AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

© 2013 McGladrey LLP. All Rights Reserved.
July 30, 2013
Joint revenue recognition project update
for finance leaders

Brian Marshall Biography
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.

Richard Stuart Biography
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.

McGladrey overview
 Largest U.S. provider of assurance, tax and
consulting services focused on the middle market
 Nearly 6,500 professionals and associates in more
than 75 offices nationwide
 US member of RSM International (RSMI) – a
network of independent accounting, tax and
consulting firms worldwide
- Offices in more than 100 countries with over 32,500 people

Agenda
 Overview
 Proposed five-step revenue model
 Other changes as a result of the model
 Disclosures, effective date and transition
 Closing / Questions
The information in this presentation is based on our understanding of
the FASB and IASB decisions to date and our expectations of what
will be in the final standard when published. The information in the
final standard could be different from that being presented today.

Objective
 Help finance leaders gain an understanding of the
significant changes that will result from the joint
revenue recognition project to enable them to
gauge the impact these changes will have on their
company

Overview

Background and status
 Preliminary views document issued in Dec. 2008
 Exposure draft issued in June 2010
 Revised exposure draft issued in Nov. 2011
 Redeliberations began in July 2012
 Final standard expected in the third quarter of 2013

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

Scope
 Applies to all contracts with customers except those
for:
- Financial instruments
- Guarantees other than warranties
- Insurance
- Leases
- Certain nonmonetary exchanges
 Contracts with performance obligations in multiple
standards
 Recognition and measurement principles also
applicable to sales of nonfinancial assets that are
not classified as revenue

Proposed five-step revenue model

Overview
 Five-step model to comply with core principle
Identify the
contract with
a customer
(Step 1)
Identify the
separate
performance
obligations in
the contract
(Step 2)
Determine
the
transaction
price
(Step 3)
Allocate the
transaction
price to the
separate
performance
obligations
(Step 4)
Recognize
revenue when
(or as) each
performance
obligation is
satisfied
(Step 5)

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
- Enforceable agreement between parties
- Can be written, oral or implied
 Contract combination
- Required for contracts entered into at or near the same time if
certain criteria are met
 Contract modifications
- Treat separately if distinct performance obligation is added
and the price 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 good or service separately if it is 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 not highly dependent on, or highly interrelated with, other promised
goods or services in the contract
 Indicators of a distinct good or service within contract context:
- No significant integration or modification services
- Can be purchased without significantly affecting other promised
goods or services in the contract
- Not part of certain consecutively delivered goods or services

3. Determine the transaction price
 Amount of consideration to which an entity expects to be
entitled to receive from a customer
 Variable / contingent consideration
- Estimate based on probability-weighted or most-likely amount
- However, only include in transaction price if not subject to a
risk of significant revenue reversal
• Evaluate based on experience with similar performance
obligations among other factors
 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 if reasonably estimable or by
reference to standalone 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 directly considered in transaction price
- Impairment from credit losses (bad debt expense)
presented as a separate line item

4. Allocate the transaction price
 Generally based on relative standalone selling
prices of separate performance obligations
 Standalone selling price
- Observable price when sold separately (best)
- Otherwise, estimate based on:
• Cost plus margin
• Adjusted market assessment
• Residual technique allowed if highly variable or uncertain
• Others?
 Subsequent changes in the transaction price that
are not contract modifications are allocated on a
relative standalone selling 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:
- Creates or enhances an asset the customer controls; or
- Benefits customer as entity performs and another entity would
not need to reperform work completed to date (for pure
services contracts); or
- Does not create an asset with an alternative use and vendor
has right to payment for performance to date
 Select method of progress toward completion (output
or input)

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
- Customer has risks and rewards of ownership
- Customer has accepted goods or services

Other changes as a result of the
model

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 a contract if
expected to be recovered
- Unless amortization period would have been one year or
less in which case have the option to immediately expense

