cfo financial forum presentation new rev rec 102209 b&w

8/4/2019 CFO Financial Forum Presentation New Rev Rec 102209 B&W

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K P M G L L P

Implementing EITF 08Implementing EITF 08--1 and EITF 091 and EITF 09--33

CFO Financial Forum Webcast

Mark BielsteinTamara MathisDavid Elsbree

Meredith Canady

Cecil Mak

Department of Professional Practice

October 22, 2009

1

Administrative

CPE regulations require online participants take partin online questions

You must respond to a minimum of three questionsin order to be eligible for CPE credit

Polling questions will appear on your media player on top of theslides.

Send Questions via Ask a Question Button. Be sure to hit the

X after you have submitted your question to close the dialogbox.

Help Desk: 1-866-956-4770 or outside the U.S. at +1-601-957-5017


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Agenda

IntroductionIntroduction

Issue 08Issue 08--1,1, Revenue Arrangements with Multiple DeliverablesRevenue Arrangements with Multiple Deliverables

First Steps to ImplementationFirst Steps to Implementation

Estimating a Standalone Selling PriceEstimating a Standalone Selling Price

Transition & DisclosuresTransition & Disclosures

Issue 09Issue 09--3,3, Certain Revenue Arrangements That IncludeCertain Revenue Arrangements That IncludeSoftware ElementsSoftware Elements

Other ConsiderationsOther Considerations

Questions and AnswersQuestions and Answers

2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMGInternational, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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References

Accounting Standards UpdateAccounting Standards UpdateASUASU

EITFEITF Emerging Issues Task ForceEmerging Issues Task Force

FASBFASB Financial Accounting Standards BoardFinancial Accounting Standards Board

ASCASC Accounting Standards CodificationAccounting Standards Codification

SOPSOP AICPA Statement of PositionAICPA Statement of Position

IASBIASB International Accounting Standards BoardInternational Accounting Standards Board

CPECPE Continuing Professional EducationContinuing Professional Education

VSOEVSOE Vendor Specific Objective EvidenceVendor Specific Objective Evidence

TPETPE Third Party EvidenceThird Party Evidence

PCSPCS PostPost--Contract Customer SupportContract Customer Support



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References, Continued

Subtopic 605-35, Revenue Recognition- Construction-Type and Production-Type Contracts

Accounting for Performance ofConstruction-Type and CertainProduction-Type Contracts

SOP 81-1

Subtopic 985-605, Software RevenueRecognition

Software Revenue RecognitionSOP 97-2

Subtopic 605-25, Revenue Recognition Multiple-Element Arrangements

Revenue Arrangements withMultiple Deliverables

EITF 00-21

Original Pronouncements FASB Accounting StandardsCodification

EITF 03-5 Applicability of SOP 97-2 to Non-Software Deliverables in anArrangement Containing More-Than-Incidental Software

Subtopic 985-605, Software RevenueRecognition(ASC paragraph 985-605-15-3(c))

FAS 154 Accounting Changes and ErrorCorrections

Topic 250, Accounting Changes andError Corrections


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References, Continued

Subtopic 985-605, Software RevenueRecognition

ASU 200914EITF 09-3

Subtopic 605-25, Revenue Recognition Multiple-Element Arrangements

ASU 200913EITF 08-1

Consensus / Accounting StandardsUpdate

FASB Accounting StandardsCodification



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EITF 08-1, Revenue Arrangements with MultipleDeliverables

EITF 08-1 will amend EITF 00-21

EITF 00-21 required objectiveand reliable evidence of fairvalue (VSOE or TPE) toseparate deliverables

EITF 08-1 requires sellingprices to be based on thehighest level of evidence butrequires a best estimate ofselling price to be made ifVSOE or TPE do not exist

Will result in more separationof deliverables revenuerecognition at earlier point

Could require significantjudgment in determiningestimated selling price

Vendor Specific Objective Evidence (VSOE)Vendor Specific Objective Evidence (VSOE)

ThirdThird--Party Evidence (TPE)Party Evidence (TPE)

Estimated Selling PriceEstimated Selling Price


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EITF 08-1, Revenue Arrangements with Multiple

Deliverables

Final Consensus requires the relative selling price method of alFinal Consensus requires the relative selling price method of allocationlocation

