What Private Companies Should Know About the New Revenue Recognition Standard

Transcription

1 Heads Up Vlume 25, Issue 4 April 11, 2018 In This Issue Intrductin High-Level Overview f the Five-Step Mdel Effective Date fr Private Cmpanies Disclsure Requirements fr Private Cmpanies Internal Cntrl Cnsideratins Related t the New Revenue Standard Lessns Learned Frm Public Cmpanies Experiences What Private Cmpanies Shuld Knw Abut the New Revenue Recgnitin Standard by Lauren Hegg, Jennifer Burns, Amy Grves, Amy Steele, and Kristin Bauer, Delitte & Tuche LLP Intrductin In May 2014, the FASB issued its final standard n revenue frm cntracts with custmers, ASU (cdified in ASC 6062). Since then, the Bard has issued a number f additinal ASUs t amend and clarify the guidance in ASC 606, ASC , and ASC The new standard replaces almst all current revenue guidance, including industry-specific requirements, and every cmpany is likely t be affected by it. Fr private cmpanies, the rules take effect fr annual reprting perids beginning after December 15, 2018, and interim perids within annual reprting perids beginning after December 15, Cnnecting the Dts Appendix A Summary f Disclsure Requirements, Including Practical Expedients, fr Private Cmpanies As used in this Heads Up, a private cmpany is an entity that is nt any f the fllwing: 1 2 A public business entity (as defined in the ASC master glssary). FASB Accunting Standards Update (ASU) N , Revenue Frm Cntracts With Custmers. Fr titles f FASB Accunting Standards Cdificatin (ASC) references, see Delitte s Titles f Tpics and Subtpics in the FASB Accunting Standards Cdificatin.

2 Appendix B Examples f Risks and Internal Cntrl Cnsideratins Related t Adptin f the New Revenue Standard and the Five-Step Mdel fr Recgnizing Revenue A nt-fr-prfit entity that has issued, r is a cnduit bnd bligr fr, securities that are traded, listed, r quted in an exchange r an ver-thecunter market. An emplyee benefit plan that files r furnishes financial statements with r t the SEC. In respnse t cncerns frm cmmenters regarding csts and cmplexities that may verburden private cmpanies, the FASB cnsidered the needs f users f such cmpanies financial statements thrughut the new revenue standard s develpment. The Bard ultimately cncluded that while n specific changes t the recgnitin and measurement guidance were necessary fr private cmpanies, 3 it wuld be apprpriate t mdify the required disclsure package and mandatry effective date fr such cmpanies. Accrdingly, the standard permits private cmpanies t elect nt t prvide certain f the quantitative and qualitative disclsures required fr public cmpanies. This Heads Up prvides a high-level verview f the new five-step mdel fr recgnizing revenue under ASC 606 and discusses the standard s mandatry effective date fr private cmpanies. It als utlines the practical expedients available t private cmpanies with respect t certain f the new standard s disclsure requirements (see Appendix A fr a cmprehensive summary) and discusses internal cntrl cnsideratins. In additin, the Heads Up prvides sme bservatins and lessns learned frm the implementatin f ASC 606 by public cmpanies. Effective Date fr Private Cmpanies As discussed abve, fr private cmpanies, the new revenue standard is effective fr annual reprting perids beginning after December 15, 2018, and interim reprting perids within annual reprting perids beginning after December 15, Private cmpanies may elect t early adpt the new guidance as f the standard s riginal effective date fr public cmpanies (i.e., annual reprting perids beginning after December 15, 2016). If private cmpanies elect t early adpt the standard, they have the ptin t either (1) adpt it beginning with interim perids within the first annual reprting perid r (2) wait t present interim perids under the new standard until the fllwing annual reprting perid. Cnnecting the Dts Effective-date relief t private cmpanies is typically described as a ne-year delay. Hwever, the delay is likely t be even greater than ne year because f the different adptin requirements fr interim perids. Public cmpanies must adpt the new revenue standard fr annual perids beginning after December 15, 2017 (ne year earlier than private cmpanies). Hwever, public cmpanies are als required t adpt the new guidance fr interim perids within thse annual perids. Therefre, a calendar-year-end public cmpany will apply the new revenue standard when presenting its results fr the first quarter f 2018 (i.e., the perid ending March 31, 2018), which the cmpany is likely t issue in April Fr insights int lessns learned frm public cmpanies that have already adpted ASC 606, see Delitte s Revenue Recgnitin Standard fr Private Cmpanies: N Free Passes. 2