Return rights
 Defer revenue by recording a refund liability for
goods expected to be returned
 Adjust refund liability (and revenue) for changes in
return expectations
 Record asset for right to recover products at former
carrying amount less costs of recovery

Warranties
 Customer option to purchase separately or
warranty provides an additional service
- Separate performance obligation recognized over time
 No customer option to purchase separately and
warranty does not provide an additional service
- Recognize revenue and accrue expected costs
- Consider following in determination of whether additional
service is being provided:
• Whether warranty is required by law
• Length of warranty period
• Nature of tasks to be performed

Optional goods or services
 Considered a performance obligation if provides a
material right customer otherwise would not receive
 Estimate standalone selling price of option using:
- Directly observable option price
- Option discount adjusted for likelihood of exercise and
discount available without the option
 Allocate portion of transaction price to option based
on relative standalone selling prices
 Recognize allocated revenue on transfer of control
of optional goods or services or when option
expires

Onerous performance obligations
 Removed from model during redeliberations
 FASB decided to retain existing guidance regarding
the recognition of losses from contracts with
customers, including that within ASC 605-35

Other changes
 Licensing and rights to use
- Revenue recognized at either a point in time or over time
depending on the characteristics of the license
• If considered the provision of a right to intellectual property,
recognize at a point in time
• If considered the provision of a service or access to intellectual
property, recognize over time
 Repurchase agreements
- Entity obligation (forward) or right (call option) to repurchase
asset
- Customer right to require entity to repurchase asset (put option)
 Shipments with risk of loss

Treatment similar to current U.S. GAAP
 Customers’ unexercised rights (“Breakage”)
 Nonrefundable upfront fees
 Principal vs. agent considerations
 Consignment arrangements
 Bill-and-hold arrangements
 Customer acceptance

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 classified separately from other
asset
- Unconditional right to receive consideration

Disclosures, effective date and
transition

Disclosures
 Disclosure objective:
- Quantitative and qualitative information regarding nature, amount,
timing and uncertainty of revenue and related cash flows
 Annual disclosures for public companies include:
- Disaggregation of revenue
- Opening and closing balances of contract assets and liabilities and
related information
- Transaction price allocated to remaining performance obligations
- Contract costs
- Description of performance obligations
- Significant judgments made including methods and inputs used to
determine transaction price and standalone selling price
- Many more
 Interim disclosures for public companies are greatly expanded as
well
 Private company annual and interim disclosure requirements are
substantially less than those of public companies

Effective date
 Public companies
- Annual reporting periods beginning after December 15,
2016, including related interim periods
- Early application is prohibited (FASB only)
 Private companies (FASB only)
- Annual reporting periods beginning after December 15,
2017, and interim periods in years thereafter
- Early application is allowed (earliest would be date that
public companies are required to adopt)

Transition
 Transition options
- Retrospective
• Apply new revenue guidance to all prior periods
• Certain practical expedients are allowed
- Modified retrospective
• No restatement of prior periods
• Apply new revenue guidance to in-progress contracts as of the
adoption date going forward and subsequent contracts
• Recognize a cumulative effect adjustment to retained earnings
for application of the new revenue guidance 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

Closing / Questions

Questions?

For more information, please contact:
Brian Marshall
 brian.marshall@mcgladrey.com
 203.312.9329
Richard Stuart
 richard.stuart@mcgladrey.com
 203.905.5027

McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting, tax and
consulting firms. The member firms of RSMI collaborate to provide services to global clients, but are separate and
distinct legal entities which cannot obligate each other. Each member firm is responsible only for its own acts and
omissions, and not those of any other party.
McGladrey, the McGladrey signature, The McGladrey Classic logo, The power of being understood, Power comes
from being understood and Experience the power of being understood are trademarks of McGladrey LLP.
McGladrey LLP
800.274.3978
www.mcgladrey.com

AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders

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AICPA webcast presented by McGladrey (July 30, 2013) - Joint revenue recognition project update for finance leaders