BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company BDO KNOWLEDGE limited by guarantee, Webinar Series and forms Revenue part of the Recognition Transition Resource Group 2015 Update international BDO network of independent member firms. Page 1
BDO KNOWLEDGE Webinar Series Revenue Recognition Transition Resource Group 2015 Update September 17, 2015 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
CPE AND SUPPORT CPE participation requirements to receive CPE credit for this webcast: You ll need to actively participate throughout the program. Be responsive to at least 75% of the participation pop-ups. Certificate of attendance: If you are logged in the entire time and respond to the minimum participation pop-ups, you will be able to print your certificate from the Participation section at the end of the webcast. If you log out before printing your certificate: BDO USA professionals CPE will automatically be issued in CPE Tracking & Reporting at the end of every week. A copy of your certificate will be sent after you have been issued credit. All others will be emailed instructions on how to access your certificate. Group participation to receive credit: Sign-in sheets must list a Proctor name and CPA license number. BDO USA professionals - submit your sign-in sheets using a Training & Development Request in BDO Service Now found at: https://apps.bdo.com > A to Z > BDO Service Now > Click Request in the upper right menu, then chose Training & Development from the Filter Category drop-down, click on Training & Development Support. Page 3
CPE AND SUPPORT (CONTINUED) Group participation to receive credit (continued): Clients and Contacts email sign-in sheets to cpe@bdo.com within 24 hours of the webcast. Alliance Members should proctor their own group participants. This process is detailed in the LearnLive Participant Guide, which can be found by searching LearnLive Participant Guide on the Alliance Portal. Call LearnLive Support below for questions. Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must register and log in on their own computer. Q&A: Submit all questions using the Q&A feature on the lower right corner of the screen. The presenter(s) will review and answer all questions submitted. Technical Support: If you should have technical issues, please contact LearnLive: Click on the Live Chat icon under the Support tab, OR Call: 1-888-228-4088 Page 4
WITH YOU TODAY Adam Brown National Director of Accounting BDO USA, LLP abrown@bdo.com Andrew Buchanan Global Head of IFRS BDO IFR Advisory Limited Member, Transition Resource Group abuchanan@bdoifra.com Ken Gee National Assurance Partner BDO USA, LLP kgee@bdo.com Page 5
LEARNING OBJECTIVES At the conclusion of this program, participants will be able to: Recognize topics currently being examined by the TRG related to implementation of the new revenue standard Identify the key points within those topics Correlate those topics with key provisions of the new revenue standard Page 6
AGENDA Overall Structure and Purpose of the TRG Discussion of Select TRG Issues Appendix: Issues Examined by TRG through July 2015 Page 7
OVERALL STRUCTURE & PURPOSE OF TRG FASB and IASB created the Joint Transition Resource Group (TRG) to inform and help the Boards determine potential issues related to implementation of the new revenue standard. TRG does not make formal recommendations to the Boards or issue guidance. Instead, the Boards are responsible in determining how to proceed on each issue. Members of TRG include financial statement preparers, auditors and users from variety of industries, countries and public and private companies. Members of the Boards and representatives of PCAOB, SEC, AICPA and the International Organization of Securities Commissions (IOSCO) also attend TRG meetings. TRG has met twice in 2014 and three times to date in 2015. The next meeting is scheduled in November 2015. Page 8 Page 8 Revenue from Contracts with Customers
DUE PROCESS FASB Issued Deferral of the Effective Date Proposed Guidance Identifying Performance Obligations and Licensing Tentative Decisions (proposed ASUs expected) Principal vs. agent Narrow scope improvements and practical expedients IASB Proposed Guidance Effective Date of IFRS 15 Clarifications to IFRS 15 Identification of performance obligations Principal vs. agent Licensing arrangements Transitional reliefs Page 9
TRG PAPER #1 GROSS VERSUS NET REVENUE (PRINCIPAL VS AGENT) Background Under the new revenue standard, determining whether an entity is a principal or agent depends on the nature of the entity s promise to a customer and who controls the promised good or service before it is transferred to the customer. Because of the nonphysical nature of arrangements in certain virtual/internet transactions, there are inconsistent views on (1) how control would be assessed with respect to the originator and intermediary, (2) the order of steps for determining whether an entity is a principal or agent, (3) how to apply the agency indicators to the originator and intermediary, and (4) whether certain indicators either are more important or should be discounted. Page 10
TRG PAPER #1 GROSS VERSUS NET REVENUE (PRINCIPAL VS AGENT) Current Status FASB & IASB agreed to propose similar revisions IASB has proposed; FASB proposal pending Clarify that a specified good or service is a distinct good or service (or distinct bundle of goods or services) Clarify the application of the control principle in the context of services Additional examples and implementation guidance to demonstrate the assessment of transfer of control for items purchased online Clarify the role of the indicators of control Page 11