Eliminates use of residual methodEliminates use of residual method

Requires that companies determine VSOE, TPE or estimated sellingRequires that companies determine VSOE, TPE or estimated sellingprice forprice for ALLALL deliverables that meet the other separation criteriadeliverables that meet the other separation criteria

Other separation criteria remain the same standalone value and

general return rights

Contingent revenue provisions unchanged

Qualitative and quantitative transition disclosures and expanded ongoingdisclosures for all arrangements with multiple deliverables including prior

transactions that continue to be accounted for under EITF 00-21


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Polling Question #1

Company A provides deliverables X, Y & Z for a total price of $100 in a

customer arrangement. There are no contingent payments in the

arrangement. Deliverable X does not have VSOE or TPE, however, the

best estimate of selling price is $30. Deliverables Y and Z have VSOE

of $50 and $40, respectively. On 12/31/XX, Company A has delivered X

and Y to the customer. Based on the new guidance in EITF 08-1, how

much revenue should be recognized for this arrangement in the period

ended 12/31/XX?

A. $60

B. $90

C. $80

D. $67


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Polling Check #1 Solution

Answer: D - $67

The use of the relative selling price method requires either

VSOE, TPE or an estimated selling price for ALL deliverables,

including delivered items. Company As estimated selling price

for deliverable X is $30. The amount of revenue recognized is

therefore calculated as 100 * ((30+50)/120)

Under existing guidance under EITF 00-21, $60 would be

recognized using the residual method and does not requireCompany A to determine an estimated selling price for

deliverable X.


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EITF 08-1, First Steps to Implementation

1. Inventory the deliverables

Identify the specific delivered elements where revenue wasbased on the residual and not VSOE or TPE

Identify typical deliverables within an arrangement thatgenerally have not been separable under EITF 00-21 becauseVSOE or TPE did not exist

2. Determine whether other separation criteria are met

Stand-alone value

General return rights

3. Determine highest available evidence for deliverables

Reasonable effort required to obtain VSOE or TPE if it existsIf VSOE or TPE was used to separate deliverables, same levelof evidence for those deliverables unless circumstanceschange


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EITF 08-1, First Steps to Implementation

4. Estimate selling price for deliverables where VSOE and TPE do notexist

Consider nature of the deliverable and best approach to estimating astand-alone selling price

There is no practicability exception for estimating selling prices forelements

5. Assess potential operational impacts of implementation, such as:

Systems and process changesInternal controls over financial reporting

Income tax considerations

Changes in business practices

Training of employees, including sales force



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EITF 08-1, Estimating a Standalone SellingPrice

EITF provides no specific guidance but added two examples andmodified one example in EITF 00-21 to include considerations inestimating a stand-alone selling price

A best estimate of selling price shall be consistent with theobjective of determining VSOE

Estimated selling price shall be the price at which the vendorwould transact if the deliverable were sold by the vendor regularlyon a standalone basis considering market conditions as well asentity-specific factors


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EITF 08-1, Estimating a Standalone Selling

Price - continued

Practical Framework (five steps) for establishing bestestimate of selling price:

STEP 1: Gather all reasonably available data points (e.g. limited orwidely-disbursed standalone sales, product costs and margins,published price lists, available third-party or industry pricing data)

STEP 2: Consider adjustments based on:Market Conditions (e.g. demand, competition, trends, constraints)

Entity-specific Factors (e.g. pricing strategies and practices, market

share and position)



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EITF 08-1, Estimating a Standalone SellingPrice - continued

Practical Framework (five steps) for establishing bestestimate of selling price:

STEP 3: Consider whether necessary to stratify selling prices intomeaningful groups (e.g. type of customer, deal size or customervolume, geography, distribution channel, or other relevant groups)

STEP 4: Weight available information and make best estimate

STEP 5: Establish process for ongoing monitoring and evaluation


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Price - continued

Best estimate of selling price point estimate or range?

A point estimate is more precise

A narrow range may be acceptable

Any price within the range should be a valid pricing point

Should not use a point estimate plus or minus an arbitrarypercentage

Consider stratification

Operational advantages ability to use stated contract price if alldeliverables are within their respective ranges

All deliverables must be within range or relative selling price methodwould be required

Select policy to determine a point within the range for outlierdeliverables



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ABC Corp. sells equipmentwith maintenance and ten daysof training for a bundled fee of$564,900 to Customer X and abundled fee of $551,000 toCustomer Y.

