Working Draft: Telecommunications Revenue Recognition Implementation Issue. Financial Reporting Center Revenue Recognition

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1 May 1, 2018 Financial Reporting Center Revenue Recognition Working Draft: Telecommunications Revenue Recognition Implementation Issue Issue #15-3 Contract Modifications Expected Overall Level of Impact to Industry Accounting: Significant Wording to be Included in the Revenue Recognition Guide: General 1. In accordance with FASB ASC , a contract modification occurs when parties to a contract approve a change in either the scope or price (or both) of a contract. Thus, contract modifications occur after the performance obligations have been identified at contract inception. Refer to section Identification of Separate Performance Obligations in paragraphs of the AICPA Audit and Accounting Guide: Revenue Recognition, for further discussion about accounting considerations at contract inception. Furthermore, in accordance with FASB ASC , performance obligations are either a good or service that is distinct or a series of services that are substantially the same and that have the same pattern of transfer to the customer. 2. When evaluating a contract modification, an entity must first consider FASB ASC , which states that an entity shall account for a contract modification as a separate contract if both of the following conditions are present: a. The scope of the contract increases because of the addition of promised goods or services that are distinct. b. The price of the contract increases by an amount of consideration that reflects the entity s standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract In the telecommunications industry, evaluating whether the incremental goods or services arising from a contract modification are distinct will often be highly judgmental and depend on the specific facts and circumstances. This is because telecommunications services come in a variety of packages and configurations with a variety of relationships among the promised goods and services. 1 References to SSP throughout this Issue should be understood in the context that standalone selling price may be adjusted for particular circumstances. An entity should consider its own facts and circumstances when making this evaluation.

2 4. If an entity concludes that the contract modification should not be accounted for as a separate contract in accordance with FASB ASC , it will next need to consider the guidance in FASB ASC That paragraph provides the following ways to account for a contract modification not deemed a separate contract: Modification Type a) The goods and services not yet provided to the customer are distinct from the goods and services provided to the customer before the change. b) The remaining goods and services are not distinct from the goods and services provided to the customer before the change. c) Some remaining goods and services not yet provided to the customer are distinct from the goods and services provided before the change, and others are not. Accounting Treatment A termination of the existing contract and creation of a new contract. The new contract incorporates both outstanding performance obligations from the original contract as well as those in the modification. A continuation of the original contract with an adjustment to revenue on a cumulative catch-up basis. A mix of a) and b) above. Performance obligations are grouped based on whether they are unsatisfied or partially satisfied at the point of modification. 5. When evaluating a contract modification under FASB ASC , an entity should consider whether the nature of the entity s promise is to provide a series of distinct goods or services. If the modification is accounted for under FASB ASC and the promised goods or services in the existing contract (i.e. before the modification) form a series, the modification will be accounted for as a termination of an existing contract and the creation of a new contract under FASB ASC (a), as there are distinct goods or services in a single performance obligation accounted for as a series. As discussed in TRG Agenda Ref. 39, Application of the Series Provision and Allocation of Variable Consideration, if the nature of the entity s promise is the delivery of a specified quantity of a service, then the evaluation of whether the promise is a series should consider whether each promised good or service is distinct and substantially the same. If the nature of the entity s promise is the act of standing ready or providing a single service for a period of time (that is, because there is an unspecified quantity to be delivered), the evaluation would likely focus on whether each time increment, rather than the underlying activities, are distinct and substantially the same. Additionally, when considering the nature of the entity s promise and the applicability of the series guidance, the criteria in FASB ASC on whether each good or service would (1) meet the criteria to be considered a performance obligation satisfied over time and (2) have the same method to measure progress should also be considered. 6. Contract modifications either create new or change existing enforceable rights and obligations for the parties. When a contract is modified through a change in either scope or price (but not both), the contract will not meet the requirements to create a separate contract in FASB ASC However, an increase in both scope and price can create a separate contract from the existing contract, if the additional goods or services are distinct from the existing goods and services and priced at standalone selling prices Contract modifications that do not create separate contracts should be treated in accordance with FASB ASC Specific to the telecommunications industry, contract modifications in many cases are not individually negotiated with the customer. Rather, the terms and conditions in the original contract specify the types of modifications that are permissible. Even though a formal negotiation process for the modification does not take place, a change in the price or scope of the contract selected by the customer and within the parameters specified by the telecom provider in the original contract is determined to qualify as a contract modification under the new revenue standard. 