Revenue Recognition. Jaime Dordik. Assistant Project Manager, FASB March 26, 2017

Transcription

1 Revenue Recognition Jaime Dordik Assistant Project Manager, FASB March 26, 2017

2 Agenda Overview of New Revenue Standard 5 Steps to Apply the Standard Disclosure Requirements Transition Example Transition Resource Group Industry Specific Concerns 2

3 Converged Standard on Revenue 3 IAS 18 Revenue IAS 11 Construction Contracts IFRICs Topic 605, Revenue Recognition Industry guidance Entertainment Broadcasters Entertainment Cable Television Entertainment Casinos Entertainment Films Software Airlines Real Estate

4 Implementation Timeline Converged standards issued Key clarification amendments issued Mandatory effective date for public entities May 2014 Mar May 2016 Jan 2018 Jan 2016 Jan 2017 SAB 74 disclosures on possible impact of application Joint IASB/FASB TRG FASB-only TRG (IASB observer) IASB/FASB available for implementation questions 4

5 Significant Improvements Robust framework for addressing revenue issues Increases comparability Eliminates complex and prescriptive rules Provides guidance in areas that previous GAAP and IFRS had none Enhances disclosures 5

6 Scope All contracts with customers (Topic 606), except: - Lease contracts (Topic 840) - Insurance contracts (Topic 944) - Financial instruments (Topic 825) - Guarantees (Topic 460) - Non-monetary exchanges between entities in the same line of business to facilitate sales to customers (Topic 845) Sales/transfers of nonfinancial assets outside of the entity s ordinary activities (Topic 610) - Ex: Company sells corporate headquarters 6

7 Five Steps to Apply the Standard 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 Steps to apply the core principle 1 Identify the contract with the customer 2 Identify the performance obligations 3 Determine the transaction price 4 Allocate the transaction price 5 Recognize revenue when (or as) a performance obligation is satisfied 7

8 Step 1: Identify the Contract(s) An entity applies the new revenue model to contracts that meet the following criteria: - The parties have approved the contract - Each party s rights can be identified - Payment terms can be identified - The contract has commercial substance - Collection is probable 8

9 Step 1: Identify the Contract(s) Two or more contracts should be combined when they are entered into at or near the same time with the same customer (or related parties) if one or more of the following criteria are met: - The contracts are negotiated as a package - Consideration in one contract depends on price or performance in the other - Goods or services in the contracts are a single performance obligation 9

10 Step 1: Identify the Contract(s) Contract modifications accounted for as a separate contract when certain conditions are met All other contract modifications are accounted for as: - A creation of a new contract (prospective accounting), - A modification of an existing contract (cumulative catch up accounting), or - A combination of the above 10

11 Step 2: Identify the Performance Obligation(s) Objective: To identify the promised goods or services that are distinct & should be accounted for separately Promise to transfer a distinct good or service criteria Customer can benefit from good or service On its own Together with other readily available goods or services (including goods or services previously acquired from entity) Promise is separately identifiable Is the nature of the promise to transfer Each good or service A combined item to which the individual goods or services are inputs? 11

12 Step 3: Determine the Transaction Price (TP) Objective: To determine the amount of consideration to which an entity expects to be entitled in exchange for promised goods or services Variable consideration Estimate using: Expected value Most likely amount Constraint Exception: royalties for IP licenses Significant financing Adjust consideration if timing provides customer or entity with significant benefit of financing Non-cash consideration Measure at fair value unless cannot be reasonably estimated Consideration payable to customer Reduction of the TP unless in exchange for a distinct good or service 12

13 Step 4: Allocate the Transaction Price Objective: To allocate to each performance obligation the amount to which the entity expects to be entitled Relative standalone selling price basis Estimate selling prices if not observable Residual estimation techniques may be appropriate in certain situations Discounts & contingent amounts Allocate entirely to specific performance obligation if specified criteria met 13

14 Step 5: Recognize Revenue Objective: To recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service Performance obligations satisfied over time if specified criteria met Revenue is recognized by measuring progress towards complete satisfaction of the performance obligation All other performance obligations satisfied at a point in time Revenue is recognized at the point in time when the customer obtains control of the promised asset 14

15 Step 5: Recognize Revenue (continued) A performance obligation is satisfied over time if one of the following criteria is met: - The customer simultaneously receives & consumes the benefits as the entity performs - The entity s performance creates or enhances an asset that the customer controls - The asset does not have an alternative use to the entity & the entity has an enforceable right to payment for performance completed to date 15

16 Step 5: Recognize Revenue (continued) For performance obligations satisfied at a point in time, an entity considers the following indicators to determine when to recognize revenue: - Present right to payment - Legal title - Physical possession - Risks and rewards of ownership - Customer acceptance 16

17 Contract costs (Topic 340) Incremental costs of obtaining a contract Recognize as an asset if: Incremental Expect to recover For example: Sales commissions Practical expedient: May recognize as an expense when incurred if the amortization period is one year or less Costs to fulfill a contract Recognize as an asset if: Relate directly to a contract Generate or enhance resources of the entity that will be used to satisfy performance obligations in the future Expect to recover For example: Pre-contract or setup costs 17