ABC determines its estimatedselling price ranges to be:

Contract PriceCustomer X

$564,900

$9,900Training 10 days

$50,000Maintenance

$505,000Equipment

Contract PriceCustomer Y

$551,000

$5,000Training 10 days

$26,000Maintenance

$520,000Equipment

$960 to $990 perday

Training

$50,000 -$52,500

Maintenance

$500,000 -$525,000

Equipment


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Price - continued

All of the stated contract prices within the arrangement with CustomerX fall within the narrow ranges and may be used to allocate revenue ABC may allocate based on stated prices in the contract

The stated contract prices for maintenance and training in thearrangement with Customer Y fall outside of the ranges, and therefore,ABC will have to perform a relative selling price allocation

ABCs policy is to allocate using the midpoint of the range when thestated contract price is not within the selling price range

$551,000$581,000

$9,3671.7%$9,750Training

$48,4888.8%$51,250Maintenance

$493,14589.5%$520,000Equipment

Relative SellingPrice AllocationRatioSelling PriceCustomer Y



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Ongoing monitoring and evaluation

Estimated selling prices likely will change over timeAllocation in previous arrangements should not be modified

New arrangements should reflect changes in estimates

Extent and frequency of changes is based on nature ofdeliverables, markets and entity-specific factors

New offerings or markets

Rate of product obsolescence

Seasonality adjustments

Monitor changes in data points used

Monitor the level of evidence available Changes inbusiness practices could result in VSOE or TPE existingin the future


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Polling Question #2

Assume Vendor A does not have VSOE or TPE for a deliverable

and determines that estimating a selling price would be difficult

and require significant judgment. Other separation criteria have

been met. Which of the following should Vendor A do?

A. Combine the deliverables into one unit of accounting

B. Use the residual method as a proxy for the estimated selling

price

C. Use the stated contract price as the estimated selling price

D. None of the above


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Polling Check #2 Solution

Answer: D None of the above

An estimate of selling price mustbe made if VSOE and TPE do

not exist

Difficulty in estimating a selling price is not a basis not to

separate

Residual method is prohibited but could provide a data point in

estimating a selling price cannot simply use as a proxy

Stated contract prices should not be presumed to berepresentative of estimated selling price may provide a data

point in estimating a selling price


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Transition

Effective Date

Prospective for revenue arrangements entered into or materiallymodified in fiscal years beginning on or after June 15, 2010

Earlier application is permitted as of the beginning of fiscal year butcan be applied in a period other than the first period of a fiscal yearby retrospective application to beginning of year

Option for retrospective application if meet practicabilityrequirements in Statement 154 (ASC Topic 250) for retrospective

application


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Transition Illustration

Company A, a public entity with a calendar year-end, elects to early adopt

as of June 30, 2010. Because adoption is not in the first fiscal quarter of

Company As fiscal year, the requirements are applied retrospectively to

the first quarter of 2010.

Company A would present the following in its June 30, 2010 financial

statements:

Statement of operations for the six months ended June 30 would

reflect six months of revenue under EITF 08-1 for any new or

materially modified arrangements entered into or modified on or after

January 1, 2010.

The statement of operations for the three months ended June 30would reflect revenue for the second quarter under EITF 08-1 for

those same arrangements.


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Transition Illustration -continued

Company A would be required to disclose the following information, at a

minimum, for all previously reported interim periods in the year of

adoption: revenue, income before income taxes, net income, earnings per

share, and the effect of the change for the appropriate captions presented

Company A would not be required to file amendments to its previously filed

first quarter Form 10-Q


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Polling Question #3

When does your company plan to adopt EITF 08-1 andEITF 09-3?

A. Early adopt in fiscal 2009

B. Early adopt in fiscal 2010

C. When the requirement is effective

D. Have not determined yet


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Prospective Transition Material Modification

EITF 08-1 may be adopted prospectively for revenue arrangements

entered into or materially modifiedin fiscal years beginning on or after

June 15, 2010.

The determination of whether a modification represents a new

arrangement or a modification that is material will require the use of

judgment

A material modification generally:

Would result from a substantive renegotiation or amendment of an

existing arrangement that is material

Would not be expected to arise from non-substantive changes such

as granting concessions to customers


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Some possible guidance to consider:

FASBs deliberations in the Joint FASB/IASB Revenue Recognition

Project on the interdependency of pricing of the modification with

pricing of deliverables in existing arrangements (June 10, 2009

FASB meeting)

Paragraph 64 of SOP 81-1 (ASC paragraph 605-35-25-29) for

guidance when determining whether contract additions are treated

as separate contracts


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Other factors to consider when determining whether an arrangement is

materially modified:

If new deliverables are included as a result of the modification, is the

increase in the price under the modified contract consistent with the

price customers would pay in a standalone sale?

