CPAs & ADVISORS. experience clarity // REVENUE RECOGNITION. FASB/IASB Joint Project

Transcription

1 CPAs & ADVISORS experience clarity // REVENUE RECOGNITION FASB/IASB Joint Project

2 May 28, ASU , Revenue from Contracts with Customers, is released Single, converged, comprehensive approach to revenue recognition, regardless of industry Replaces virtually all existing U.S. GAAP for revenue recognition Effective for public companies in 2017 with additional year for nonpublic entities 2

3 Industry-specific guidance Software (Subtopic ) Real Estate Sales (Subtopic ) Contractors - Construction Revenue Recognition (Subtopic ) Real Estate - General Revenue Recognition (Subtopic ) Real Estate - Retail Land - Revenue Recognition (Subtopic ) CREATING A ONE-STOP SHOP FOR REVENUE LITERATURE Current Guidance New Principle General Recognition Concepts Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered is fixed or determinable Collectibility is reasonably assured The transfer of a promised good or service determines when revenue is recognized and occurs when (or as) the customer obtains control of the asset. Transfer can be made either at a point in time or over time. Construction and production type contracts (Subtopic ) 3

4 WHO S IMPACTED All entities that enter into contracts with customers Public, private, not-for-profit Regardless of industry 4

5 REASONS FOR THE CHANGE Remove inconsistencies in existing requirements Provide more robust framework Improve comparability across companies, industries & capital markets Enhance disclosure Simplify financial statement preparation Provide guidance for transactions that did not previously have authoritative guidance 5

6 SCOPE Contracts with customers, except Lease contracts Insurance contracts Financial instruments Certain guarantees (other than product warranties) Certain nonmonetary exchanges 6

7 CUSTOMERS VS. COLLABORATORS Proposal does not apply to pure collaborative arrangements, that is Parties share in risk of developing product Not for sale of goods or services that are output of entity s ordinary activities Must determine if contract is with customer, collaborator or entity with elements of both 7

8 FIVE-STEP MODEL Step 1 Step 2 Step 3 Step 4 Step 5 Identify contract(s) with customer Identify performance obligations Determine transaction price Allocate transaction price to performance obligations Recognize revenue when (or as) performance obligation is satisfied 8

9 SOME ENTITIES WILL BE AFFECTED MORE THAN OTHERS Industry Step 1 Identify Contract Step 2 Identify Performance Obligations Step 3 Determine Step 4 Allocate Step 5 Recognize Revenue Contract Costs Health Care X X X X X X Finance - Asset Mgrs. X X X X X X Real Estate & Construction X X X X X Manufacturing X X X X X 9

10 STEP 1 IDENTIFY CONTRACT(S) WITH CUSTOMER Contract = agreement between two or more parties that creates enforceable rights & obligations & meets following criteria Commercial substance Approval & commitment by all parties Identifiable rights, obligations & payment terms Collectibility threshold Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 10

11 STEP 1 IDENTIFY CONTRACT(S) WITH CUSTOMER Commercial Substance Collectibility Contract Approval & commitment Identifiable rights, obligations & payment terms 11

12 COLLECTIBILITY Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is probable that it will collect amount of consideration due in exchange for goods or services Assessment is based on both customer s ability & intent to pay as amounts become due 12

13 STEP 2 IDENTIFY PERFORMANCE OBLIGATIONS Performance obligation Promise to transfer goods/services to customer Can be explicitly identified in contract or implied by customary business practices One contract could equal one or many performance obligations Significant judgment may be required Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 13

14 STEP 2 IDENTIFY PERFORMANCE OBLIGATIONS Separate performance obligations should be identified if good or services meet both of following Customer can benefit from good/service on its own or with other readily available resources; & Distinct within context of contract, i.e., not highly dependent on, or highly interrelated with, other promised goods/services in contract Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 14

15 STEP 3 DETERMINE TRANSACTION PRICE price = amount of consideration entity expects to be entitled to (after collectibility threshold is met) Contract terms Customary business practices Time value of money (if significant financing component) Variable consideration (including consideration of constraint) Cash & noncash consideration Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 15

16 STEP 3 DETERMINE TRANSACTION PRICE Revenue from variable consideration constrained unless Entity has experience with similar contracts & is able to estimate cumulative amount of revenue Based on experience, significant reversal of revenue previously recorded is not probable Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 16

17 STEP 4 ALLOCATE TRANSACTION PRICE TO SEPARATE PERFORMANCE OBLIGATIONS Allocate based on relative standalone selling prices of separate performance obligations Observable price when sold separately (best evidence) Otherwise, estimate based on Adjusted market assessment Cost plus margin Residual value - Only if highly variable or uncertain Other Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 17

