Deeper Dive into. Revenue. The Financial Reporting series presents:

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1 The Financial Reporting series presents: IFRS: A Regulatory Update and Deeper Dive into Revenue Recognition and Derecognition Bob Uhl, Deloitte & Touche LLP Randall Sogoloff, Deloitte & Touche LLP Stephen McKinney, Deloitte & Touche LLP Trevor Farber, Deloitte & Touche LLP July 29, 2009

2 Agenda IFRS regulatory update IFRS requirements and standard setting developments Revenue recognition Derecognition

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 To enhance participants understanding of important accounting issues and developm ments pertaining to: IFRS regulatory matters IFRS requirements and standard setting developments for revenue recognition and derecognition

5 Poll question #1 Do you believe that the use of a principles-based set of accounting standards will impro ove financial reporting? Yes No Don t know/not applicable

6 Regulatory Update

7 The global move towards IFRS Canada 2009/11 United States (2009/14?) Europe 2005 China 2007 Japan (2009/2015)* Mexico 2008/12 India 2011 Brazil 2010 Chile 2009 Argentina 2010 South Africa 2005 Australia 2005 Current or anticipated requirement or option to use IFRS (or equivalent) * Japanese Roadmap is recently approved 1.1

8 IFRS in the U.S. November 2008 Recent developments SEC issues proposed roadmap and rule changes (comments on roadmap were due on April 20, 2009) The G-20 adopted, as a medium-term priority, the implementation of a globally consistent set of accounting standards January 2009 Mary Schapiro, SEC Chairperson, indicates in her confirmation hearing that she would carefully review the IFRS roadmap and notes issues around the cost of implementation and independence of the IASB April 2009 The G-20 reiterates support for implementing global accounting standards in the medium-term Mary Schapiro indicates that the SEC remains committed to a single set of high-quality global accounting standards June 2009 President Obama s Financial Regulatory System Reform Proposal recommends that accounting standard setters make substantial progress toward the development of a single set of high-quality global accounting standards Mary Schapiro states that she believes that we should absolutely get to a place where we have a single, global set of high-quality accounting standards July 2009 Mary Schapiro indicates that analysis of the comments on the Roadmap was continuing and that the SEC would resume consideration of the Roadmap in the fourth quarter of

9 Comments on SEC s Proposed IFRS Roadmap General comments Strong support for global standards Some have raised concern about the potential ti costs of IFRS adoption Some have commented on the lack of detailed guidance in IFRS, and potential implications General support for more professional judgment, although concerns about potential implications Second-guessing by regulators, legal exposure Approach to IFRS Some suggest continuing the convergence of standards vs. adoption Some have suggested that t a date certain for mandatory adoption be set Of the propos p sed milestones, many have suggested that the funding and accountability of the IASCF must be addressed Many suggest having sufficient time for implementation is necessary for a smooth transition Early use of IFRS Some suggest expanding the eligibility criteria for early adoption Some note that t several disincentives for early adoption exist, including: Potential reversion back to U.S. GAAP Requirement for three years of audited IFRS financial statements in the initial year of IFRS adoption Proposal to provide ongoing unaudited supplemental U.S. GAAP financial information 1.3

10 FASB/IASB convergencee efforts In April 2008, the Boards discussed the convergence Memorandum of Understanding di (MOU) Significant concern about lack of progress to date Small group was developed to make recommendations on the way forward IASB and FASB issued updated d MOU in September 2008 Assumed target date for mandatory adoption of IFRS would be 2013 A quiet period of at least one year would be provided Where are we today with convergence? The IASB and FASB have issued a number of proposals Confusion exists as to the objective of convergence The IASB and FASB continue to differ on views relating to many projects 1.4

11 IFRS and U.S. GAAP level of convergence Standard (IAS/IFRS) Converged? Mostly Some No Standard (IAS/IFRS) Converged? Mostly Some No 1 Presentation of financial statements X 2 Inventories X 7 Cash flow statements X 8 Error corrections and policy changes X 10 Events after the balance sheet X 29 Financial reporting in hyperinflationary economies 31 Investment in joint ventures X 32 Financial Instruments presentation X 33 Earnings per share X 34 Interim financial reporting X X 11 Construction contracts X 12 Income Taxes X 16 Property, plant & equipment X 17 Leases X 18 Revenue X 19 Employee benefits X 21 Effects of changes in foreign exchange rate X 23 Borrowing costs X 24 Related party disclosures X 27 Consolidated financial statements X 28 Investment in Associates X 36 Impairment of assets X 37 Provisions, contingent assets and contingent liabilities 38 Intangible assets X 39 Financial Instruments recognition & measurement 40 Investment in property X 41 Agriculture X 2 Share-based payment X 3 Business combinations X 5 Discontinuing operations X 7 Financial Instruments disclosure X 8 Segment reporting X X X 1.5