TRG PAPER #2 GROSS VERSUS NET REVENUE (AMOUNTS BILLED TO CUSTOMERS) Background New revenue standard says that the transaction price should exclude amounts collected on behalf of third parties (e.g. some sales taxes, shipping and handling fees, out-of-pocket expenses). It is unclear whether such amounts are collected on behalf of third parties in certain circumstances and jurisdictions. Therefore, there are inconsistent views on whether such amounts should be presented as revenue or as reductions of costs. Page 12
TRG PAPER #2 GROSS VERSUS NET REVENUE (AMOUNTS BILLED TO CUSTOMERS) Current Status FASB to propose adding a practical expedient that would allow an entity to present revenue net of certain types of taxes, including sales, use, excise, value-added and franchise taxes (collectively referred to as sales taxes) with disclosure of the policy. IASB not expected to propose changes. Page 13
TRG PAPER #3 SALES-BASED AND USAGE-BASED ROYALTIES IN CONTRACTS WITH LICENSES AND GOODS OR SERVICES OTHER THAN LICENSES Background The new revenue standard requires entities to record revenue on sales- or usage-based royalties for IP licenses when the subsequent sale or usage occurs, assuming the related performance obligation has been satisfied. Questions have risen regarding how this royalty constraint would apply when an IP license is offered with other goods or services in a contract. Page 14
TRG PAPER #3 SALES-BASED AND USAGE-BASED ROYALTIES IN CONTRACTS WITH LICENSES AND GOODS OR SERVICES OTHER THAN LICENSES Current Status FASB and IASB Proposals Royalties should not be split into portions subject separately to royalty and general constraints Apply the royalty constraint if license of IP is the predominant item to which the royalty relates Page 15
TRG PAPER #8 DETERMINING THE NATURE OF A LICENSE OF INTELLECTUAL PROPERTY Background The new revenue standard includes implementation guidance about whether an entity s promise to grant a license to intellectual property (IP) is satisfied either (a) over time or (b) at a point in time. Stakeholders have raised several questions when making this judgment: 1. Does an entity need to determine the nature of the license as a right to access the entity s IP (over time) or a right to use the entity s IP (point in time) for a license of IP that is not a separate performance obligation? 2. In order to conclude a license is satisfied over time, (a) do the contractual or expected activities of the licensor have to change the form and/or functionality of the underlying IP or (b) do significant changes in the value of the IP alone constitute a change to the IP? 3. Can restrictions in a contract for a license of IP affect the determination of whether that contract contains one or multiple licenses? Page 16
TRG PAPER #8 DETERMINING THE NATURE OF A LICENSE OF INTELLECTUAL PROPERTY Current Status FASB Proposal Classify IP into one of two categories in order to clarify whether a license of IP is satisfied over time or at a point in time: 1. Functional - has significant standalone functionality (point-in-time recognition) 2. Symbolic - no significant standalone functionality (over-time recognition) IASB Proposal Clarify activities that significantly affect IP (over-time recognition) Expected to change the form or functionality of the IP or Ability of the customer to obtain benefit from the IP is substantially derived from, or dependent upon, the activities Page 17
TRG PAPER #9 DISTINCT IN THE CONTEXT OF THE CONTRACT Background The new revenue standard establishes two-steps for determining whether a promised good or service is distinct: 1. Consideration at the level of the individual good or service (i.e., the goods or services are capable of being distinct); and 2. Consideration of whether the good or service is separable from other promises in contract (i.e., the good or service is distinct within the context of the contract). The standard provides three indicators to help entities with the second step. Issue: Different views on how the three indicators in the second step should be interpreted might cause diversity in practice Page 18
TRG PAPER #9 DISTINCT IN THE CONTEXT OF THE CONTRACT Current Status FASB Proposal - Clarify the separately identifiable criterion - Revise the separation criteria to focus on bundles of goods/services - Add illustrative guidance IASB Proposal - Add limited number of examples - Not expected to propose other changes Page 19
TRG PAPER #12 IDENTIFYING PROMISED GOODS OR SERVICES Background The new revenue standard requires an entity to identify the performance obligations in contracts with its customers by identifying promised goods and services. The Basis for Conclusions notes that an entity is not exempt from accounting for performance obligations that might be regarded as being perfunctory or inconsequential. Issues: Whether the new standard requires identification of promised goods or services that are not identified as deliverables under the current guidance Whether certain activities (e.g. marketing and sales incentives, shipping/handling) would be considered performance obligations Page 20
TRG PAPER #12 IDENTIFYING PROMISED GOODS OR SERVICES Current Status FASB Proposal Identifying promised goods/services Immaterial promises do not need to be evaluated, although specific guidance will apply to certain incentive programs (e.g. point & loyalty programs) Shipping & handling services - Clarify S&H occurring before transfer of control = fulfillment costs - Allow policy election to treat S&H occurring after control transfers as fulfillment costs IASB not expected to propose changes. Page 21