18 Other Income (Subtopic ) Subtopic was created with the new revenue standard primarily to address real estate transactions with noncustomers. Subtopic provides derecognition guidance for nonfinancial assets in transactions with noncustomers and requires that to derecognize the asset that: The requirements in Topic 606 on existence of a contract are met (including collectibility) Control of the nonfinancial asset has transferred pursuant to Topic 606 When the asset is derecognized the gain or loss is the difference between the transaction price measured in accordance with Topic 606 and the carrying amount of the asset 18

19 Disclosure Requirements To enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Revenue Disaggregation of revenue Amounts recognized relating to performance in previous periods Contracts Information about contract balances and changes Information about performance obligations Amounts allocated to remaining performance obligations Significant Judgments Timing of and methods for recognizing revenue Determining the transaction price and amounts allocated to performance obligations 19

20 Effective Date Public entities 2018 (annual and interim periods) Nonpublic entities 2019 (annual periods); 2020 (interim periods) Earlier adoption as of original effective date (2017) permitted The effective dates for Topic 606 and IFRS 15 for public entities are aligned. 20

21 Transition PY2 (2016) PY1 (2017) CY (2018) CY Footnotes Retrospective (with optional practical expedients) Cumulative catch-up Contracts under new standard Cumulative effect at date of application Contracts under legacy standard Cumulative catch-up Existing and new contracts under new standard Existing and new contracts disclosed under legacy standard for CY (2018) Early application permitted in

22 Questions? 22

23 Joint Transition Resource Group (TRG)

24 Joint Transition Resource Group (TRG) Objectives: To solicit, analyze, & discuss stakeholder issues arising from implementation of the new guidance To inform the FASB and the IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues To provide a forum for stakeholders to learn about the new guidance from others involved with implementation The TRG will not issue authoritative guidance 24

25 Transparent Process Public meetings to discuss implementation questions Staff papers, meeting summaries & summary of stakeholder questions available on website Members include financial statement preparers, auditors and users - Wide spectrum of industries, geographical locations & public & private organizations Clear communication about next steps for each issue 25

26 Revenue Recognition TRG Activities 72 Discussed at TRG Meetings** 36 Discussed directly with stakeholders 0 Open 108 Submissions to Date* A majority of the TRG issues were educational Input from TRG led to amendments to clarify the Boards intent for a handful of issue *Data as of March

27 Where are the issues? Identify the performance obligations (Step 2) 16 Determine the transaction price (Step 3) 14 Recognize revenue when (or as) the 13 Scope Presentation and disclosure Identify the contract(s) with a customer (Step 1) Contract costs 16 Principal vs. Agent Licensing 5 6 Allocate the transaction price (Step 4) 4 Transition 3 27

28 Standard Setting Targeted amendments to clarify how the principles of the new revenue standard should be applied New practical expedients and transition relief to reduce cost and complexity 28

29 Industry Specific Concerns

30 Implementation Issues for Power and Utilities* Description Scope Clarification Tariff Sales to Regulated Customers Accounting for Contracts with Price / Volume Variability Status Out for Exposure Until May 2017 Submitted to AICPA RRWG Strip vs. Step Price Arrangements* Application of Series Guidance to Storable Commodities Accounting for Contract Modification * Partial Terminations Accounting for Bundled Arrangements Revenue timing for RECs Submitted to AICPA RRWG Submitted to AICPA RRWG Submitted to AICPA RRWG Submitted to AICPA RRWG Submitted to AICPA RRWG Submitted to AICPA RRWG * on/pages/rrtf-oilandgas.aspx 30

31 Scope of Tariff Sales to Regulated Customers Working Draft of Accounting for Tariff Sales to Regulated Customers(#13-1) issued by FINREC March 1, 2017 FINREC Position: Tariff sales should be within scope of Topic 606 (believe a tariff is separately identifiable and distinguishable from revenue under alternative revenue programs) Status: Comments Due May 1, 2017 Link to the Paper ( ion/downloadabledocuments/working_drafts/power_utility/pu_%2013-1_tariff_sales.pdf) 31

32 Strip Vs. Step Priced Arrangements Addresses strip (constant fixed price per unit delivered) and step (increasing fixed price per unit delivered) pricing conventions Issue: Need to carefully consider contract terms and evaluate the reason for price changes when identifying performance obligations and allocating the transaction price Status: Submitted to AICPA RRWG 32

33 Accounting for Contract Modifications Blend and Extend Arrangements Common in the power & utility industry. In many cases a modification may extend the term and change overall pricing. Issue - Management needs to evaluate these types of modifications to determine how and when accounted for under contract modification provision Status: Submitted to AICPA RRWG 33

34 Contributions in Aid of Construction Common in the power & utility industry. Issue Customer in remote area requires utility to build a connection exclusively for that customer. Customer reimburses the utility for the cost. (Revenue, Deferred Revenue, offset to Property Plant and Equipment) Status: Submitted to AICPA RRWG 34

35 Collectibility Focuses on sales to low credit quality custumers Issue How to assess whether regulated utility tariff sales meet the collectibility criteria of Topic 606 Status: Submitted to AICPA RRWG 35

36 Alternative Revenue Programs These are programs for special events such as extreme weather or achieving goals/improvement metrics Issue How should this be presented on the Income Statement Status: Submitted to AICPA RRWG 36

37 Resources to Help With Implementation Technical inquiry service Transition resource group Regular agenda item for formal and informal advisory groups Public Board meetings about implementation status and issues Resources to help with implementation Education (FASB webcasts, external conferences)

38 Questions? 38