12 Poll question #2 Do you believe the SEC should require U.S. issuers to transition to IFRS at some point in the future? Yes No Don t know/not applicable

13 Revenue Recognition

14 Revenue recognition Agenda Relevant literature under IFRS Definition Measurement Sale of goods Rendering of services Multiple elements Joint revenue recognition i proje ect 2.1

15 Relevant literature under IFRS IAS 18, Revenue IAS 11, Construction ti Contracts t SIC-31, Revenue-Barter Transactions Involving Advertising Services IFRIC 13, Customer Loyalty Programs IFRIC 15, Agreements for the Construction of Real Estate U.S. GAAP Difference The requirements in U.S. GAAP comprise numerous standards (over 100) Many of the standards are industry-specific 2.2

16 Definition Revenue is the gross inflow of economic benefits during the period arising in the course of th he ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. Revenue does not result from amounts collected on behalf of others (i.e., entity acting as an agent) Sales taxes Value added taxes Royalties 2.3

17 Measurement Revenue shall be measured at the fair value of the consideration received or receiv vable Additional fac tors to consider Trade discounts Vendor rebates Early payment discounts Extended payment terms Barter transactions Measure revenue as the arrangement consideration less any of these items Measure revenue as the consideration discounted by an imputed interest rate Measure revenue based on the fair value of the goods received for dissimilar goods and services 2.4

18 Sale of goods Revenue from the sale of goods shall be recognized when all of the following conditions ha ave been met: Condition 1 Condition i 2 Condition 3 Condition 4 Condition 5 The entity transfers signif icant risks and rewards of ownership of the goods to the buyer The entity retains neither continuing managerial involvement to the degree usually associ iated with ownership nor effective control over the goods sold The amount of revenue ca an be measured reliably It is probable that the economic benefits associated with the transaction will flow to the entity The costs incurred or to be incurred in respect of the transaction can be measured reliably 2.5

19 Rendering of services The percentage of completion method is used for all service contracts including construction n type contracts Revenue is recognized using th his method only when the outcome of rendering of services can be reliably estimated U.S. GAAP Difference Unlike U.S. GAAP, IFRSs require the use of the percentage of completion method for both service arrangements and construction contacts where U.S. GAAP prescribes thatt method as a potential recognition method only for construction contracts, not service contracts. 2.6

20 Rendering of services (cont.) IAS 18 states that the outcome can be reliably measured if all of the following conditions ar re satisfied: Condition 1 Condition 2 Condition 3 Condition 4 The amount of revenue can be measured reliably It is probable that the economic benefits associated with the transaction ti will flow to the enterprise The stage of completion of the transaction at the balance sheet date can be measured reliably The costs incurred for the transaction and the costs to complete the transaction can be measured reliably Outcome cannot be reliably estimated Recognize revenue only to the extent of expenses incurred which are recoverable OR Defer revenue and expense all costs incurred if costs incurred are not recoverable 2.7

21 Multiple elements Identify the transaction Revenue recognition criteria must b e applied to: Separately identifiable components of a single transaction; or A combination of two or more transactions together to reflect the substance of the transaction ti Ascribe value to separate eleme ents Selling price of a product includes an identifiable amounts for subsequent services, the amount is deferred and recognized over service period Amount deferred d is equal to the esti imated cost of the subsequent services plus a reasonable margin U.S. GAAP Difference Unlike IFRS, U.S. GAAP provides explicit guidance on certain aspects of multiple element arrangements, specifically on the separation and allocation of those arrangements. As such, differences in the timing and amount of revenue recognized under both set ts of standards could be dramatically different 2.8

22 Poll question #3 Do you think that the IASB and the FASB should address revenue recognition in a joint pr roject? Yes No Don t know/not applicable

23 Joint revenue recognition project Project objective Entities affected Scope To improve current revenue recognition guidance by: Enhancing consistency and comparability Simplifying U.S. GAAP Providing guidance currently lacking in IFRSs Applicable to all entities Contracts with customers Agreements do no ot have to be in writing to be considered a contract Project stage In December of 2008, the IASB and FASB published a discussion i paper for public comment. The comment period ended on June 19, An exposure draft is expected in the first half of 2010 with a final standard issued in the first half of Reference: See our January 6, 2009 Heads Paper on Revenue Recognition Up, FASB and IASB Issue Discussion 2.9

