Handout -revenue recognition webcast 5-27-15
-
Upload
jin-young-park -
Category
Business
-
view
38 -
download
1
Transcript of Handout -revenue recognition webcast 5-27-15
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 0
0 WELCOME TO TODAY’S WEBINARThe webinar “Revenue Recognition: Mastering Today’s Issues for
Tomorrow’s Transition” will begin at 12:30 pm (Eastern)Have a question or comment? – Please use the chat box. If we don’t get to your question, we will reach out to you at the conclusion of the
webinar.Today is interactive. Your participation in the polling questions is
appreciated and required to be eligible for CPE credit. We will begin shortly!
www.withum.com
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | withum.com
REVENUE RECOGNITION: MASTERING TODAY’S ISSUES FOR TOMORROW’S TRANSITIONMAY 27, 2015
Margaret F. Gallagher, CPA [email protected] Rhen, CPA [email protected]
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 2
2
The information presented in this presentation represents our personal perspectives, and not necessarily the views of WithumSmith+Brown, PC.
It is not necessarily all inclusive, and does not constitute legal or any other
advice.
Today’s Disclaimer
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 3
3 MEET YOUR PRESENTERS
Margaret F. Gallagher, CPAWithumSmith+Brown, PCTechnical Resources [email protected]
Jarrod Rhen, CPAWithumSmith+Brown, [email protected]
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 4
4 TODAY’S OUTLINEGENERAL PRINCIPLES OF REVENUE RECOGNITION:1. Persuasive evidence of an arrangement2. Delivery and performance:
3. The seller’s price to the buyer is fixed or determinable4. Reasonable assurance of collectability
OTHER MATTERS:1. Gross vs. net2. Product Warranties
Products Services Software arrangements
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 5
5 REVENUE - BACKGROUND Single most important financial statement measure
No single authoritative pronouncement Revenue recognition differs by transaction and industry This presentation will not discuss the new ASU 2014-09
Gross vs. Net Product Warranties
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 6
6 REVENUE - CONSIDERATIONSDoes the revenue recognition policy fit the substance???? Sale of products Rendering of services Are there multiple elements?
• Are they tangible or intangible? Is there a contract?
• Does it contain important milestones?• Is there a right to use?• Is there a licensing arrangement?
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 7
7 REVENUE CONSIDERATIONS
Industry specific
Non-recurring gains/losses
Principal/Agent considerations (gross vs. net)
Customer incentives
Retrospective considerations
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 8
8
PERVASIVE CONCEPTS There are two factors that must be achieved in order for a company to recognize revenue:
ONE The
revenue must be Earned
TWO Revenue
must be Realized or Realizable
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 9
9 EARNED
So, what does it mean to have earned the revenue? Examples:
You sign one year contract with Verizon FiOSfor cable and internet service
Best Buy delivers TV to your house
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 10
10 REALIZED OR REALIZABLE
So what does it mean that revenue is Realized orRealizable?Examples:
Magazine subscriptions
paid in advance
Airlines are paid for tickets
in advance
Restaurant gets paid for
dinner
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 11
11 FOUR CONDITIONS OF RECOGNITIONRevenue is generally earned and realized or realizable when the following four criteria are met:
Persuasive evidence of an arrangement exists
Delivery or performance has occurred
Arrangement fee is fixed or determinable
Collectibility is reasonably assured
CRITERIA
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 12
12 1. PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS
Persuasive evidence is dictated by the company’s customary business practices:
Online authorization
Purchase order
Written contract or agreement
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 13
13 2. DELIVERY OR PERFORMANCE
• A single act of performance• Seller’s fulfillment & customer’s value
Basic Model
• Multiple acts, with the “final act” being most significant• Value received all at once (“final act”)
Completed Performance Model
• Providing service over period of time• Receive value over period of time
Proportional Performance Model
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 14
14 DELIVERY OF PRODUCTS Transfer of Title
Review the Contractual TermsFOB (“Free on board”) terms FOB Destination Point: Shipping free to buyer and paid for by seller, title passes when buyer receives goods at predetermined destination point.FOB Shipping Point: Title passes when goods leave the shipping area of the seller, shipping is paid by the buyer
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 15
15 DELIVERY OR PERFORMANCE - PRODUCTS
Customer Acceptance ProvisionsCustomer acceptance provisions generally allow customers to cancel the arrangement when the product delivered does not meet the customer’s needs or desires
Types of Acceptance Provisions:1. Evaluation or trial purposes2. Right of return based on customer subjective criteria3. Right of return based on seller-specified objective criteria
Tip: The nature of customer acceptance provisions should be analyzed to determine the appropriate accounting model to apply to the transaction.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 16
16 DELIVERY OR PERFORMANCE - PRODUCTS
Customer Acceptance Provisions1. Was it shipped for trial or evaluation purposes?