8. TRG Agenda Ref. 32, Exercise of a Material Right, concludes that the exercise of a material right may be evaluated either as a continuation of the contract or a contract modification. The following paragraphs discuss how the contract modification guidance is applied to the exercise of a customer option (regardless of whether or not it is a material right). Modifications Providing Additional Goods or Services 9. According to FASB ASC , additional goods or services that were not previously promised in an existing contract can result in a contract modification treated as a separate contract. The first requirement for determining whether a separate contract has been created is to identify whether the additional goods or services are distinct from the promised goods or services in the existing contract. FASB ASC describes goods and services as being distinct if they are a) capable of being distinct and b) separately identifiable in the context of the contract. Whether goods and services are distinct must be assessed when identifying performance obligations in a contract. The section Identification of Separate Performance Obligations in paragraphs of

3 the AICPA Audit and Accounting Guide: Revenue Recognition, provides insight to determining when common telecommunication goods and services are considered distinct. 10. Additional goods or services added as a result of a contract modification may not be considered distinct if they are not separately identifiable. 11. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 1: New Line added to a Wireless Multi-line Plan The customer adds a new line to an existing multi-line account, which shares minutes, text messages, and data among multiple devices. The additional line modifies the existing promised services in the multi-line contract. The evaluation of this fact pattern will depend on how the entity evaluates the nature of the promises and whether additional services have been promised to the customer as a consequence of the modification (for example: additional minutes or additional level of service) or if the price of the contract has changed. If, a wireless service provider concludes that there are additional promised goods or services to evaluate, it would first consider whether the incremental goods or services are distinct from the other promises in the contract and priced at their SSP to determine whether the modification should be accounted for as a new contract under FASB ASC If the criteria in that paragraph are not met, the wireless service provider would then consider the criteria in FASB ASC FinREC generally believes a contract modification that adds a new line to an existing multi-line account with shared minutes, text message, and data that is determined not to be distinct under FASB ASC would be accounted for in accordance with FASB ASC (a) when the promised wireless services are considered to be a series of services that are substantially the same and that have the same pattern of transfer to the customer. See further discussion on multi-line accounts in paragraphs of this paper. 12. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 2: Cable Service Addition A customer signs-up for a triple-play arrangement including basic television, internet, and phone services. The customer enters into a three-year contract at a monthly price of $95. As part of the basic television services, the customer is able to access and purchase pay-per-view channels. In month 10 of the contract, the customer adds a premium pay channel for an additional $5 per month and in another separate transaction purchases a pay-per-view movie for $1.99. The premium pay channel and the pay-per-view movie are separately available, do not modify the existing promised services and there is no interdependency with the television, internet, or phone services, thus the additional services are considered distinct under paragraphs 19 and 21 of FASB ASC If these distinct promises for premium pay channels and pay-per-view services are at their respective SSPs, these modifications would be treated as separate contracts, and the company would recognize an additional $5 of revenue per month for the premium pay channel and $1.99 of revenue in month 10 for the pay-per-view movie. 13. If it is determined that the scope increases because of additional distinct goods or services that are sold at a price not reflective of their SSP, then the contract modification would not create a separate contract, and, instead, the contract modification should be accounted for in accordance with FASB ASC (a) when the promised cable services are considered to be a series of services that are substantially the same and that have the same pattern of transfer to the customer. That is, the modification should be treated as a termination of the existing contract and creation of a new contract. 14. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 3: Additional Wireless Service Provided at a Discount After month 3 of an existing 2-year wireless service contract, the customer takes advantage of a special new promotion only to existing customers on certain rate plans to add an international calling plan for an incremental $10 per month. The customer s existing wireless plan did not have international calling services, and the $10 per month price is not reflective of the company s SSP for this service. While the international calling plan is distinct from the services already provided, because it is not provided at its SSP the additional service would not be treated as a separate contract in accordance with FASB ASC and would be accounted for in accordance with FASB ASC (a).