24 Joint revenue recognition project (cont.) Recognition Revenue is recognized when a contract t asset increases or a contract liability decreases (i.e., when performance obligations are satisfied) Customer pays Net Con ntract Contract Contract Position Asset Liability Entity provides goods or services [Adapted from paragraph 2.32 of the Discussion Paper] Performance obligations are satisfied when "the customer obtains control" of the promised assets Multiple performance obligations are accounted for separately when assets in a contract are transferred to a customer at different times 2.10

25 Joint revenue recognition project (cont.) Measurement principles: Measure performance obligations on the basis of the amount of the "transaction price" (the customer's promised consideration) at contract inception Contract with multiple performa ance obligations Transaction price would be allocated to relative stand-alone selling gprices of the underlying assets (goods, services, or both) to be transferred each obligation on the basis of the After contract inception, the initial measure of a performance obligation would not be updated unless the obligation is "deemed onerous" 2.11

26 Joint revenue recognition project (cont.) Potential effects on current practice Use of a contractbased model Identification of performance obligations Use of estimates Capitalization of costs Revenue only recognized when a performance obligation is satisfied (potentially significant effect on construction contracts) Account for contractual obligations (e.g., warranties, post-delivery services) as performancee obligations, not cost accruals Revenue would be reco gnized when these obligations are satisfied Would not be as limited under the proposed model (e.g., multiple element arrangements VSOE not required for undelivered element) Costs are capitalized only if they qualify for capitalization in accordance with other st tandards 2.12

27 Poll question #4 Do you believe that the new revenue recognition model will have a significant impact on you ur entity? Yes No Don t know/not applicable

28 IAS 39 Derecognition

29 IAS 39: Derecognition Scope IAS 39 provides requirements for the derecognition of financial assets Principles The derecognition principles incorporate both risks & rewards AND control conside erations Risks & rewards take precedence over control Significantly different model to U.S. GAAP Process Multiple step process to dete rmine if derecognition is appropriate 3.1

30 Derecognition approach Step #1: Consolidate all subsidiaries (including SPEs) Derecognition considered at the consolidated group level Apply IAS 27 and SIC-12 prior to derecognition assessment Ensures consistency in the derecognition decision [IAS 39.15] Entity A Consolidated Level Entity A ABC Company Guarantor Entity B Consoli idate Subs Pursuant to IAS 27 and SIC-12 ABC Company Entity B SPE C SPE C 3.2

31 Derecognition approach (cont.) [IAS 39.16] Step #2: Determine whether the derecognition principles are applied to a part or all of a finan ncial asset (or group of similar assets) Derecognition is applied to a pa art of an asset transferred only if the part comprises: Specifically identified cash flows (e.g., an I/O strip); or A fully proportionate (pro rata) share of cash flows (e.g., 90 percent of all cash flows); or A fully yproportionate p share of specifical ly identified cash flows (e.g., 90 percent of the I/O strip) In all other cases, the derecognition principles must be applied to the entire asset (or group of similar assets) 3.3

32 Poll question #5 How often are you involved in transactions that result in the transfer of financial assets? Multiple transactions a year Only a few transactions a year Never Don t know/not applicable

33 Derecognition approach (cont.) [IAS 39.17] Step #3: Determine whether the rights to the cash flows from the financial asset have expired d? If yes Derecognize the asset If no Go to step #4 [IAS 39.18] Step #4: Has the entity transferred its rights to receive the cash flows from the financial asset? If rights to the cash flows are retained, consider whether a pass-through arrangement exists (step #5) If rights to the cash flows are transferred, consider whether risks and rewards of ownersh ip are transferred (step #6) 3.4

34 Derecognition approach (cont.) [IAS 39.19] Step #5: Has the entity assumed an obligation to pay the cash flows from the financial asset to a third party in a pass-through arrangement? Pass-through arrangement, if all of the following are met: The entity has no obligation to pay amounts not collected Short-term t advances do not violate this condition The entity is prohibited from selling or pledging the asset The entity has an obligation to remit all amounts collected without material delay The entity must not be entitled to reinvest or cash equivalents Interest must be passed on (if any) the cash flows, except for investments in cash If the arrangement is qualifies as a pass-through arrangement, proceed dto the risk and rewards analysis (Step 6) 3.5