3 By cntrast, private cmpanies are nt required t adpt the new revenue standard until they reprt their annual results. Fr example, a calendar-year-end private cmpany wuld typically prduce the results f its year ended December 31, 2019, in March r April In additin, if a private cmpany s financial statements fr an interim perid are required r are therwise prduced, the private cmpany is nt required t adpt the new revenue standard fr that interim perid if such perid ccurred in the year ended December 31, Hwever, given that the annual results will be reprted n a new basis (i.e., under ASC 606), a private cmpany may find it beneficial t early adpt the standard fr interim perids since the cmpany wuld therwise be required t revise the accunting fr its revenue transactins as presented in its interim financial statements when including full-year results in its year-end reprting. High-Level Overview f the Five-Step Mdel The graphic belw summarizes the five-step mdel fr recgnizing revenue under ASC Identify the cntract with a custmer 2. Identify the perfrmance bligatins 3. Determine the transactin price 4. Allcate the transactin price 5. Recgnize revenue when (r as) perfrmance bligatins are satisfied A cntract is an agreement between tw r mre parties that creates enfrceable rights and bligatins. A cntract can be written, ral, r implied by an entity s custmary business practices. Fr a cntract t exist under ASC 606, the fllwing five criteria must be met: The parties t the cntract have apprved the cntract. The entity can identify each party s rights. The entity can identify the payment terms. The cntract has cmmercial substance. It is prbable that the entity will cllect the amunt t which it expects t be entitled. A perfrmance bligatin is the prmise t transfer t the custmer a gd r service (r bundle f gds r services) that is distinct. Distinct gds and services shuld be accunted fr as separate units f accunt. Entities need t determine whether a gd r service (r bundle f gds r services) is capable f being distinct and distinct in the cntext f the cntract. A series f substantially the same gds r services fr which cntrl transfers ver time and that have the same pattern f transfer is accunted fr as a single perfrmance bligatin. The transactin price is the amunt the entity expects t be entitled t in exchange fr transferring prmised gds r services t the custmer. The transactin price may include fixed amunts, variable amunts, r bth. T determine the transactin price, entities shuld cnsider the effects f: Variable cnsideratin. The cnstraint n estimates f variable cnsideratin. Significant financing cmpnents. Nncash cnsideratin. Cnsideratin payable t the custmer. The transactin price (frm step 3) is allcated t each perfrmance bligatin identified (frm step 2). On the basis f its specific circumstances, an entity wuld use ne f the fllwing appraches t allcate the transactin price t the perfrmance bligatins: Allcate accrding t each perfrmance bligatin s stand-alne selling price. Allcate a discunt r variable amunt t a specific perfrmance bligatin (r bundle f specific perfrmance bligatins) if certain criteria are met. Requires cnsideratin f: Revenue recgnitin when (r as) cntrl f the gd r service is passed t the custmer. The criteria fr satisfying perfrmance bligatins and recgnizing revenue ver time. Measurement f prgress tward satisfying perfrmance bligatins t determine a pattern f revenue recgnitin ver time. Indicatrs f when perfrmance bligatins are satisfied and when t recgnize revenue at a pint in time. 3

