Revenue Recognition Considerations for Manufacturers & Distributors 6/27/2018. THOUGHTWARE Manufacturing & Distribution THOUGHTWARE

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1 THOUGHTWARE Manufacturing & Distribution THOUGHTWARE Revenue Recognition Considerations for Manufacturers & Distributors Justin Roberts, CPA Partner David Stotelmyer, CPA Managing Director June 27,

2 TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar Agenda The 5 Step Process Contract Costs & Contract Modifications Transition Method Disclosures What To Do 2

3 The 5 Step Process Step 1: Identify the Contract Step 2: Identify the Performance Obligations Step 3: Determine the Transaction Price Step 4: Allocate the Transaction Price Step 5: Recognize Revenue Step 1 Identify the Contract May be formal & written May be informal & only exist for a moment Barring credit quality issues in client base, this should be straight forward Portfolio method available, but can be tricky with multiple performance obligations 3

4 Step 2 Identify Performance Obligations Distinct & distinct within the context of the contract Similar to current guidance, except marketing incentives Consider whether marketing incentives are a separate PO Disregard immaterial Immaterial in context of the contract Costs associated must be accrued when revenue recognized This could be material to the client, even though it is immaterial to the contract Step 2 Identify Performance Obligations Material Rights Customer options to acquire additional goods or services Can be for free or at a discount Sales incentives, contract renewal options, other discounts Material right separate performance obligation if the options provides a right to the customer that it would not receive without entering into the contract 4

5 Step 3 Determine the Transaction Price Variable Consideration Discounts Incentives Penalties Rebates Refunds Sales to distributors Price may not be final until sale to end customer Etc. All Subject to a Constraint Step 3 Determine the Transaction Price The Constraint Only recognize variable consideration to the extent it is probable that a significant reversal of revenue will not occur 5

6 Step 3 Determine the Transaction Price Sell 100 units for $10 each with a cost of $8 each Expect 2 units to be returned for a full refund Consideration is $980 Accounts Receivable $1000 Revenue $980 ($1000 selling price x 98%) Refund liability $20 Cost of Sales $784 ($800 cost x 98%) Contract Asset $16 Inventory $800 Step 3 Determine the Transaction Price Only one unit is returned Refund liability $20 Cash $10 Revenue $10 Cost of Sales $8 Inventory $8 Contract Asset $16 6

7 Step 4 Allocate the Transaction Price For each performance obligation, determine standalone selling price If one doesn t exist, use a reasonable basis to estimate If not estimable, use residual if one of the following: Sold to different customers for broad range of amounts Has not yet been sold on a standalone basis Spread transaction price over performance obligations using standalone selling price to weight allocation Step 5 Recognize Revenue Now there are rules for over time vs point in time Over Time when at least one of the following is true The customer simultaneously receives & consumes the benefits provided by the entity s performance as the entity performs The entity s performance creates or enhances an asset that the customer controls as the asset is created or enhanced The entity s performance does not create an asset with an alternative use to the entity & the entity has an enforceable right to payment for performance completed to date Prior conservatism or lack of guidance may lead to slower or faster revenue recognition under the new standard 7

8 Step 5 Recognize Revenue Intellectual property has a special rule Functional IP recognize at a point in time Have significant standalone functionality Completed media content, software, formulas/recipes Symbolic IP recognize over time Requires ongoing involvement or activity Trade names, franchise rights, logos Sales or usage based royalties recognized later of usage occurring or satisfaction of performance obligation Step 5 Recognize Revenue Customer Acceptance Provisions Subjective or Objective Subjective provisions prevent recognition until acceptance Objective provisions may allow earlier recognition Trial periods are an indicator that control has not transferred 8

9 Contract Modifications Additional goods or services that are distinct & at standalone prices Separate contract Remaining services distinct, but not at standalone prices Replacement contract Remaining services not distinct Addendum to existing contract Contract Costs under ASC Capitalize incremental cost of obtaining a contract Only the costs incurred to obtain because of success Think commissions One year or less contracts can be expensed Not recorded in excess of profit on the contract Amortize capitalized cost on a systematic basis 9

10 Effective Dates Nonpublic Entity Annual reporting periods beginning after December 15, 2018 Calendar year January 1, 2019 December 31, 2019 Transition Method Determine transition method Full retrospective adjust each prior reporting period Modified retrospective cumulative effect at the beginning of the period of adoption 10

11 Transition Method Full retrospective Change everything Adjust all periods presented Opening retained earnings adjustment Practical expedients Contracts that begin & end in same period no adjustment Completed contracts & variable consideration can use the actual transaction price rather than estimating Comparative periods before date of application do not disclose transaction price allocated to remaining performance obligations No retrospective restatement of contracts modified before beginning of earliest reporting period Transition Method Modified retrospective Change current year Adjust the current year Cumulative effect recognized in retained earnings at the date of application Additional disclosures Amount each financial statement line item is affected in the current year by the application of the new standard when compared to the old standard Reasons for any significant changes above Can chose to apply to all contracts or only to contracts not completed as of the date of adoption 11

12 Disclosures New disclosures private companies Disaggregation of revenue Point in time vs over time Qualitative information Information about performance obligations Significant payment terms Nature of goods & services Obligations for returns & refunds Types of warranties & related obligations Disclosures Examples 12

13 What To Do Remember even if nothing changes, this has to be proven through documentation Decide transition method Determine revenue streams Determine contracts in revenue streams & if they can be grouped together (portfolio method) Analyze contracts to determine recognition under new standard Gather information for disclosures Document decisions made, document significant judgments, document, document, document BKD Thoughtware Webinars, seminars & articles Many are CPE-eligible 13

14 BKD Hot Topics In its ongoing efforts to offer valuable insights into accounting issues affecting organizations, BKD has created BKD Hot Topics, an online resource dedicated to helping you understand & address significant emerging accounting issues BKD Hot Topics offers insights & guidance, including transition & implementation considerations, on accounting topics such as New revenue recognition standard Leases project Current expected credit loss Accounting alternatives available to private companies BKD Hot Topics BKD Hot Topics offers articles & webinars from BKD s accounting & audit professionals and connects you to valuable external resources visitors will have easy access to BKD industry professionals; they ll also be able to share resources through numerous social media outlets To learn more about how BKD advisors can help you understand & implement new & proposed accounting standards, visit BKD Hot Topics 14

15 Continuing Professional Education (CPE) Credit BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered 15

16 To Receive CPE Credit CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at 16

Revenue Recognition: Considerations for Technology & Software Companies

Revenue Recognition: Considerations for Technology & Software Companies JULY 25, 2018 To Receive CPE Credit Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader