Revenue Recognition: A Comprehensive Update on the Joint Project

Transcription

1 The Dbriefs Financial Reporting series presents: Revenue Recognition: A Comprehensive Update on the Joint Project Bob Uhl, Deloitte & Touche LLP Mark Crowley, Deloitte & Touche LLP Bryan Anderson, Deloitte & Touche LLP Beth Young, Deloitte & Touche LLP July 28, 2011

2 Agenda Project Overview Steps in the Model Costs and Disclosures Implementation Considerations

3 Keep in mind This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance Check with a qualified advisor before taking any action See later slides for information on obtaining written summaries of issues discussed today

4 Learning objective At the end of the webcast, participants should be able to identify and understand the key accounting concepts and the latest developments on the FASB/IASB joint project on revenue recognition.

5 Poll question #1 Are you a financial statement preparer, user, auditor or other interested party? Preparer User Auditor Other

6 Project Overview

7 Revenue project Current timeline December 2010 and January 2011 Summarized comment letter responses and affirm redeliberation plan Segmenting a contract Identifying separate performance obligations Determining the transfer of control for goods and services February and March 2011 Cost of obtaining a contract, warranties, breakage and prepayments Measuring progress, contract combining, modifications, onerous Time value of money, collectibility, uncertain consideration April and May 2011 Determining and allocating the transaction price, licenses and rights to use, fulfillment costs, sales and repurchase agreements Disclosures and fulfillment costs June 2011 Application to telecommunications industry, transition, re-expose Q Expose for comment with 120-day comment period Q2/Q3 2012? Finalize standard? 1.1

8 Revenue project Key concepts in the Exposure Draft Transfer of Control Performance Obligations One Size Fits All Can a one size fits all model for revenue recognition work? 1.2

9 Revenue project summary of key provisions Scope (and scope exceptions) Applies to an entity s contracts with customers Does not apply to: Lease contracts (ASC 840) Insurance contracts (ASC 944) Certain contractual rights or obligations Guarantees (other than product warrants), and Nonmonetary exchanges whose purpose is to facilitate a sale to another party A contract can be written, verbal, or implied (specific criteria provided in the exposure draft) If both parties can unilaterally terminate without penalty then a contract does not exist 1.3

10 Revenue project summary of key provisions Core principle and steps in the model Core principle: Recognize revenue to depict the transfer of goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Identify contract(s) with the customer (Step 1) Identify the separate performance obligations (Step 2) Determine and allocate the transaction price (Step 3 & 4) Recognize revenue when performance obligations are satisfied (Step 5) Steps in Applying the Revenue Recognition Model 1. Identify the contract(s) with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when the performance obligations are satisfied SOUNDS SIMPLE RIGHT? 1.4

11 Poll question #2 If the Revenue from Contracts with Customers standard was finalized today, how long do you think you would need to implement its provisions? Can adopt it today Less than 3 months 3-6 months 6-12 months More than 12 months Don t know / not applicable

12 Steps in the Model

13 Revenue project summary of key provisions Step 1. identify the contract(s) with the customer Combine Contracts Contracts combined Contract A Contract B Combine contracts entered into at (or near) the same time with the same (or related) customer if: - Single commercial objective, - Interdependent consideration, or - Interrelated design, technology, or function Contract Modifications Deemed a separate contract when additional obligations are at current prices (otherwise reallocate price to all obligations) Contract Segmentation Guidance eliminated (still identify separate performance obligations) 2.1

14 Revenue project summary of key provisions Step 2. identify the performance obligations in the contract NEW! Is the entity integrating a bundle of highly interrelated goods or services? No Do the promised goods or services transfer at the same time? No Does the good or service have a distinct function? No Yes Yes Yes Treat as a single performance obligation and recognize revenue when control transfers Account for distinct performance obligation(s) separately Combine performance obligations until two or more performance obligations are distinct A good or service has a distinct function if it either (1) is regularly sold separately by the entity or (2) can be used on its own or together with resources that are readily available to the customer NEW! 2.2

15 Revenue project summary of key provisions Step 3. determine the transaction price Transaction Price Consideration often varies due to discounts, rebates, refunds, credits, incentives, performance bonus/penalty, contingencies, price concessions, or similar items Probability weighted or most likely amount of consideration the entity is entitled to from customer (which ever is most predictive) Other considerations include: Time value of money Noncash consideration Consideration paid to a customer Collectibility initial and subsequent adjustments for collectibility presented separately within net revenue. 2.3

16 Revenue project summary of key provisions Step 4. allocate transaction price to separate performance obligations Allocate transaction price on a relative standalone selling price basis (estimate standalone selling price if not observable) Expected cost-plus margin, adjusted market assessment, or residual (when price is highly variable) methods are acceptable Allocate changes in the transaction price to all performance obligations (based on initial allocation) unless portion of (or changes in) transaction price relate entirely to one (or more) obligations, which is the case when Contingent terms relate specifically to a certain obligation, and Amount allocated is reasonable relative to entire contract Do not reallocate for changes in standalone selling prices 2.4