4 Fr a cmprehensive discussin f the new revenue standard and each f the five steps, see Delitte s A Radmap t Applying the New Revenue Recgnitin Standard. Disclsure Requirements fr Private Cmpanies The FASB gave private cmpanies sme relief related t applying the new revenue standard by permitting them t elect nt t prvide certain f the standard s quantitative and qualitative disclsures. The paragraphs belw discuss the disclsure requirements fr private cmpanies under ASC 606. Disaggregatin f Revenue ASC requires public cmpanies t disaggregate revenue... int categries that depict hw the nature, amunt, timing, and uncertainty f revenue and cash flws are affected by ecnmic factrs. ASC prvides the fllwing examples f categries that public cmpanies may cnsider when preparing their disaggregated revenue disclsures, including (but nt limited t): Type f gd r service. Gegraphical regin. Market r type f custmer. Type f cntract. Cntract duratin. Timing f transfer f gds r services. Sales channels. Private cmpanies may elect nt t disclse the disaggregated revenue infrmatin required by ASC ; hwever, under ASC , such cmpanies shuld, at a minimum, prvide revenue infrmatin disaggregated accrding t the timing f transfer f gds r services (fr example, revenue frm gds r services transferred t custmers at a pint in time and revenue frm gds r services transferred... ver time). Further, because private cmpanies are nt required t prvide segment reprting infrmatin, they need nt recncile such data t the disaggregated revenue infrmatin. Cntract Balances Private cmpanies are required t disclse the pening and clsing balances f receivables, cntract assets, and cntract liabilities frm cntracts with custmers, if nt separately presented r disclsed. Hwever, they may elect nt t disclse the ther cntract balance infrmatin required by ASC thrugh and ASC A. That is, private cmpanies are nt required t disclse: The amunt f revenue recgnized in the current perid that was previusly recgnized as a cntract liability. The amunt f revenue recgnized that is related t perfrmance bligatins satisfied... in previus perids (e.g., because f changes in the transactin price). [H]w the timing f satisfactin f its perfrmance bligatins... relates t the typical timing f payment and the effect... n the cntract asset and the cntract liability balances. [A]n explanatin f the significant changes in the cntract asset and the cntract liability balances during the reprting perid. 4

5 Perfrmance Obligatins ASC requires private cmpanies t disclse infrmatin abut the nature f their perfrmance bligatins, including: When the entity typically satisfies its perfrmance bligatins (fr example, upn shipment... as services are rendered...). Significant payment terms, including infrmatin abut variable cnsideratin and significant financing cmpnents. The nature f the gds r services that the entity has prmised t transfer, including arrangements in which the cmpany is acting as an agent. Obligatins fr returns, refunds, and ther similar bligatins. Types f warranties and related bligatins. Remaining Perfrmance Obligatins ASC requires a public cmpany t disclse the aggregate amunt f the transactin price allcated t the [remaining] perfrmance bligatin and when the cmpany expects t recgnize that amunt as revenue (either n a quantitative r qualitative basis). Many refer t this requirement as the backlg disclsure because a cmpany must describe expected future revenue t be recrded n partially cmpleted cntracts. Fr example, suppse that a calendar-year-end public cmpany sells a tw-year magazine subscriptin t a custmer n April 1, 20X8, fr an up-frnt payment f $24. As f December 31, 20X8, the cmpany has fulfilled nine mnths f the cntract by delivering nine magazines t the custmer and has recgnized $9 f revenue. In accrdance with ASC , the cmpany is required t quantitatively disclse fr December 31, 20X8, the $15 remainder as the transactin price allcated t the utstanding perfrmance bligatins since it expects t fulfill the 15 mnths left in the subscriptin and recgnize the remaining $15 in revenue in future perids (i.e., in the years ending December 31, 20X9, and December 31, 20Y0). The FASB decided t permit private cmpanies t elect, as a practical expedient, nt t disclse the infrmatin required by ASC thrugh abut their remaining perfrmance bligatins. Significant Judgments ASC thrugh require public cmpanies t disclse infrmatin abut the significant judgments they used in (1) determining the amunt and timing f revenue recgnitin, including infrmatin abut the timing f satisfactin f perfrmance bligatins; (2) determining the transactin price; and (3) allcating the transactin price t the perfrmance bligatins in the cntract. Private cmpanies may elect nt t disclse the majrity f the infrmatin required fr public cmpanies; hwever, at a minimum, they must disclse: The methds they used t recgnize revenue fr perfrmance bligatins satisfied ver time (e.g., utput r input methds). The methds, inputs, and assumptins they used t evaluate whether an estimate f variable cnsideratin is cnstrained. 5