TRG PAPER #13 COLLECTIBILITY Background The new revenue standard requires an entity to assess collectibility at contract inception. If collection is not probable, any nonrefundable cash received is recognized as revenue only when: entity has completed performance & received substantially all consideration or the contract has been terminated Issue: Whether this requirement will indefinitely delay recognition of nonrefundable cash consideration in some situations (e.g. customer pays monthly for monthly service provided by the entity but collectibility in future months may not be probable). Page 22
TRG PAPER #13 COLLECTIBILITY Current Status The FASB tentatively decided to clarify that: An entity should consider the probability of collecting the consideration to which it will be entitled in exchange for the goods or services it will transfer to the customer, rather than the total amount promised A contract is terminated when an entity has the ability to stop transferring goods or services and has actually done so. The FASB also plans to add/amend examples IASB staff is expected to perform more research on this topic and consider changes similar to the FASB s approach. Page 23
TRG PAPER #15 NONCASH CONSIDERATION Background The new revenue standard requires noncash consideration to be measured at fair value. Also requires that constraint on variable consideration be applied only if variability is due to factors other than the form of consideration. Issues: Different views on when measurement should occur: At contract inception When noncash consideration is received or receivable Earlier of when noncash consideration is received and related performance obligation is satisfied How to apply the constraint on variable consideration when variability is due to both the form of consideration and other reasons Page 24
TRG PAPER #15 NONCASH CONSIDERATION Current Status The FASB tentatively decided to clarify that: Fair value of noncash consideration Measured at contract inception Any subsequent changes = gain or loss (rather than as revenue) Variability of noncash consideration due to both its form and other reasons Constraint on variable consideration applies only to variability for reasons other than the form of consideration (e.g. vendor performance vs. changes in stock price) IASB does not plan to address either point at this time. Page 25
TRG PAPER #24 CONTRACT MODIFICATIONS Background The new revenue standard is required to be applied to contracts that are in progress at the date of initial application as if the entity had applied the new standard since contract inception. Also requires contract modifications to be accounted in different ways depending on whether the modification is distinct and whether priced at the stand-alone selling price. Issues: Under the transition requirements, entities would have to evaluate all prior modifications to contracts that aren t completed at the date of adoption Could be onerous for multi-year contracts that have been modified many times Page 26
TRG PAPER #24 CONTRACT MODIFICATIONS Current Status FASB Tentative Decision: Use of hindsight practical expedient: Transaction price determined at initial application date (modified retrospective) or beginning of earliest period presented (full retrospective) Single allocation of transaction price to all satisfied and unsatisfied performance obligations (based on historic standalone selling prices) Any subsequent modifications accounted for under the new standard IASB Proposal Use of hindsight practical expedient Similar expedient as FASB s except transaction price is determined at the beginning of earliest period presented under either transition approach Page 27
TRG PAPER #27 SERIES OF DISTINCT GOODS OR SERVICES Background The new revenue standard requires a series of distinct goods or services to be accounted for as a single performance obligation if they: are substantially the same have the same pattern of transfer to the customer; and meet the criteria to be accounted for as a single performance obligation under the series provision. Issues: Accounting as a single performance obligation could result in differences in timing recognition Determining which arrangements meet the criteria creates complexities and may undermine the intention for the series provision to simplify the accounting Page 28
TRG PAPER #27 SERIES OF DISTINCT GOODS OR SERVICES Current Status Members suggested that the FASB consider amending the guidance to make the application of the series guidance optional, rather than a requirement. FASB indicated that it will revisit previous decision to make the guidance a requirement vs. optional (a practical expedient). Page 29
TRG PAPER #38 PORTFOLIO PRACTICAL EXPEDIENT AND APPLICATION OF VARIABLE CONSIDERATION Background The new revenue standard requires an entity to estimate variable consideration using either: the expected value or most likely amount, based on which better predicts the expected consideration. Also provides constraint guidance which limits revenue recognition to the amount for which it is probable that there will be no significant cumulative revenue reversal. The expected value method may better predict expected consideration for large number of contracts with similar characteristics. However, application of the constraint, may result in an estimated transaction price that is not a possible outcome of an individual contract. Page 30
TRG PAPER #38 PORTFOLIO PRACTICAL EXPEDIENT AND APPLICATION OF VARIABLE CONSIDERATION Background Issues: Whether a transaction price estimated under the expected value method can be an amount that is not a possible outcome of an individual contract Identifying when an entity should use expected value method Current Status TRG agreed that using historical data from other contracts to estimate the transaction price for an individual contract is not the same as applying the portfolio practical expedient. Further TRG discussion is expected. Page 31