4 15. Although paragraphs 9 14 discuss contract modifications that provide additional goods and services, it is common that the scope of the existing contract can be reduced in a term contract or certain optional telecommunication services can be removed by the customer upon request without penalty. The accounting for such reductions in the scope of service depends on how the entity determined the transaction price under Issue #15-8, Determining the Transaction Price. When the contract is accounted for based on the contracted amount, the reduction of service should be assessed under the contract modification guidance. When the contract is accounted for based on the minimum amount, services beyond the minimum are accounted for as optional services. An entity applying Alternative A in Example 2 in Issue # 15-8 to determine the transaction price should account for a reduction in the scope of service under the contract modification guidance. Refer to example 2 in Issue #15-8 for further discussion. An entity applying Alternative B in Example 2 in Issue #15-8 to determine the transaction price should not account for such reductions in the scope of service as contract modifications, because those services that the customer may remove without penalty are considered contract options that are exercised by the customer on a period-toperiod basis. When applying Alternative B, it is not appropriate to anticipate the duration of these optional services in these situations, according to Issue #15-6, Impact of Enforceable Rights and Obligations. It is also not appropriate to include these optional services in the determination of the transaction price, beyond the initial enforceable periods, according to Issue #15-8. Therefore, if a customer elects to reduce the scope of service, that reduction would not be a modification. However, if a customer continues to purchase optional services beyond the initial enforceable periods, and those contract options were not deemed to be a material right at inception, a contract modification would arise upon each service extension. If these optional services are provided at SSP (and therefore the option does not reflect a material right), such modifications would meet the criteria in FASB ASC and would be accounted for as separate contracts when exercised. However, if that option is deemed to be a material right, the exercise of the option may be evaluated as either a continuation of the contract or a contract modification. Additionally, the recognition period of any existing material rights previously determined would need to be re-evaluated if the option to extend certain services is not exercised. Refer to Issue #15-7, Material Rights for further discussion on recognition period of a material right. Modifications from Service Level or Rate Plan Changes 16. The ability and ease for customers to change the level of services promised in an existing contract is common in telecommunication contracts. When customers change the scope of their existing promised services, as opposed to adding new services discussed in paragraphs 9-12, these modifications are commonly referred to as service level changes (or sometimes rate plan changes for wireless contracts). For wireless contracts, rate plan changes can often include upgrades or downgrades to existing voice, data, or messaging services. For wired contracts, service level changes can occur when customers upgrade or downgrade the speed of their existing broadband services or change their existing television content packages. 17. Contract modifications that result in an increased service level when compared to the existing promised services should be evaluated to determine if the services are both distinct and sold at SSP to determine if the modification should be treated as a separate contract in accordance with FASB ASC Increasing a service level for an existing telecommunications services does not create a distinct service, if it is determined that the incremental service is not separately identifiable in the context of the contract from the existing service. However, this determination is highly dependent on the facts and circumstances of the individual contract and may be subject to significant judgment. Refer to Issue #15-2 Identification of Separate Performance Obligations for further discussion. 18. When service level changes do not result in the creation of separate contracts, the promised services yet to be provided at the point of modification should be evaluated under FASB ASC to see if they should be accounted for as a) a termination of the existing contract and the creation of a new contract b) part of the existing contract or c) as a combination of the two prior accounting results. The key to this classification is whether the promised services yet to be provided are distinct from the services transferred on or before the date of the contract modification. 19. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 4: Incremental Rate Plan Change A customer changes their data rate plan from 2GB per month to 3GB. Based on the facts and circumstances of the contract, an entity might conclude the incremental service (in this case, the 1GB) is not distinct from the existing service (the 2GB), if it is determined that the nature of the promise