6 Cntract Csts ASC thrugh 50-4 require public cmpanies t disclse quantitative and qualitative infrmatin abut their cntract csts, including the clsing balances f their capitalized cntract csts, the amunt f amrtizatin and impairment lsses they recgnized in the reprting perid, certain judgments they made in determining the csts t be capitalized, and the amrtizatin methd they used. Private cmpanies, hwever, may elect nt t disclse any infrmatin abut their cntract csts. Practical Expedients While ASC requires public cmpanies t disclse their electin f practical expedients related t the determinatin f whether a significant financing cmpnent exists and the capitalizatin f incremental csts t btain a cntract, private cmpanies d nt have t disclse whether they have used any f the ASC 606 r ASC practical expedients. Interim Disclsure Requirements fr Private Cmpanies Interim reprting requirements, including thse related t disclsure, are utlined in ASC 270. In particular, ASC (a) requires public cmpanies t disclse, at a minimum, [s]ales r grss revenues, prvisin fr incme taxes, net incme, and cmprehensive incme. The new revenue standard amended the interim reprting requirements in ASC 270 t add ASC A, under which public cmpanies must prvide certain annual revenue disclsures n an interim basis. 4 Many private cmpanies are nt subject t interim financial reprting requirements and therefre need nt cmply with thse in ASC 270. In additin, ASC A applies nly t public business entities, nt-fr-prfit entities, and emplyee benefit plans. Thus, even if a private cmpany prduces interim financial infrmatin, it is nt required t prvide the interim disclsures that public cmpanies must prvide. Internal Cntrl Cnsideratins Related t the New Revenue Standard While the regulatry rules related t internal cntrl may be less stringent fr private cmpanies than their public cunterparts, internal cntrls are still an imprtant tpic, particularly regarding changes in the accunting, reprting, and disclsure f revenue. Belw are sme cnsideratins fr private cmpanies as they implement ASC 606. Internal Cntrls Over the Adptin f New Standards The unique circumstances and cnsideratins assciated with the adptin f a new accunting standard can ften result in an increased risk f material misstatement. Private cmpanies shuld therefre cnsider circumstances that may be present nly during the adptin perid and evaluate whether there are any unique risks that require netime internal cntrls (i.e., cntrls that perate exclusively during the adptin perid). Management shuld als cnsider the internal cntrls, dcumentatin, and evidence it may need t supprt: Entity-level cntrls such as the cntrl envirnment and general tne at the tp. Identificatin f material revenue streams and different cntract types within thse revenue streams. 4 ASU amended the interim reprting requirements in ASC 270 t add ASC A, which requires public cmpanies t prvide the fllwing annual revenue disclsures n an interim basis: [D]isaggregatin f revenue. [O]pening and clsing balances f receivables, cntract assets, and cntract liabilities. Revenue recgnized in the reprting perid that was included in the [pening] cntract liability balance. Revenue recgnized in the reprting perid frm perfrmance bligatins satisfied (r partially satisfied) in [prir] perids. Infrmatin abut the transactin price allcated t the remaining perfrmance bligatins. 6

7 Accunting cnclusins reached (e.g., as a result f preparing accunting white papers r internal mems memrializing management s cnsideratins and cnclusins), including the effect n ther accunt balances such as csts f sales r services, cntract assets and liabilities, and incme tax accunts. Infrmatin used t supprt accunting cnclusins, new estimates, adjustments t the financial statements, and disclsure requirements. Identificatin and implementatin f changes t infrmatin technlgy (IT) systems, including the lgic f reprts. The transitin apprach selected. The accunting lgic used and jurnal entries (including the transitin adjustments) that recrd the adptin s impact. Any practical expedients applied and related disclsures. Changes t the mnthly, quarterly, r annual clse prcess and related reprting requirements (e.g., internal reprting, and disclsure cntrls and prcedures). See Appendix B fr cnsideratins related t additinal risks and internal cntrls. Risks and Internal Cntrls Assciated With the Five-Step Mdel As a result f the new revenue standard s requirement that cmpanies apply a five-step mdel fr recgnizing revenue, it is pssible that new financial reprting risks will emerge, including new r mdified fraud risks, and that new prcesses and internal cntrls will be required. Cmpanies shuld therefre cnsider whether they need t mdify their internal cntrls t address such risks. Fr example, in applying the five-step mdel, management will need t make significant judgments and estimates (e.g., the determinatin f variable cnsideratin and whether t cnstrain such cnsideratin). It is critical fr management t (1) evaluate the risks f material misstatement assciated with these judgments and estimates, (2) design and implement cntrls t address thse risks, and (3) maintain dcumentatin that supprts the assumptins and judgments that underpin its estimates. Appendix B utlines the five-step revenue recgnitin mdel and cntains examples f risks and cntrls fr cnsideratin. 7