17 Revenue project summary of key provisions Step 5. recognize revenue when performance obligations are satisfied Recognize revenue when promised good or service is transferred to the customer which occurs when the customer obtains control of that good or service (in the amount that the entity is reasonably assured to be entitled to) Indicators of control (point-in-time) the customer - has an unconditional obligation to pay - has legal title - has physical possession - has risks and rewards of ownership NEW! If continuous transfer of goods or services select one revenue recognition method for each separate performance obligation - Select a method that best depicts the transfer of the goods or services (input, output, or passage of time) 2.5

18 Revenue project summary of key provisions Step 5. recognize revenue when performance obligations are satisfied An entity satisfies a performance obligation continuously if Its performance creates or enhances a customer controlled asset, or Its performance does not create an asset with an alternative use and at least one of the following the customer receives a benefit as the entity performs each task, another entity would not need to reperform the task(s) performed to date it were to fulfill the remaining obligation to the customer, the entity has a right to payment for performance to date even if the customer could cancel the contract for convenience 2.6

19 Revenue project summary of key provisions Step 5. recognize revenue when performance obligations are satisfied Entities shall recognize revenue from satisfying performance obligations only if the transaction price is reasonably assured NEW! The amount is not reasonably assured when 1. Additional consideration can be avoided without breaching the contract (e.g., certain royalties) 2. Entity has no experience with similar types of contracts (or other persuasive evidence) 3. Entity has experience, but experience is not predictive (susceptible to external factors, judgment of third parties, and risk of obsolescence) 2.7

20 Poll question #3 The transaction price is not reasonably assured in which of the following circumstances? Additional consideration can be avoided without breaching the contract Entity has no experience with similar types of contracts Entity has experience, but experience is not predictive All of the above

21 Costs and Disclosures

22 Revenue project summary of key provisions Subsequent measurement Onerous performance obligations Onerous test is limited to contracts with performance obligations that an entity satisfies over an extended period of time (e.g., long-term service contracts) Recognize a separate liability and a corresponding expense for expected losses on satisfying remaining obligations Measure liability based on difference between the allocated transaction price and amount of direct costs (costs related directly to the contract) to satisfy the performance obligation, or amounts the entity would have to pay to cancel the contract Update the measurement of the liability at each subsequent reporting date (changes recognized as an adjustment of expense) 3.1

23 Revenue project summary of key provisions Contract cost Cost of fulfilling the contract Recognize assets in accordance with other Topics (inventory, PP&E, software, etc.), otherwise only if the costs: - relate directly to the contract (or specific contract under negotiation) - relate to future performance (generate/enhance a resource used to satisfy obligations in the future) and - are expected to be recovered Costs related to contracts with a duration of one year or less may be expensed, as a practical expedient Amortize on a systematic basis consistent with the transfer of the related goods or services - amortization period may extend past expected duration of original contract (e.g., for other contracts/renewals with same customer) 3.2

24 Revenue project summary of key provisions Contract cost Cost of obtaining the contract Costs of obtaining a contract that are incremental and expected to be recovered should be capitalized - Optional practical expedient to expense if less than 1 year - Present such costs separately in financial statements - Subsequently amortize on a systematic basis (may be over multiple or renewal contracts with same customer) Recognize the following costs as expense when incurred: - Certain costs of obtaining a contract (that is, costs that don t qualify for capitalization) - Costs related to satisfied performance obligations - Costs of abnormal amounts of wasted material, labor or other resources to fulfill the contract 3.3

25 Poll question #4 Unless the amortization period is less than a year, do the boards tentative decisions require entities to recognize an asset for costs of obtaining and fulfilling a contract that meet the criteria in the proposed guidance? Yes No

26 Revenue project summary of key provisions Disclosure Objective Disclose qualitative and quantitative information about Contracts with customers, and Significant judgments, of changes to such, in applying the revenue recognition guidance Information shall be aggregated or disaggregated so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics. Constituents expressed concern that useful information may be lost in the extensive disclosure requirements and had concerns with specific disclosure requirements such as the account reconciliation and the back-log disclosures 3.4

27 Revenue project summary of key provisions Disclosure (cont.) Contracts with customers disclose information to help users understand amount, timing, and uncertainty of revenue and cash flows, including: Disaggregation of revenue into categories that best depict how its affected by economic factors (such as type of product or contract, geography, or market) Reconciliation of contract balances from the opening to the closing contract asset/liability positions and to the statement of financial position including material changes from: - amounts recognized in comprehensive income - cash received - amounts transferred to receivables - noncash consideration received - contracts acquired (business combinations) or disposed Onerous performance obligations discussion about and a reconciliation of such obligations (specifics provided in ED) 3.5