5 is to provide a series of services for a period of time and the additional data is not separately identifiable from the existing data promised under the original contract. Based on the facts and circumstances of the contract, an entity might alternatively conclude that the incremental service (in this case, the 1GB) is distinct from the existing service (the 2GB), if it is determined that the nature of the promise is to provide a specified quantity of a service. This determination is highly dependent on the facts and circumstances of the individual contract and may be subject to significant judgment. Refer to section Identification of Separate Performance Obligations in paragraphs of the AICPA Audit and Accounting Guide: Revenue Recognition, for further discussion. If the incremental 1GB of data is considered distinct, an entity should consider whether the incremental data is priced at its SSP under FASB ASC (b). If the entity concludes that the incremental 1 GB of data is not distinct or is distinct but not priced at its SSP, the modification does not meet the conditions in FASB ASC to be accounted for as a separate contract. If the conditions in FASB ASC are not met, FinREC believes the modification generally should be accounted for in accordance with FASB ASC (a), because, as discussed below, the nature of the promise to the customer is to provide a series of services and the services not yet provided to the customer are distinct from the goods or services provided to the customer before the rate plan change. 20. Although it appears that the customer is receiving the same type of telecommunications service before and after the service level change (albeit at an adjusted service level), most services can be disaggregated into distinct parts over time (e.g., monthly service) or distinct increments of service (e.g., each GB). That is, the service satisfied before the service level change can be separated from the promised future service at the updated service level. As the remaining promised services after a service level change are distinct from the services already transferred to the customer, FinREC believes that service level changes that are not accounted for as separate contracts under FASB ASC generally will be treated as a termination of the existing contract and the creation of a new contract in accordance with FASB ASC (a). 21. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 5: Upgrade in Service A wireless customer enters into a 2-year service contract that includes 1,000 minutes per month at a monthly rate of $85. After month 3, the customer upgrades the service level to 1,500 minutes per month plan for $90 per month for the remaining 21 months. Based on the facts and circumstances of the contract, an entity might conclude that the additional 500 minutes per month acquired by the customer are not distinct from the 1,000 minutes per month previously ordered, if it is determined that the nature of the promise to the customer is to provide a series of services for a period of time and the additional 500 minutes per month are not separately identifiable from the existing 1,000 minutes per month in the contract. Based on the facts and circumstances of the contract, an entity might alternatively conclude that the additional 500 minutes per month acquired by the customer are distinct from the 1,000 minutes per month previously ordered, if it is determined that the nature of the promise is to provide a specified quantity of a service. This determination is highly dependent on the facts and circumstances of the individual contract and may be subject to significant judgment. Refer to Issue #15-2 Identification of Separate Performance Obligations for further discussion. If the incremental 500 minutes per month are considered distinct, an entity should consider whether the incremental minutes are priced at their SSP under FASB ASC (b). If the incremental minutes are not considered distinct, or if the incremental minutes are distinct but not priced at their SSP, the modification does not meet the conditions in FASB ASC to be accounted for as a separate contract. If the conditions in FASB ASC are not met, FinREC believes the contract modification generally should be accounted for in accordance with FASB ASC (a) as the services provided before the upgrade (i.e., the 1,000 minutes for 3 months) can be considered distinct from the services yet to be provided in months 4 to 24 (i.e., the 1,500 minutes a month). Under FASB ASC (a), the wireless company would measure the amount of consideration included in the transaction price not recognized as revenue ($85 * 21 months = $1,785, plus the additional consideration promised as part of the modification ($5 * 21 months = $105), and recognize $85 per month in months 1 to 3 for the basic wireless services and $90 per month in months 4 through 24. Modifications Specific to Multi-line plans 22. Many wireless service providers offer customers the option of enrolling into multi-line plans, whereby several lines of service are included under a single account. Changes to multi-line plans, such as the addition of devices and related access, result in contract modifications, which need to be evaluated individually to determine the appropriate accounting. 23. Multi-line plans typically allow existing customers the ability to add lines of service for newly acquired devices under the same established account. Wireless service providers will need to exercise judgment when determining if the new line of service creates a separate contract or the termination of the existing contract and a creation of a