• Requires affirmative acceptance• Includes trial periods
2. Is customer acceptance based on meeting standard performance criteria?
• Product is defective• Product fails to meet advertising claims or published
criteria for performance
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 17
17 DELIVERY OR PERFORMANCE - PRODUCTS
Customer Acceptance Provisions3. Is customer acceptance based on customer specified
or negotiated criteria• Common example: Equipment sales to be used in
manufacturing plant.• Seller must be able to reliably demonstrate that the
delivered product meets the specified acceptance criteria before revenue can be recognized.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 18
18 DELIVERY OR PERFORMANCE - PRODUCTS
Is there a Right of Return?It is usual and customary to record revenue upon delivery of products sold with a right of return, IF: The terms of the arrangement make it clear that a sale
has occurred There are no contingencies other than a right of return The likelihood of the customer exercising the right of
return can be estimated (allowance established)
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 19
19 DELIVERY OR PERFORMANCE - PRODUCTS
Right of Return - Key ConsiderationsRevenue can be recognized under the following conditions: Sales to buyer is fixed or determinable Payment is not contractually or otherwise excused until the
product is resold Buyer holds risks of destruction, damage, theft of the property Buyer has economic substance apart from the seller Seller does not have future obligations Returns can be reasonably estimated
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 20
20 REVENUE RECOGNITION FOR SERVICES
Clubs & other membership organizations
Consulting arrangements
Legal & other professional
services
Advertising and marketing
Data processing
Maintenance contracts
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 21
21REVENUE RECOGNITION FOR SERVICES
SAME GENERAL PRINCIPLES APPLY
Revenue from service transactions should be recognized when it has been earned and is realized or realizable.
Earned either as the service is performed, over time, or when the services
are complete.
Realizable once the customer has committed
to pay, and the customer’s ability to pay is not in
doubt.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 22
22 APPLYING 4 CRITERIA FOR REVENUE RECOGNITION TO SERVICES • ‘Evidence of an arrangement’ and ‘collectibility’
are the same for service deliverables and other types of revenue transactions.
• ‘Fixed and determinable fees’ – customer cancellation provisions may impact timing of revenue recognition
• Special considerations related to the ‘delivery or performance has occurred’ criteria
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 23
23TWO REVENUE RECOGNITION METHODS
FOR SERVICE REVENUES
• Appropriate for when performance is a single act• And sometimes when it involves multiple acts• Recognize 100% of revenue all at once (ie, a haircut, a car wash)
Completed or specific performance
• Recognize revenue over time as the services are rendered. • Only used for certain multiple acts, because the customer receives
value as the services are performed.
Proportional performance
If the arrangement involves multiple deliverables, or software, refer to other specific US GAAP, FIRST.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 24
24 PERFORMANCE INVOLVING MULTIPLE ACTS
The Proportional Performance model is often appropriate because the customer typically receives value as the services are performed.
When there are multiple acts, how do we determine whether revenues should be recognized under the completed or proportional performance methods?
Do not assume that multiple acts = proportional performance method of recognition
HOWEVER The Completed Performance model should be used if services are performed in more than a single act, but the final act is so significant in relation to the overall transaction that substantive performance only takes place when the final act is completed.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 25
25 INDICATORS OF COMPLETED PERFORMANCE
ONE• If the seller fails to perform the final act, the customer (or the customer's new
service provider) would need to "start over"
TWO• Payment terms indicate that no payment is due until the final act is
performed.
THREE• The final act is significantly different in nature from the other acts to be
performed.
FOUR• The contracts underlying the transaction specify only the final act (i.e.,
completion of service) and other acts are performed at the seller's discretion.
FIVE• There is significant uncertainty as to whether the vendor can complete all of
the acts in the arrangement.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 26
26PERCENTAGE OF COMPLETION METHOD & SERVICE REVENUESPOC is universally loved because it is logical (matching of revenues and costs)However, it does not apply to service transactions unless they are:• the construction and/or production of tangible
property, such as architectural and engineering design contracts.
• OR the ‘construction’ of software system that involves significant production and customization
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 27
27DELIVERY AND PERFORMANCE –LICENSES
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 28
28 REVENUE RECOGNITION FOR LICENSESThe four conditions of revenue recognition apply to licenses of intellectual property (“IP”)
Revenue is generally earned at either the beginning or throughout the license term, depending upon the nature of the license.
Revenue is usually considered realizable once the customer has committed to pay for the license (assuming collection isn’t in doubt).