8 Significant Changes in Infrmatin and Related Data-Quality Needs Private cmpanies may need t gather r track new infrmatin t cmply with the five-step mdel and related disclsure requirements. Management shuld cnsider whether apprpriate cntrls are in place t supprt (1) the necessary IT changes (including change management cntrls and, nce the IT changes have been implemented, the testing f their design and perating effectiveness) and (2) the accuracy f the infrmatin used by the cmpany t recgnize revenue and prvide the required disclsures. The table belw illustrates sme ptential challenges and examples f internal cntrl practices. Ptential Challenge Infrmatin systems have nt been updated t supprt the new standard s reprting requirements (e.g., annual requirements, including disclsures). Cntrl expectatins have nt been cnsidered fr new infrmatin required under the standard. Internal cntrls ver surce data, reprt lgic, r reprt parameters have nt been recnsidered. Example f Internal Cntrl Practice Management establishes data gvernance plicies fr identifying and reslving data gaps and implements prcesses t verify the quality f infrmatin needed fr implementatin f the new standard. The revenue recgnitin implementatin team meets peridically with the cntrl team (and cntrl wners as apprpriate) t share relevant infrmatin abut the adptin f the new standard s that the cntrl team can prepare and plan accrdingly. Management takes steps t update and review the apprpriate flwcharts, data flw diagrams, prcess narratives, prcedure manuals, and cntrl prcedures t reflect the new prcesses as a result f the standard. Applying the COSO Principles The Cmmittee f Spnsring Organizatins f the Treadway Cmmissin s (COSO s) Internal Cntrl Integrated Framewrk prvides 17 principles and related guidance that private cmpanies may want t cnsider in their evaluatin and design f cntrls in respnse t the new revenue standard. They may als want t cnsider any evidence and dcumentatin they will need t supprt the peratin f thse cntrls. Fr further discussin, see Delitte s May 9, 2017, Heads Up n internal cntrl cnsideratins related t adptin f the new revenue standard. 8

9 Lessns Learned Frm Public Cmpanies Experiences The experiences f public cmpanies may prve helpful t private cmpanies as they implement the new revenue standard s requirements, particularly its recgnitin and measurement principles. The fllwing graphic illustrates sme lessns learned frm public cmpanies regarding the implementatin prcess: Training utside f accunting Budgeting and financial clse prcess All emplyees invlved in revenue-prducing transactins can benefit frm understanding the standard s changes and their effect n the business. Sales, finance, legal, IT, and tax persnnel can wrk tgether t determine hw the standard affects peratins. Be aware f hw changes t the timing f revenue recgnitin may affect year-n-year cmparisns and current and year-end prjected results (including effects n prjected cmmissins and bnuses). Revisit the financial clse prcess t identify and address any ramificatins (e.g., prcess changes and new data needs). Incme taxes Changes in timing f revenue recgnitin can affect recgnitin f taxable incme, expenses, benefits, and deferrals. Timing changes may als affect state apprtinment factrs, sales and use tax, and transfer pricing. Gvernance and legal Bards, audit cmmittees, and banks will expect detailed plans that address adptin and its effect n revenue trends. Cnsider planning, timelines, added internal and external csts and headcunt, and adequacy f management systems. Cntracts may have prvisins that need t be revisited in light f ASC 606. Cmpensatin plans Bards, management, and human resurces shuld cnsider ways t adapt perfrmance cmpensatin prgrams t accmmdate changes in revenue calculatins that are likely t affect bnus plans and ther perfrmance-based cmpensatin arrangements. Fr a cmprehensive discussin f the abve lessns learned, see Delitte s Revenue Recgnitin Standard fr Private Cmpanies: N Free Passes. 9