6 new contract. The different outcomes will be based on various factors such as whether additional minutes, text messages, and/or data are included in the modification, whether the price of the plan changes, what the nature of the promise to the customer is determined to be, and whether the new line and additional minutes, text messages, and/or data are distinct from the other lines in the account and if the pricing of the additional lines, minutes, text messages, and/or data is at SSP. When assessing whether the new lines, minutes, text messages, and/or data are distinct, companies should consider the interdependency between the lines, the sharing of services between the lines, such as data, texts or minutes, and any other service features being offered. The guidance in paragraphs of FASB ASC should be considered to make this determination. The evaluation of whether individual lines in multi-line plans represent separate performance obligations are explored further in the section Identification of Separate Performance Obligations in paragraphs of the AICPA Audit and Accounting Guide: Revenue Recognition. 24. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 6: Enrollment in a Multi-line Account A customer purchases a device for $200 and enters into a twoyear contract for unlimited voice and text with 2GB of data per month for $65 a month. The service performance obligation in this contract is determined to be a series of services that include unlimited voice and text and the 2GB of data per month to be delivered over the two-year period. In month 6, the customer determines he would like to add an additional device and line of service to his plan. The additional device will cost $200 and the line will also include unlimited voice and text with 2GB of data per month (separate from the voice, text and data on the first line). Consistent with the first line, the service performance obligation in the second line is also a series of services that includes the unlimited voice and text and the separate 2GB data per month plan. Data will not be shared between the lines. As such, the services related to each line (voice, text, and data) are considered to be separate performance obligations from each other. The total monthly price for voice, text and data for both lines is $130, which is representative of the SSP of the service. The price for the device of $200 is also representative of its SSP. The additional device and related service represent a contract modification as they increase the overall scope and price of the contract. This fact pattern would result in the new device and line being considered a separate contract in accordance with FASB ASB with an allocation of revenue only between the new $200 device and $65 per month line services. In practice, FinREC notes there could be other complicating factors which could call into question whether the services related to the new line are distinct or sold at their SSP, as typically there are value differences or volume discounts to the customer between single-line and multi-line plans. 25. If the modification is not treated as a separate contract because the services associated with the new line are either not considered distinct from the services associated with the existing line or not sold at a price representative of SSP or both, the modification should be treated as a termination of the existing contract and creation of a new contract in accordance with FASB ASC (a) when the promised services are considered to be a series of services that are substantially the same and that have the same pattern of transfer to the customer. The additional consideration together with any unrecognized consideration from the original contract would be allocated to the remaining performance obligations. 26. The following example is meant to be illustrative, and the determination of whether a contract modification should Example 7: Additions to a Multi-line Shared Data Account A customer signs up for a 2-year service contract for two lines and purchases two devices for $200 each. The monthly service includes unlimited voice and text with 10GB of shared data per month at a cost of $130 a month. In month 2, the customer adds a third line to the plan and pays $200 for a third device. The third line will also have unlimited voice and text and will share the 10GB of data per month with the other lines (i.e., there is no incremental data promised). The total monthly recurring service charge for the three lines is $165. The change represents a contract modification, because the scope and price of the contract have increased. While the additional device is considered distinct, the entity will need to determine if the incremental service for the third line is distinct from the service to be provided for the first two lines. Generally, when there are shared services at the account level, such as the data in this example, the service for each line may not be distinct, when it is determined that the services are inputs to the combined output for which the customer contracted to receive from the entity (i.e., to provide an integrated service data plan). However, this determination is highly dependent on the facts and circumstances of the individual contract and may be subject to significant judgment. Refer to the section Identification of Separate Performance Obligations in paragraphs of the AICPA Audit and Accounting Guide: Revenue Recognition for further discussion. Under the view that the incremental service for each line is not distinct, FinREC believes those services generally should be accounted for in accordance with FASB ASC (a) when the promised services are considered to be a