TRG PAPER #42 COMPLETED CONTRACTS AT TRANSITION Background Under the modified transition method, entities will apply the new revenue standard only to contracts that are not completed as of the date of initial application. Issues: When is a contract considered complete (e.g., upon performance or when revenue is recognized)? How should completed contracts be accounted for after adoption? Current Status Further TRG discussion is expected. Page 32
ADDITIONAL RESOURCES BDO USA Revenue Recognition Resource Center: https://www.bdo.com/services/assurance/revenue-recognition/overview BDO International Revenue Recognition Resource Center: http://www.bdointernational.com/services/audit/revenue- Recognition/Pages/default.aspx FASB Revenue Recognition Project Page: http://www.fasb.org/jsp/fasb/page/bridgepage&cid=1351027207987 Page 33
CONCLUSION Thank you for your participation! Certificate Availability: If you participated the entire time and responded to at least 75% of the participation pop-ups, click the Participation button below to access the print certificate button. Group Participation Reminder to receive credit: Sign-in sheets must list a Proctor name and CPA license number. BDO USA professionals - submit your sign-in sheets using a Training & Development Request in BDO Service Now found at: https://apps.bdo.com > A to Z > BDO Service Now > Click Request in the upper right menu, then chose Training & Development from the Filter Category drop-down, click on Training & Development Support. Clients and Contacts email sign-in sheets to cpe@bdo.com within 24 hours of the webcast. Alliance Members should proctor their own group participants. This process is detailed in the LearnLive Participant Guide on Alliance Portal > Resource Center. Call LearnLive Support for questions at 1-888-228-4088. Unfortunately, we cannot currently support group CPE for International Firms. Those wanting CPE must have registered and participated from their own computer. Please exit the course by clicking on the red X in the upper right corner. Page 34
APPENDIX Issues Examined by TRG through July 2015 Page 35
ISSUES EXAMINED BY TRG July 18, 2014 Meeting TRG Agenda Ref # Topic 1 Gross versus Net Revenue (Principal versus Agent) 2 3 Gross versus Net Revenue (Amounts Billed to Customers) Sales-Based and Usage-Based Royalties in Contracts with Licenses and Goods or Services Other than Licenses Current Status FASB to propose amendments. IASB has proposed amendments. FASB plans to propose a practical expedient for taxes collected from customers FASB and IASB have separately proposed amendments. 4 Impairment Testing of Capitalized Contract Costs No further action expected Page 36
ISSUES EXAMINED BY TRG October 31, 2014 Meeting TRG Agenda Ref # 6 7 8 Topic Customer Options for Additional Goods and Services and Nonrefundable Upfront Fees Presentation of a Contract as a Contract Asset or a Contract Liability Determining the Nature of a License of Intellectual Property 9 Distinct in the Context of the Contract Current Status No further action expected No further action expected FASB and IASB have separately proposed amendments. FASB and IASB have separately proposed amendments. 10 Contract Enforceability and Termination Clauses No further action expected Page 37
ISSUES EXAMINED BY TRG January 26, 2015 Meeting TRG Agenda Ref # Topic Current Status 12 Identifying Promised Goods or Services FASB has proposed amendments. 13 Collectibility FASB to propose amendments. 14 Variable Consideration No further action expected 15 Noncash Consideration FASB to propose amendments. 16 Stand Ready Obligations No further action expected 17 Islamic Finance Transactions No further action expected 23 Costs to Obtain a Contract No further action expected 24 Contract Modifications FASB to propose amendments. IASB has proposed amendments. Page 38
ISSUES EXAMINED BY TRG March 30, 2015 Meeting TRG Agenda Ref # Topic Current Status 26 Contributions No further action expected 27 Series of Distinct Goods or Services 28 Consideration Payable to a Customer FASB to consider practical expedient for series guidance Topic discussed at July 13, 2015 TRG meeting (Agenda Ref #37) 29 Warranties No further action expected 30 Significant Financing Component No further action expected 31 Variable Discounts No further action expected 32 Exercise of a Material Right No further action expected 33 Partially Satisfied Performance Obligations No further action expected Page 39
ISSUES EXAMINED BY TRG July 13, 2015 Meeting TRG Agenda Ref # Topic Current Status 35 Accounting for Restocking Fees and Related Costs No further action expected 36 Credit Cards No further action expected 37 Consideration Payable to a Customer No further action expected 38 39 40 41 Portfolio Practical Expedient and Application of Variable Consideration Application of the Series Provision and Allocation of Variable Consideration Practical Expedient for Measuring Progress toward Complete Satisfaction of a Performance Obligation Measuring Progress when Multiple Goods or Services are Included in a Single Performance Obligation Further discussion expected No further action expected No further action expected No further action expected 42 Completed Contracts at Transition Further discussion expected 43 Determining When Control of a Commodity Transfers No further action expected Page 40
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