18 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED Revenue recognized when (or as) control of good/service is transferred to customer Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service Can be recognized over time or at a point in time, depending on how performance obligations are satisfied Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 18

19 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED Control is transferred over time if any of following criteria are met Customer controls asset as it is created/enhanced Customer receives & consumes benefits of entity s performance as entity performs Entity s performance doesn t create asset with alternative use to entity & customer doesn t control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 19

20 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED Measuring progress toward satisfaction of obligation Output methods Milestones reached Units produced Only used if value of WIP & value of units produced but not yet delivered is immaterial Input methods Costs incurred Machine hours used Time lapsed Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 20

21 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED Control transferred at a point in time indicated by following Present right to payment from customer Customer has legal title Customer has physical possession Customer has significant risks/rewards of ownership Customer has accepted asset Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 21

22 STEP 5 RECOGNIZE REVENUE Control transferred at a point in time Present right to payment Legal title Physical possession Significant risk & rewards of ownership Customer acceptance 22

23 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED Licenses - Entity must first determine if license is distinct from other goods or services in arrangement. For licenses that are not distinct, entity would combine license with other goods & services in contract & recognize revenue when it satisfies combined performance obligation Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 23

24 STEP 5 RECOGNIZE REVENUE WHEN (OR AS) PERFORMANCE OBLIGATIONS ARE SATISFIED For distinct licenses, entity would assess nature of promise before applying revenue recognition model to license arrangements Right to use - License is promise to provide right to use entity s IP as it exists at a point in time when license was granted, which transfers to customer at a point in time Access - License that allows customer to access intellectual property as it exists at time of access results in revenue recognition over time Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Step 4: Allocate Step 5: Recognize Revenue 24

25 CONTRACT COSTS Incremental Cost of Obtaining a Contract - Capitalized if recoverable Direct response advertising would be expensed Costs to Fulfill Contract - Entity would recognize asset only if costs meet all of following criteria Relate directly to contract or specific anticipated contract, e.g., direct labor or materials Generate or enhance resources that would be used to satisfy performance obligations in future Are expected to be recovered 25

26 FINANCIAL STATEMENT DISCLOSURES Significantly expanded disclosures Quantitative & qualitative information about nature, amount, timing & uncertainty of revenue & cash flows Limited relief offered to nonpublic companies on some of qualitative disclosures 26

27 EFFECTIVE DATE & TRANSITION Public companies First interim period within annual reporting periods beginning on or after December 15, 2016 Early application would not be permitted Nonpublic entities Additional year after public company effective date Early application permitted as early as public company date 27

28 Cumulative catch-up for existing contracts Cumulative catchup for completed & existing contracts EFFECTIVE DATE & TRANSITION Two transition options Transition 2015* 2016* 2017* Disclosure Full retrospective method with practical expedients Completed & existing contracts restated & presented under new standard Existing, new & completed contracts restated & presented under new standard Modified retrospective method Existing contracts presented under legacy U.S. GAAP Any remaining legacy contract For each line item effect of applying the ASU vs. not applying * Dates are for public entities; nonpublic organizations will be one year later. 28

29 CROSS-FUNCTIONAL IMPLEMENTATION TEAM REQUIRED Department Board of Directors Tax Legal IT Internal Audit Investor Relations Treasury HR Marketing Operations Approve changes to compensation plans Impact of changing in timing of revenue recognition Redraft contract terms with customers System updates Review new internal controls & documentation Communication strategy, manage analysts expectations Review debt covenants for impact of changes in revenue timing Review compensation & incentive plans Review advertising plans & sales incentive programs Review contract fulfillment costs for capitalization 29

30 NEXT STEPS Substantial additional implementation guidance & outreach from FASB expected in upcoming months We plan to issue White papers General Industry specific C&RE Health Care M&D Alerts on AICPA implementation guides Webpage 30

31 JOINT TRANSITION RESOURCE GROUP (TRG) First meeting July 18, 2014, with one additional meeting in October 2014 & four in All meetings will be public & co-chaired by vice chairmen of IASB & FASB Members include financial statement preparers, auditors & users representing wide spectrum of industries, geographical locations & public & private companies & organizations Anyone can submit potential implementation issue for discussion at TRG meetings. IASB & FASB will evaluate each submission & prioritize issues for discussion at TRG meetings TRG will NOT issue guidance 31

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