10 Appendix A Summary f Disclsure Requirements, Including Practical Expedients, fr Private Cmpanies The table belw summarizes the disclsure requirements and practical expedients fr private cmpanies under the new revenue standard. Categry Disaggregatin f revenue Cntract balances Perfrmance bligatins (including remaining perfrmance bligatins) Disclsure Requirements Disaggregate revenue int categries that depict hw revenue and cash flws are affected by ecnmic factrs. Sufficient infrmatin fr users t understand the relatinship between disaggregated revenue and each disclsed segment s revenue infrmatin. Opening and clsing balances (receivable, cntract assets, and cntract liabilities). Amunt f revenue recgnized frm beginning cntract liability balance. Explanatin f significant changes in cntract balances (using qualitative and quantitative infrmatin). Qualitative infrmatin abut (1) when perfrmance bligatins are typically satisfied, (2) significant payment terms, (3) the nature f gds r services prmised, (4) bligatins fr returns r refunds, and (5) warranties. Amunt f revenue recgnized frm perfrmance bligatins satisfied in prir perids (e.g., changes in transactin price estimates). Transactin price allcated t the remaining perfrmance bligatins: Disclsure f quantitative amunts. Quantitative r qualitative explanatin f when remaining perfrmance bligatin amunts will be recgnized as revenue. Practical Expedient Available t Private Cmpanies 5 N N 5 At a minimum, a private cmpany must, under ASC , disclse revenue disaggregated accrding t the timing f transfer f gds r services (fr example, revenue frm gds r services transferred t custmers ver time). 10

11 (Table cntinued) Categry Significant judgments and estimates Cntract csts Disclsure Requirements Qualitative infrmatin abut determining the timing f: Perfrmance bligatins satisfied ver time (e.g., methds f measuring prgress, why methds are representative f the transfer f gds r services, judgments used in the evaluatin f when a custmer btains cntrl f gds r services). Perfrmance bligatins satisfied at a pint in time specifically, the significant judgments used in the evaluatin f when a custmer btains cntrl. Qualitative and quantitative infrmatin 7 abut: Determining the transactin price (e.g., estimating variable cnsideratin, adjusting fr the time value f mney, nncash cnsideratin). Cnstraining estimates f variable cnsideratin. Allcating the transactin price, including estimating stand-alne selling prices and allcating discunts and variable cnsideratin. Measuring bligatins fr returns, refunds, and ther similar bligatins. Qualitative infrmatin abut: Judgments made in determining the amunt f the csts incurred t btain r fulfill a cntract. The methd the entity uses t determine the amrtizatin fr each reprting perid. Quantitative infrmatin abut: The clsing balances f assets recgnized frm the csts incurred t btain r fulfill a cntract, by main categry f asset. The amunt f amrtizatin and any impairment lsses recgnized in the reprting perid. Practical Expedient Available t Private Cmpanies 6 8 Practical expedients Disclsure f practical expedients used. 6 At a minimum, a private cmpany must disclse the methds used t recgnize revenue fr perfrmance bligatins satisfied ver time. 7 This includes the methds, inputs, and assumptins used in an entity s assessment. 8 At a minimum, a private cmpany must disclse the methds, inputs, and assumptins used in evaluating whether an estimate f variable cnsideratin is cnstrained. 11