Are any new deliverables included in the modification closely

interrelated with the deliverables in the original arrangement in terms

of design, technology or function?

Is there evidence that the pricing of the modification includedconsideration of the pricing in the existing arrangement?

Is the contract modification a unilateral grant of a concession by a

vendor without a bona fide renegotiation of the original arrangement?


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Prospective Transition New Arrangements


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When does a new arrangement exist?

Arrangements considered new in the period that the key terms of anarrangement are agreed to between a vendor and its customers,consistent with persuasive evidence of an arrangement

For example, Company A and Customer Z both sign a multiple deliverablearrangement on December 31, 2010 but delivery takes place January 15,2011. If Company A adopts EITF 08-1 prospectively on January 1, 2011,this arrangement would still be accounted for under EITF 00-21 sincepersuasive evidence of the arrangement existed prior to January 1, 2011.

New arrangements may include:

Substantive contract renewals

Purchase orders under master purchase agreements

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Disclosure Requirements - Objective

The objective of the disclosure guidance is to provide:

Qualitative and quantitative information about a vendors revenue

arrangements and about the significant judgments made about the

application of EITF 08-1

Changes in those judgments or in its application that may

significantly affect the timing or amount of revenue recognition

Specific disclosure requirements are significantly expanded under EITF

08-1 as compared to EITF 00-21 and apply to all multiple elementarrangements.



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Disclosure Requirements - Transition

Minimum Transition Disclosures

Qualitative information:

Changes in the units of accounting

Changes in the allocation of arrangement consideration

Changes in the pattern of revenue recognition

Whether adoption is expected to have material effect onperiods subsequent to period of adoption


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Disclosure Requirements - Transition

Minimum Transition Disclosures

If the effect of adoption is material, supplement with quantitativedisclosure to allow users to understand the impact of adoption andassess trends

Preparers have discretion to determine the quantitative disclosuresthat would achieve the overall objective. Examples include:

Amount of revenue recognized subject to EITF 08-1 and amount thatwould have been recognized if transactions subject to EITF 00-21

Amount of revenue that would have been recognized in thepreceding year if transactions had been subject to EITF 08-1

Revenue recognized in the current period and the amount of deferredrevenue at the end of the current period for those arrangements stillunder EITF 00-21 as well as those arrangements under EITF 08-1



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EITF 09-3, Certain Revenue Arrangements ThatInclude Software Elements

Scoping Principle

Modifies scope of SOP 97-2 to exclude tangibleproducts containing both software and non-softwarecomponents that function together to deliver theproduct's essential functionality

All tangible components now scoped outEITF 03-5 eliminated for tangible products, but conceptsretained to determine if service deliverables are consideredsoftware deliverables

Determine what software is now scoped out

EITF 08-1 applies to arrangements that are scopedout of SOP 97-2

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EITF 09-3, Certain Revenue Arrangements That

Include Software Elements

Rebuttable presumption that software elements areconsidered essential to functionality of the tangibleproduct if sales of the tangible product without thesoftware elements are infrequent

Selling the software on a stand-alone basis does nottaint this assessment

Software does not have to be embedded on hardwareto qualify

Different product models with same functionality exceptthat one model is sold with the software and the otherwithout would be considered the same product forpurposes of this evaluation

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EITF 09-3, Certain Revenue Arrangements ThatInclude Software Elements

The hardware components must substantivelycontribute to the tangible products essentialfunctionality not simply a delivery mechanism

For example, a software vendor could not avoid thescope of SOP 97-2 by delivering its software products tocustomers on read-only storage devices

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EITF 09-3, Certain Revenue Arrangements That

Include Software Elements

Other guidanceStand alone sales of essential software are under SOP 97-2Undelivered elements (e.g. PCS and upgrades) related to theessential software are scoped out of SOP 97-2Bifurcate undelivered elements into software and non-softwareApply EITF 08-1 to separate software deliverables accounted forunder SOP 97-2 from hardware and related software deliverablesscoped out

Initially allocate consideration to software deliverables as a group andnon-software deliverablesLook to SOP 97-2 to further separate software deliverables

Disclosures, transition and effective date consistent with EITF08-1

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Allocation of Arrangement Consideration Illustration

ABC Co. enters into an arrangement to sell Software A, bundled with one year ofPCS and Software B on a hosted basis (outside the scope of SOP 97-2) for totalfee of $1.2 million.