7 series of services that are substantially the same and that have the same pattern of transfer to the customer, and therefore, the services not yet provided to the customer are distinct from the goods and services provided to the customer before the rate plan change. As a result, the additional consideration promised as part of the modification, together with any unrecognized consideration from the existing contract, would be allocated to the remaining performance obligations, which are the third device and the promised service for three lines. Equipment Upgrades 27. In addition to modifying service plans, customers in the telecommunications industry are often able to upgrade their related equipment at, or prior to, the end of their original contract upon negotiation. Such upgrades would include handsets for wireless customers or customer premise equipment (CPE) for cable or wired customers. 28. If a customer in a service contract negotiates an upgrade of their CPE or handset prior to the end of the existing contract, the upgrade would need to be assessed to determine if it should be accounted for under FASB ASC or Such determination should be based on the facts and circumstances of an entity s specific situation. Considerations include whether the additional services are determined to be distinct and if the new device and service bundle is priced at SSP. Changes to Service Pricing 29. Changes to service pricing for existing contracts can be normal occurrences in the telecommunications industry. If pricing changes occur on performance obligations that give rise to variable consideration that was estimated at the inception of a contract, such changes in pricing would not be considered a contract modification in accordance with FASB ASC and paragraphs of ASC If service pricing changes are not anticipated at the onset of a contract according to the variable consideration guidance in paragraphs 5-10 of FASB ASC , pricing changes should be accounted for as a contract modification, in accordance with paragraphs of FASB ASC Contract Assets and Liabilities at Modification 30. When a contract modification occurs that is accounted for under FASB ASC (a), the company will need to allocate to the remaining performance obligations the additional consideration promised as part of the contract modification together with any unrecognized consideration from the existing arrangement. As such, the company will need to consider the impact to existing contract assets and liabilities associated with the existing contract at the date of the modification. 31. As concluded in TRG Agenda Ref. 51, Contract Asset Treatment in Contract Modifications, and TRG Agenda Ref. 55, April 2016 Meeting Summary of Issues Discussed and Next Steps, existing contract assets should be carried forward to the new contract created as part of a modification accounted for under FASB ASC (a). Doing so is consistent with the objective of accounting for a modification in accordance with that paragraph, which is to account for the contract on a prospective basis. 32. FinREC believes an existing contract asset will remain on the balance sheet at the point of a modification, subject to impairment testing under FASB ASC 310. When performing impairment testing, the future cash flows associated with new contracts resulting from a FASB ASC (a) modification help support the value of the existing contract asset. As long as these expected future cash flows continue to support the stated contract asset, the asset will not be impaired. 33. If the existing contract had been actually terminated, as opposed to theoretically terminated in accordance with the contract modification guidance, then there would be no future cash flows associated with the contract asset, and in such cases, the contract asset would be impaired. 34. The example below illustrates only one methodology that a company may employ to account for contract assets at the time of the modification. While included below for illustrative purposes, other methods may be appropriate based on the facts and circumstances Example 8: Existing Contract Asset with a Multi-line Account Modification A customer signs a 24-month wireless service contract with shareable data and purchases a subsidized device. For purposes of this example, assume that there is no significant financing component. The customer s upfront device charge is $100, and the SSP of the device is $400. The monthly wireless service charge is $100 consisting of $40 for access and $60 for data. The wireless service provider considers access and data one performance obligation, and the amount billed represents the SSP of the service.