28 Revenue project summary of key provisions Disclosure (cont.) Performance obligations a description of the obligations and information about the expected timing of their satisfaction: A description of: goods or services promised to be transferred when performance obligations are typically satisfied significant payment terms (variable consideration/financing) provisions for returns or refunds or similar obligations types of warranty or related obligations The amount and information about when future obligations will be satisfied if they have an original expected contract duration of more than 1 year terms result in the entity being required to apply each step of the revenue model (i.e., determine/allocate the transaction price) 3.6

29 Revenue project summary of key provisions Disclosure (cont.) Assets from contract acquisition and fulfillment costs a reconciliation of capitalized costs by major classification (e.g., acquisition costs, pre-contract costs, and setup costs) and description of amortization method Impairment reversals are allowed under IFRSs and not U.S. GAAP 3.7

30 Revenue project summary of key provisions Disclosure (cont.) Significant judgments and changes in judgments, that affect the determination of the amount and timing of revenue Continuous transfer methods used to recognize revenue and why methods faithfully depict the transfer of goods/services Determining and allocating the transaction price information about methods, inputs and assumptions used: to determine the transaction prices to estimate standalone selling prices to measure returns, refunds, and other similar obligations to measure any liability for onerous performance obligations At their May meeting, the boards requested that the staffs field test the disclosure package as a whole with constituents. 3.8

31 Revenue project summary of key provisions Effective date and transition Effective Date to be determined (2015, 2016?) Transition apply retrospectively by applying Topic 250 (with certain transition reliefs) (3 years of information start in 2013?) 3.9

32 Poll question #5 Do you think the proposed disclosure requirements are excessive? Yes No Not sure

33 Implementation Considerations

34 Revenue project summary of key provisions Implementation guidance Principal versus agent considerations determine whether obligation is to actually provide goods or services (gross) or arrange for another party to provide (net) goods or services Options to acquire additional goods or services represents a performance obligation only if it provides a material right to a customer that would not otherwise have been received Sales and repurchase agreements customer has the unconditional right to require the entity to repurchase the asset and customer has a significant economic incentive to exercise that right, the customer is paying for the right to use the asset for a period of time and should account for the contract as a lease. Entity should consider the relationship of the expected market value to the repurchase price (at the date of repurchase), and the amount of time until the right expires 4.1

35 Revenue project summary of key provisions Implementation guidance (cont.) Product Warranties Product warranties represent a separate performance obligation (and revenue is deferred) when the warranty Represents an optional purchase Provides more than assurance of past performance Assurance warranties (those that assure past performance was as specified) use a cost accrual accounting model Licenses ED originally included specific guidance related to licenses Grant of an exclusive license (without obtaining control of the license) recognized over time Non-exclusive license recognized when customer can use/benefit from license (consider other obligations) Guidance proposed in ED eliminated Apply general principles to sale of licenses 4.2

36 Revenue project summary of key provisions Implementation guidance (cont.) Right of Return not a separate performance obligation but do not recognize revenue for goods expected to be returned Product Liabilities account for in accordance with ASC , Loss Contingencies Breakage on Nonrefundable Prepayments if a reasonable estimate of expected breakage can be made then breakage should be recognized in same pattern of rights exercised by the customer (if not recognize when the likelihood of exercise is remote) 4.3

37 Poll question #6 Do you think the boards have provided sufficient implementation and industry specific guidance? Yes No Not sure

38 Revenue project summary of key provisions Industry specific decisions Telecommunications industries Allocation of transaction price Aerospace and Defense industry Cost associated with long-term programs Rate-regulated industry Alternative revenue programs 4.4

39 Poll question #7 Do you think the changes made by the FASB and IASB to the revenue recognition project since the issuance of the exposure draft last summer represent an improvement to the project? Yes No Not sure

40 Question and Answer

41 Join us September 8, 2011, at 2 PM EDT as our Financial Reporting series presents: EITF Roundup: Highlights of the September Meeting

42 Contact information Bob Uhl Mark Crowley Bryan Anderson Beth Young

43 Other resources Heads Up: Recap of Revenue Recognition Redeliberation Results (July 22, 2011) Heads Up: Sharing Views on the Revenue Project (December 9, 2010) Heads Up: FASB Issues Proposed ASU on Revenue Recognition (June 28, 2010) t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/ea6db VgnVCM b56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/78d42f5d7cbcc210VgnVCM c56f00aRCRD.htm t-enterprise-risk-services/financial-statement- Internal-Control-Audit/Accounting-Standards- Communications/5a2a96afc2f79210VgnVCM bb42f00arcrd.htm

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