12 Appendix B Examples f Risks and Internal Cntrl Cnsideratins Related t Adptin f the New Revenue Standard and the Five-Step Mdel fr Recgnizing Revenue The table belw summarizes certain risks assciated with a private cmpany s adptin f the new revenue standard s five-step mdel and examples f related cntrl cnsideratins. Cre Cnsideratins Examples f Risks Examples f Cntrl Cnsideratins 9 Adptin perid Five-Step Mdel 1. Identify the cntract with the custmer 2. Identify the perfrmance bligatins 3. Determine the transactin price All material revenue streams and cntract types are nt identified. Accunting cnclusins are nt accurate r cmplete. The recrding f the adptin f the revenue standard is nt accurate r cmplete. IT lgic fr reprts and jurnal entries is nt accurate. Revenue is/is nt recgnized when a cntract (as defined by the new revenue standard) des nt exist/ des exist. Side agreements exist that are nt knwn t accunting persnnel. Perfrmance bligatins are nt prperly identified. Management s estimates are inaccurate as a result f an inapprpriate methd r inapprpriate significant assumptins. Internal cntrls related t: Identifying and evaluating all material cntract types. Identifying the cmplete ppulatin f cntracts t evaluate. Evaluating whether the data used t recrd adjustments t the financial statements is accurate and cmplete. Dcumenting and reviewing accunting cnclusins and revised accunting plicies. Reviewing the applicatin f the transitin methd elected. Identifying, develping, and implementing new system requirements, including lgic f reprts. Internal cntrls related t: Identifying cntracts that meet the criteria defined in the new standard. Reassessing arrangements that d nt initially meet the criteria f a cntract in accrdance with the new standard given that significant changes may ccur in the underlying facts and circumstances. Assessing management s cmmitment and ability t perfrm under the cntract. Ensuring payment terms are prperly cnsidered. Assessing the cllectibility criterin. Evaluating whether cmbined cntracts meet the varius criteria specified in the new standard. Evaluating cntract mdificatins. Internal cntrls related t: Identifying implied prmises. Evaluating whether custmer ptins are material rights. Evaluating whether a warranty is a perfrmance bligatin. Evaluating whether the gd(s) r service(s) is/are capable f being distinct within the cntext f the cntract r if tw r mre gds r services shuld be cmbined. Evaluating whether a series f gds r services shuld be treated as a single perfrmance bligatin. Internal cntrls related t: Estimating the amunt t which the entity expects t be entitled including variable cnsideratin and cnstraining variable cnsideratin. Reevaluating the accuracy f judgments and assumptins used in estimates fr variable cnsideratin. Determining the fair value f nncash cnsideratin. Determining significant financing cmpnents. Determining nncash cnsideratin. Determining cnsideratin payable t a custmer. 9 One r mre cntrls may address ne r mre risks. The number f cntrls a cmpany may have will vary depending n hw the cntrls are designed t address the cmpany s risks. 12

13 (Table cntinued) Cre Cnsideratins Examples f Risks Examples f Cntrl Cnsideratins Internal cntrls related t: 4. Allcate the transactin price Management s estimates are inaccurate as a result f an inapprpriate methd r inapprpriate significant assumptins. Selecting an apprach fr determining the stand-alne selling price that maximizes the use f bservable data. Estimating the stand-alne selling price. Determining the apprpriate transactin price allcatin including variable cnsideratin and discunts. Reevaluating the accuracy f judgments and assumptins used in estimates fr the determinatin f the stand-alne selling price. Five-Step Mdel 5. Recgnize revenue when (r as) perfrmance bligatins are satisfied Revenue is recgnized befre the perfrmance bligatin is satisfied. Internal cntrls related t: Determining whether perfrmance bligatins are satisfied at a pint in time r ver time. Identifying when cntrl transfers t the custmer fr a perfrmance bligatin satisfied at a pint in time. Measuring prgress tward cmplete satisfactin f a perfrmance bligatin that is satisfied ver time (i.e., the input and utput methds). Licensing Cntract csts Presentatin and disclsure Licensing revenue is imprperly recgnized. Csts incurred with btaining r fulfilling a cntract are inapprpriately capitalized. Cntract assets and liabilities are nt presented apprpriately. Ftnte disclsures are nt accurate, cmplete, r understandable. Internal cntrls related t: Determining whether the license is distinct. Identifying the nature f the license (functinal vs. symblic). Determining whether bligatins t prvide updates t r maintenance f licensed intellectual prperty are distinct. Accunting fr sales- r usage-based ryalties. Internal cntrls related t: Evaluating whether the cst f btaining r fulfilling a cntract may be capitalized n the basis f the criteria f the new standard. Amrtizing capitalized cntract csts. Internal cntrls related t: Evaluating whether t present cntract assets and liabilities as current r nncurrent. Determining the level f aggregatin r disaggregatin f the disclsures. Reviewing the accuracy and cmpleteness f cntract disclsures. Reviewing the disclsures f significant judgments and estimates. 13

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