Partial payments at the inception of the license and additional payments based on performance milestones, use of the property, or the passage of time are common
Delivery - most significant revenue recognition issue for licenses – when does ‘delivery’ occur?
If the transaction is, in substance, a sale of an asset, the CPM should be applied; If the seller/licensor does not transfer all of the risks and rewards at the inception of the
arrangement, a PPM should be applied. (akin to an operating lease arrangement)
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 29
29 “DELIVERY” FOR LICENSES DEPENDS ON EXCLUSIVITY & DURATION
Perpetual Term Term <( = Life of License) Life of License
ExclusiveCompleted
performance method
Proportional performance
method
Non-exclusive
Completed or proportional performance
method
Completed or proportional performance
method
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 30
30
DELIVERY AND PERFORMANCE MULTIPLE ELEMENTS
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 31
31 MULTIPLE - ELEMENT ARRANGEMENTS
Companies often provide more than one product or service in a single arrangement. But does it require multiple element accounting? Key questions to ask are:
Is the other item(s) or service incidental to the primary sale?
If not incidental, is software involved?
If software is involved, apply ASC
985-605 Software Revenue Recognition
for allocating the transaction price
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 32
32 ASC 605-25 MULTIPLE-ELEMENT ARRANGEMENTS
Separating multiple deliverables into different units of accounting (separation)
Allocating revenue to the different units of accounting (allocation)
Recognizing revenue when each different unit of accounting meets the 4 conditions (recognition)
Key considerations
for analysis:
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 33
33UNITS OF ACCOUNTING – ARE THERE SEPARATE ELEMENTS?A delivered item or items shall be considered a separate element for accounting purposes if both of the following conditions are met:1. The delivered item or items have value to the customer on a stand-alone basis.
2. If the arrangement includes a general right of return related to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor.
Stand-alone value exists if it is sold separately by any vendor
OR the customer could resell the delivered item or items on a stand-alone basis.
If the separation conditions are met, the delivered item(s) must be treated separately for accounting purposes. It is not optional to bundle elements that otherwise satisfy these conditions.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 34
34 MEASUREMENT AND ALLOCATION OF ARRANGEMENT CONSIDERATIONGenerally, consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price (the relative selling price method).
The ‘selling price’ for each deliverable shall be determined using (in this order):
The revenue recognition model shall be considered individually for each separate unit of accounting.
1 - vendor-specific objective evidence (VSOE) of selling
price, if it exists; if not 2 - third-party evidence of
selling price,
3 - If neither 1 nor 2 exists , use best estimate of the
selling price for that deliverable when applying the relative selling price method.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 35
35ASC 985-605 SOFTWARE MULTIPLE-ELEMENT ARRANGEMENTS
First
SEPARATION - apply separation guidance from ASC 605-25 to determine
the units of account
NextALLOCATION - ASC 605-25 is also applied to determine the amount of arrangement consideration to allocate to those non-software-related
elements.
The remaining consideration is allocated to the software-related element(s) in the arrangement. The software-related elements are evaluated for further separation and recognition under ASC 985-605.
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 36
36 3. FIXED OR DETERMINABLE FEE
There is no firm definition of fixed and determinableFactors preventing a fee from being fixed or determinable:
Coupons & Rebates
Right of return provisions Penalties Bonuses
Usage Cancellation Success/failure
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 37
37 4. COLLECTIBILITY
• Collectibility should only be assessed after the first three criteria are met
• Apply many of the same factors used to determine whether a receivable has become a bad debt
• If collectibility at the outset is questionable, revenue should not be recognized until collectibility is reasonably assured
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 38
38 OTHER REVENUE RECOGNITION MATTERS
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 39
39 ASC 605-45 (FORMERLY EITF 99-19) Provides indicators for reporting revenue Gross (as a
Principal) versus Net (as an Agent)
Applies to transactions in all industries (except for those governed by specific guidance)
Must apply judgment in analyzing the facts and circumstances of an arrangement
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 40
40 INDICATORS OF GROSS REVENUE
The company has credit risk.
The company has physical loss inventory risk
The company is involved in the determination of product or service specifications
The company has discretion in supplier selection
The company changes the product or performs part of the service
The company has latitude in establishing price
The company has general inventory risk
The company is the primary obligor
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 41
41 STRONG INDICATORS OF NET REVENUE
The supplier is the primary
obligor
The company earns a fixed
amount
The supplier has the credit
risk
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 42
42
WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 43
43 THANK YOU FOR ATTENDING THIS WITHUM WEBINAR
Margaret F. Gallagher, CPAWithumSmith+Brown, PCTechnical Resources [email protected]
Jarrod Rhen, CPAWithumSmith+Brown, [email protected]