35 Derecognition approach (cont.) [IAS 39.20] Step #6: Has the entity transferred substantially all of the risks and rewards of ownership of the financial asset? Risks and rewards of ownership Derecognize asset Continue to Consider control recognize asset (Step #7) Substantially transferred Substantially retained Neither transferred nor retained If risks and rewards transfer: derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer 3.6

36 Derecognition approach - examples [IAS 39.AG39] Substantially all risks and rewards are transferred: Unconditional sale of a financial asset Sale of a financial asset with an option to repurchase at fair value at the time of repurchase Sale of a financial i asset with a put or a call option that t is deeply out of the money (i.e., highly unlikely to be in the money before expiry) [IAS 39.AG40] Substantially all risks and rewards are retained: Sale and repurchase transactionn with repurchase price being fixed or sales price plus lender s return Sale of a financial asset with a total return swap Sale of short-term receivables with a guarantee to compensate for credit losses that are likely to occur 3.7

37 Derecognition approach (cont.) [IAS 39.20&23] Step #7: Determine whether control over the transferred financial asset has been retaine ed If yes Entity continues to recognize the financial asset to the extent of its continuing involvement in the financial asset If no Entity derecognizes the financial asset and recognizes separately as assets or liabilities any rights and obligations created or retained in the transfer Control under IAS 39 focuses on whethe er the transferee: - Has the practical ability to sell the asset to a third party - Is able to exercise that ability unilaterally; and - Does not need to impose additional restrictions on the transfer 3.8

38 Accounting if control retained [IAS 39.31] 31] Continue to recognizee the financial asset to the extent t of con tinuing i involvement & Recognize an associated liability Measure on basis that reflects rights and obligations that entity has retained Liability is measured so that net carrying amount of transferred asset and associated liability is: Equal to the fair value of the rights and obligations retained by the entity, if transferred asset is measured at fair value; or Amortized cost of the rights and obligations retained by the entity, if transferred asset is measured at amortized cost. 3.9 NO OFFSETTING!!!

39 IAS 39 Derecognition matrix Situation Accounting treatment Substantially all risks/rewards transferred Control transferred Derecognize old asset Transferred and retained significant risks/rewards Control retai ined Continuing involvement approach Substantially all risks/rewards retained Continue to recognize old asset 3.10

40 Poll question #6 Do you believe that the requirement to consider both the risks and rewards of ownership of a financial asset and the control over a financial asset results in an overly complex derecognition analysis? Yes No Don t know/not applicable

41 Derecognition n of a Financial Liab bility

42 Derecognition of a financial liability [IAS 39.AG57] The conditions for derecognitionn of a financial liability are met when either: (i) the debtor discharges the liability by paying the creditor, normally with cash, other financial assets, goods, or services; or (ii) the debtor is legally released from primary responsibility for the liability (or part thereof) either by process of law or by the creditor (the fact that the debtor may have given a guarantee does not necessarily mean that this condition is not met) In substance defeasance: Liability is not extinguished until legal release is obtained 4.1

43 Derecognitionn Exposure Draft

44 How does it compare to IAS 39? Similarities Same criteria i for what qualifie s as a part of an asset Similar control test Differences Focus on single concept (control): No pass-through requirements No explicit risks and rewards test No continuing involvement measurement Alternative model - Derecognize a financial asset if... the entity no longer has present access, for its own benefit, to all of the cash flows or other economic benefits of the asset. 5.1

45 Poll question #7 Do you believe that the FASB should amend Statement 140 (ASC 860) as part of the converg gence efforts? Yes No Don t know/not applicable

46 Questions & Answers

47 Join us September 15, 2009 at 2 PM EDT as our Financial Reporting series presents: EITF Roundup: Highlights of fthe Septem mber Meeting

48 Thank you for jo oining today s webcast. To request CPE credit, click the link belo ow.

49 Contact information Bob Uhl Randall Sogoloff Trevor Farber Stephen McKinney

50 Other resources IFRS Insights: SEC Issues Proposed IFRS Roadmap 3D177677%2526cid%253D236182,00.html IFRS Insights: Dialogue with Sir David Tweedie, Q&A with the Chairman of the International Accounting Standards Board Ccid%25253D243191%2C00.html SEC IFRS Roadmap, amended rule SEC IFRS Roadmap / / 8982.pdf Heads Up: FASB and IASB Issue Discussion Paper on Revenue Recognition

51 This presentation contains general information only and is based on the experiences and research of Deloitte practitioners. i Deloitte is not, by means of this presentation, rendering business, financial, investment, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this presentation.

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