8 Original Allocation Transaction Price SSP Ratio Allocation 1st Device $100 $400 14% $ Service Month 1-24 $2,400 $2,400 86% $2,142.86* $2,500 $2, % $2, *The monthly allocated revenue amount is $89.29 The following illustrates the journal entry to record the sale of the device. The difference between the device revenue and cash received creates a contract asset, which represents the timing difference between consideration earned and the amount billed: Dr. Device Receivable (or Cash) $ Dr. Contract Asset ($ allocated less $100 cash collected) $ Cr. Device Revenue $ During months 1 through 6, the following entry will be made each month to record service revenue and adjust the contract asset for the amount to be reclassified as receivables: Dr. Service Receivable $ Cr. Contract Asset ($ divided by 24 months) $10.71 Cr. Service Revenue $89.29 At the end of six months, the customer purchases another subsidized device under the same account and shares the data between the two devices, without increasing the data plan in total. Assume for the purposes of this example that the company concludes the incremental services for the second line are not distinct from the services for the first line. The contract is extended six months, as the customer is required to have service for 24 months after the addition of the second device. The resulting wireless service charge will be $140 per month, in months 7 through 24, and $100 per month, in months 25 through 30, as there only will be the second device on the account during those months. As a result of the modification, the company prepares a new revenue allocation based on the updated contract terms. Service provided in months 7 through 24, for a two-line shared data plan, is a separate series of services, and thus a separate performance obligation, from services provided in months 25 through 30, when it is a singleline data plan. This is reflective of the fact that the company is providing a greater level of wireless services when there are two devices on the account, versus when there is only one device on the account, and thus the services are not substantially the same between the two periods when they are provided. The new contract will require the wireless service provider to calculate a transaction price and an allocation at the modification point: $2, Original transaction price Less revenue previously recorded: (Device Revenue $357.14) + (Service Revenue $89.29 * 6 (892.88) months) Incremental device fee for the second device sale Incremental access fees of $40 per month x 24 months Incremental data fees of $60 per month x 6 months for months 25 to 30 Transaction price post-modification (see use $3, below)

9 Modification Allocation Transaction Price SSP Ratio Allocation 2nd Device $ % $ Months 7 to 24 $2, * 72% $2, Months 25 to 30 $ ** 17% $ $3, $3, % $3, * ($60 data fees + $40 access fee on 1st device + $40 access fee on 2nd device) x 18 months ** ($60 data fees + $40 access fee on 2nd device) x 6 months The company records the following entry for the device sale and to increase the contract asset for the incremental revenue earned but not yet billed: Dr. Cash $ Dr. Contract Asset ($ allocated less $100 cash collected) $ Cr. Device Revenue $ Immediately after the contract modification, the value of the contract asset is: Initial contract asset $ Amounts reclassified as receivables from months 1 to 6 (64.29) Amounts earned but not yet billed from 2nd device $ During months 7 through 24, the company is entitled to collect $140 from the customer and makes the following entry to record service revenue and adjust the contract asset for amounts reclassified as receivables: Dr. Receivable $ Cr. Contract Asset $19.60 Cr. Service Revenue ($2, divided by 18 months) $ The balance of the contract asset after the satisfaction of the service obligation relating to months 7 to 24 is rolled forward is as follows: Contract asset after modification $ Amounts reclassified as receivables from months 7 to 24 (352.84) $84.01 During months 25 through 30, the company is entitled to collect $100 from the customer and records the following entry to recognize service revenue and adjust the contract asset for amounts reclassified as receivables: Dr. Receivable $ Cr. Contract Asset $14.00 Cr. Service Revenue ($ divided by 6 months) $86.00

10 The balance of the contract asset after the satisfaction of the service obligation relating to months 25 to 30 is rolled forward as follows: Contract asset, after satisfying months 7 to 24 $84.01 Amounts reclassified as receivables from months 25 to 30 (84.01) - Comments should be received by July 2, 2018, and sent by electronic mail to Desiré Carroll at desire.carroll@aicpa-cima.com, or you can send them by mail to Desiré Carroll, Accounting Standards, AICPA, 1211 Avenue of the Americas, NY DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2016 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC