Exposure d ft issued i J
E draft i d in June 2010
 Revised exposure draft issued in Nov. 2011 with
comments due March 13
d e
 Final standard expected in late 2012 / early 2013


Scope

 Applicable to all industries and entities
 Specific contracts with customers outside of scope:
- Financial instruments
- Guarantees (other than warranties)
- Insurance
- Leases
- Certain nonmonetary exchanges
y g
 Contracts with performance obligations in multiple
standards
 Recognition and measurement principles also
R iti d t i i l l
applicable to sales of nonfinancial assets that are
not classified as revenue


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


Revised proposed revenue model


Overview

 Approach to comply with core principle

Identify the Identify the Determine Allocate the Recognize
contract with separate the transaction revenue when
a customer performance transaction price to the (or as) each
(Step 1) obligations in price separate performance
the contract (Step 3) p
performance obligation is
(Step 2) obligations satisfied
(Step 4) (Step 5)

© 2012 McGladrey & Pullen, LLP. All Rights Reserved.

1. Identify the contract with a customer

 Enforceable agreement between parties
 Can be itt
C b written, oral or i li d
l implied
 Combination
- Required f contracts entered into at or near the
R i d for t t t di t t th
same time if certain criteria are met
 Modifications
- Treat separately if separate performance obligation
is added and the consideration is consistent with its
standalone selling price
- Otherwise combine with remaining goods or services


2. Identify separate performance obligations

 Promise in a contract to transfer a good or service
 Account for separately if distinct because either of the
following criteria are met:
- Good or service is regularly sold separately by the entity; or
g y p y y y;
- Customer can benefit from good or service on its own or
together with other readily available resources
 However, b dl of promised goods or services i
H bundle f i d d i is
accounted for as one performance obligation if both of
the following criteria are met:
g
- Highly interrelated and require significant integration service;
and
- Significantly modified or customized to fulfill contract


3. Determine the transaction price

 Amount of consideration to which an entity
expects to be entitled from a customer
 Variable consideration
- Estimate based on probability-weighted or most
probability weighted most-
likely amount
 Time value of money
- Only affects transaction price if significant financing
component exists
- Can ignore if time between payment and transfer of
goods or services is one year or less


3. Determine the transaction price

 Noncash consideration
- Measure at fair value or b reference t standalone
M tf i l by f to t d l
selling price of related goods or services
 Consideration payable to a customer
- Reduction of transaction price unless in exchange
for distinct good or service
 Collectibility
- Not considered in transaction price
- Record uncollectible amounts adjacent to revenue


4. Allocate the transaction price

 Generally based on relative standalone selling
prices of separate performance obligations
 Standalone selling price
- Observable price when sold separately (
p p y (best)
)
- Otherwise, estimate based on:
• Cost plus margin
• Adjusted market assessment
• Residual technique allowed if highly variable or uncertain
• Others?
 Subsequent changes i th t
S b t h in the transaction price
ti i
are allocated on a relative standalone selling
p
price basis unless certain criteria are met

5. Recognize revenue

 Recognize revenue as performance obligations are
satisfied based on transfer of control
 Determine if satisfied (and revenue recognized)
over time, based on whether entity’s performance:
, y p
- Creates or enhances an asset the customer controls; or
- Does not create an asset with an alternative use and one
of following criteria is met:
• Customer receives a benefit as entity performs
• Another entity would not need to reperform work completed to
date
• Vendor has right to payment for performance to date
 Select method of progress toward completion
(output i
( t t or input)
t)

5. Recognize revenue

 If prior criteria not met, then satisfied at a point in time
 Recognize revenue when customer obtains control
based on following indicators:
- Entity has right to payment
- Entity has transferred physical possession
- Customer has legal title and risks and rewards of ownership
- Customer has accepted goods or services
 Recognize amount allocated to performance obligation
except for certain variable consideration, which is limited
to
t reasonably assured amount b
bl d t based on:
d
- Experience with similar performance obligations
- Whether that experience is p
p predictive of outcome


Other revenue issues


Onerous performance obligations

 Only applicable to performance obligations satisfied
over a period greater than one year
 Recognize liability if allocated transaction price is
less than lower of:
- Direct costs to satisfy performance obligation; or
- Amount to be paid to exit the performance obligation
 Direct costs include:
- Direct labor and materials
- Allocated costs directly related to contract
- Costs explicitly chargeable to the customer
- Other costs incurred only because contract entered into
y


Contract costs

 Capitalize direct costs of fulfilling a contract or
anticipated contract if those costs:
- Generate or enhance a resource that will be used to
satisfy performance obligations in the future (e.g.,
setup costs); and
- Are expected to be recovered
 Capitalize incremental costs to obtain contract if
expected to be recovered
 Practical expedient to expense costs as
incurred if amortization period would have been
one year or less
y

Warranties

 Customer option to purchase separately
- Separate performance obligation recognized over
S t f bli ti i d
time (warranty service)
 No customer option to purchase separately and
warranty does not provide an additional service
- Recognize revenue and accrue expected costs
g p
- Consider following in determination of whether
additional service is being provided:
• Whether
Wh h warranty i required b l
is i d by law
• Length of warranty period
• Nature of tasks to be performed


Other issues

 Customers’ unexercised rights (“Breakage”)
- Relatively
R l ti l consistent with current U S GAAP practice
i t t ith t U.S. ti
 Licensing and rights to use
- Same guidance as f other goods or services
S id for h d i
- Revenue recognized at point in time when control
transfers if separate performance obligation


Disclosures / transition / effective date

 Disclosure objective:
- Quantitative and qualitative i f
Q tit ti d lit ti information regarding
ti di
nature, amount, timing and uncertainty of revenue
and related cash flows
 Retrospective transition with certain practical
expedients
 Effective date no earlier than 2015 for public
entities and 2016 for nonpublic entities


Questions?
For more information, please contact:
,p
Rick Day
rick.day@mcgladrey.com
rick day@mcgladrey com
563.888.4017

Brian Marshall
brian.marshall@mcgladrey.com
203.312.9329
203 312 9329

Richard Stuart
richard.stuart@mcgladrey.com
203.905.5027


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http://mcgladrey.com/Assurance/Accounting-Resources
p g y g


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p g y p


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f f
associates in more than 70 offices nationwide. McGladrey & Pullen is a licensed CPA firm.

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Thank you!

The information contained herein is general in nature and based on authorities that are subject to change. McGladrey & Pullen, LLP
guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions or for results
obtained by others as a result of reliance upon such information. McGladrey & Pullen, LLP assumes no obligation to inform participants
of any changes in tax laws or other factors that could affect information contained herein. This presentation does not, and is not
intended to, provide legal, tax or accounting advice and readers should consult their tax advisors concerning the application of tax laws
to their particular situations.

Circular 230 Disclosure
This analysis is not tax advice and is not intended or written to be used and cannot be used for purposes of avoiding tax penalties that
may be imposed on any taxpayer.


McGladrey Revised Revenue Recognition Exposure Draft Webcast – What Does It Mean for You?

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McGladrey Revised Revenue Recognition Exposure Draft Webcast – What Does It Mean for You?