Post on 13-Apr-2017
Revenue Recognition is Changing
General Principals of Revenue Recognition
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Persuasive evidence of an arrangement
Determining if delivery has occurred or
services have been performed
Fixed or determinable
fees
Collectability is reasonably
assured
.
Persuasive evidence of arrangement exists
Entity A business practices are to obtain a written
legal contract signed by both
parties
EXAMPLE
Entity B business practices are to conduct contracts
through emailed conversations
If Entity A sells a product or services to Entity B in
order for Entity A to recognize revenue, Entity B must be aware, accepted the terms, and signed the
contract
To ensure that the understanding
between parties about the specific
nature and terms of a transaction has been
finalized.
To account for a transaction depends on
evidence of the final understanding between
parties; changes can result in different
methods of recognizing revenue
Persuasive evidence of
arrangement is based on an
entity’s customary business practices
Determining If Delivery Has Occurred or Services Have Been Performed
.
Delivery and Service Terms should be explicit in the
contract
Revenue is generally recognized on the delivery of the product and when the service rendered is performed
Delivery and Service accidental delays or postponement should be explicit for in the contract of recognizing revenue based on those stipulation
Entity A is a maid service which customary practices are for customers to sign a written
contract. Entity A states in the contract that revenue is
recognized once services are performed and the customer is (reasonably) satisfied. Entity A performed services at Entity B,
however Entity B stated Entity A job was poor which Entity A
agreed. Entity A cannot recognize revenue until the customer is
satisfied even though the services was already performed.
Fixed or Determinable Fees
Sales price must be fixed or determinable however there is a regard to the amount of consideration the seller will receive due to existence of
uncertainties. In addition, evaluation of whether an arrangement fee is fixed or determinable can be flexible.
An example is portion of the fee can be fixed or determinable while the remaining becoming fixed or determinable over time
Factors that impact fixed or determinable fees include cancellation provisions,
estimates of future returns and contingent income
Collectability is reasonably assured.
To assess if an entity can collect receivables or cash when revenue is earned, it is usually applied the same way as determining whether a receivable has become a bad debt
If collectability from the customer is questionable, the vendor should not recognize revenue until it receives the amount due or conditions change
The customer financial condition is an indicator of both its ability to pay and to determine if revenue is realizable.
If collectability reasonable assure from the customer but changes due to customer circumstances and the vendor determines collection from the customer is no longer probable, the amount should be recorded as a bad debt
FASB NEW UPDATES TO REVENUE RECOGNITION
The FASB and IASB issued a converged
guidance on recognizing revenue
in contracts with customers
Why Did The FASB Issue A New Standard on Revenue
Recognition?
The objective of the new guidance is to establish the principles to report useful
information to users of financial statements about
the nature, timing, and uncertainty of revenue from
contracts with customersRevenue recognition differs in (GAAP) and
International Financial Reporting Standards
(IFRS) (both need improvement)
.
.
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The New GuidanceRemoves inconsistencies and weaknesses in existing revenue requirements
Provides a more robust framework for addressing revenue issues
Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
Provides more useful information to users of financial statements through improved disclosure requirements
Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer
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Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
Step1: Identify the contract(s) with a customer.
.
Step 2: Identify the performance obligations in the contract.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Core Principle
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
Step 3: Determine the transaction price
Identify the Contract with a Customer
A contract is an agreement between two or more parties that creates enforceable rights and obligations. A Entity should
ensure that the contract meets the following criteria:
Approval and commitment of the parties
Identification of the rights of the parties
Identification of the payment terms
The contract has commercial substance
Identify the Performance Obligations in the Contract A performance obligation is a promise in a contract with
a customer to transfer a good or service to the customer.
A good or service is distinct when
It is Capable of being distinct
It is distinct within the context of the
contract
The customer can benefit the good or service either on its own or together with other resources that are readily available to the customer.
The promise to transfer the good or service is separately identifiable from other promises in the contract.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. To determine the transaction price, an entity should consider the effects of
Determine the Transaction Price
• Variable Consideration
• Constraining estimates of
variable consideration
• The existence of a significant
financing component
• Noncash consideration
• Consideration payable to
the customer
For a contract that has more than one performance obligation, an
entity should allocate the transaction price to each
performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange
for satisfying each performance obligation
Amounts allocated to a satisfied performance obligation should be
recognized as revenue, or as a reduction of revenue, in the
period in which the transaction price changes.
Allocate the Transaction Price to the Performance Obligations in
the Contract
All reporting entities will allocate the transaction price to the good or
service underlying each performance obligation on a relative stand-alone
selling price basis
There will be consistent principles for recognizing
revenue regardless of industry and/or geography
The new guidance includes a cohesive set of disclosure requirements that will
provide users of financial statements with useful information about the
organization’s contract with customers.
The new guidance introduces a constraint on revenue that applies
to variable consideration
Collectability is no longer a recognition threshold and does not affect the measurement of
transaction price
Top Changes to Expect with the New Standard
• Company A’s has to enter a contract with the customer regardless of industry practices and has to identify the contract and terms with a customer
• Company A would not use collectability as a criterion to recognize revenue. The transaction price will be equal to the amount of consideration to which the reporting entity is entitled- not the amount that the reporting entity expects to receive.
• Company A would recognize revenue once it satisfies a performance obligation which could be at the point time or over time. The new guidance put emphasis on the transfer of control.
• Company A would consider how much of the amount is variable and estimate the total consideration to which it is entitled and update that estimate at each reporting date.
• Company A’s persuasive evidence of arrangement to recognize revenue can be dictated by entity’s customary business practices.
• Company A would consider collectability of revenue and if it determined the customer’s financial standing is questionable, Company A would only recognize revenue when its receives the amount due
• Company A would recognize revenue once the product or service has been implemented and the customer is “satisfied”. (Transfer of risks and rewards)
• Company A would recognize revenue in consideration that the price is fixed or determinable which doesn’t include variable amounts in the transaction price until the variability is resolved.