ABC regularly sells Software A bundled with one year of PCS for $1.6 million(VSOE for bundled group). VSOE for Software B hosting is $400,000.

ABC would allocate the arrangement consideration using the relative selling pricemethod to the software group and to the hosting as follows:

Hosting (non-software) $240,000 [$1.2 million x ($400,000 / $2 million)]

Software A and PCS (group) $960,000 [$1.2 million x ($1.6 million / $2million)]

ABC would then follow the guidance in SOP 97-2 to determine whether Software

A and PCS can be separated into units of accounting.


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Polling Question #4

Vendor sells a personal computer that includes an operating system

that, along with the hardware, provides the basic functionality of a

personal computer. The vendor rarely sells the personal computer

without the operating system but does sell the same operating system

for the personal computer separately. Based on the factors provided in

EITF 09-3, which deliverables would be excluded from the scope of

SOP 97-2?

A. Personal computer including the operating system

B. Stand-alone sale of the operating system

C. Both A & B

D. None of the above


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Polling Question #4 - Solution

Answer: A

The personal computer including the operating system would be

excluded from the scope of SOP 97-2. Sales of the personal computer

without the operating system are infrequent and the fact that the

operating system is also sold separately does not affect the

assessment of the essential nature of the operating system when sold

with the computer. However, the stand-alone sale of the operating

system would be included in SOP 97-2.


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Other Considerations Contingent Revenue

Contingent Revenue

EITF 08-1 does not change the existing contingent revenue guidance

Arrangement consideration allocated to delivered items is limited to amountsnot contingent upon the delivery of other items

Amount allocated to delivered items would be the lesser of amount initiallyallocated on a relative selling price method or non-contingent amount

The change to the relative selling price method from the residual method mayresult in the conclusion that contingent revenue exists resulting in differencesin how arrangement consideration is allocated



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Other Considerations Contingent RevenueIllustration

Contingent RevenueConsider a vendor that sells equipment and installation services for $100.VSOE for the installation service is $25 which is also the stated contractualprice. The estimated selling price of the hardware is $100.$75 of the arrangement consideration is due upon delivery of the equipmentand $25 is not due until the installation is complete.Assume the separation criteria in EITF 08-1 are met for the equipment andinstallation.Under the relative selling price method, the arrangement consideration wouldbe allocated as follows:

Equipment $80 [$100 x ($100/$125)]Installation services $20 [$100 x ($25/$125)]

However, because $5 of the amount allocated to the equipment is contingenton the delivery of installation, the amount allocated to the equipment is limitedto $75.


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Other Considerations Interaction of EITF 08-1

with FTB 90-1 (ASC Subtopic 605-20)

FTB 90-1, Accounting for Separately Priced ExtendedWarranty and Product Maintenance Contracts

EITF 08-1 does not change the existing guidance in FTB 90-1

FTB 90-1 defines a product maintenance contract as an agreementto perform certain agreed-upon services to maintain a product for aspecified period of time.

The PCS deliverable must be separately priced within thearrangement to be within the scope of FTB 90-1

A PCS deliverable that relates only to the maintenance of thehardware elements of a tangible product is likely within scope of FTB

90-1A PCS deliverable that includes rights to unspecified upgrades andenhancements of the software element is likely outside scope of FTB90-1



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Polling Question #5

Company B sells a personal computer (computer processor and operatingsystem software) and provides one year of PCS on the operating systemsoftware.

The operating system software is essential to the personal computersfunctionality and scoped out of SOP 97-2. The PCS relates to the essentialsoftware and is also considered to be a separate deliverable excluded fromSOP 97-2.

Company B has VSOE for the PCS but not for the operating systemsoftware and hardware.

Company B would allocate the arrangement consideration to the personalcomputer and the PCS using the residual method.

A. True

B. False


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Polling Question #5 - Solution

Answer: B False

Company B would allocate the arrangement consideration using therelative selling price method for the deliverables.



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