Speaker Firms and Organization:

McGladrey LLP Brian H. Marshall

Partner, National Accounting Standards Group

Morgan, Lewis & Bockius LLP Susan D. Resley

Partner

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Presented By:

September 5, 2012

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Sponsored By:

Sponsored By:

Morgan Lewis provides comprehensive corporate, transactional, regulatory, litigation, and labor and employment legal services to clients of all sizes—from global Fortune 100 companies to just-conceived startups—across all

major industries. We craft and execute business- and industry-specific strategies that align with today’s evolving economic and regulatory

conditions, and that address the full scope of our clients’ challenges and opportunities in the courtroom, in the boardroom, within the workforce, and in

government and policy matters.

Founded in 1873, Morgan Lewis comprises some 3,000 professionals—lawyers, patent agents, employee benefits advisors, regulatory scientists and other specialists—in 24 offices across the United States, Europe, and Asia.

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McGladrey LLP is the fifth largest U.S. provider of assurance, tax and consulting services, with more than 6,500 professionals and associates

in 75 offices nationwide. McGladrey is a licensed CPA firm, and a member of RSM International, the sixth largest global network of

independent accounting, tax and consulting firms.

September 5, 2012

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September 5, 2012

Brief Speaker Bios:

Susan D. Resley Susan D. Resley is a partner in Morgan Lewis's Litigation Practice. Ms. Resley represents companies, brokerage and accounting firms, as well as individual directors, officers, and employees in investigations and proceedings brought by the Securities and Exchange Commission, the PCAOB, FINRA and in related shareholder and derivative litigation. She has been retained by a number of audit and independent board committees to conduct internal investigations on a variety of issues, including accounting, disclosure, and FCPA. Prior to joining Morgan Lewis, Ms. Resley was a partner in the securities litigation group of an international law firm in its Silicon Valley office; before that, she was a partner at another international firm. Previously, she was with the SEC's Division of Enforcement in its Pacific Regional Office, where she led and conducted investigations involving insider trading, accounting practices, broker-dealer practices, market manipulation, municipal bond offerings, and offering fraud.

6 ► For more information about the speakers, you can visit: http://www.knowledgecongress.org/speakers_2012_Revenue_Recognition.html

Brian H. Marshall Brian is a partner in the National Accounting Standards Group of McGladrey LLP. His responsibilities include consulting with clients and engagement teams on complex accounting issues, facilitating training, monitoring standard setting and writing interpretive guidance. Brian’s primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting. Prior to joining McGladrey in 2007, Brian worked in the accounting practices group of a Fortune 50 company serving as a resource on complex technical accounting matters. Brian also was employed by a Big Four firm for over eight years in various U.S. and European offices, with his last position being an assurance senior manager. Brian holds a Bachelor of Business Administration degree in accounting from Holfstra University in New York. He is a licensed CPA in Connecticut and New York, and a member of their respective state CPA societies along with the AICPA.

September 5, 2012

Revenue recognition remains to be a topic of perennial interest in 2012 as it affects almost all companies. In an effort to resolve incongruent accounting standards and practices on revenue recognition, FASB and IASB have proposed new revenue recognition standards through an Exposure Draft in 2011. These new standards, if enacted, would result in the most broad reaching and fundamental changes to the recognition of revenue in businesses moving forward. The Knowledge Group is producing a two-hour LIVE webcast to help companies gain a complete understanding of the nuts and bolts of the proposed standards and its potential impact on their businesses. Changes to Revenue Recognition in 2012 is a must attend event for accountants, finance executives and managers, corporate attorneys and other related professionals.

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Featured Speakers:

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Introduction

Brian is a partner in the National Accounting Standards Group of McGladrey LLP. His responsibilities include consulting with clients and engagement teams on complex accounting issues, facilitating training, monitoring standard setting and writing interpretive guidance. Brian’s primary areas of expertise include general revenue recognition, software revenue recognition, asset impairments, and business combinations accounting.

Prior to joining McGladrey in 2007, Brian worked in the accounting practices group of a Fortune 50 company serving as a resource on complex technical accounting matters. Brian also was employed by a Big Four firm for over eight years in various U.S. and European offices, with his last position being an assurance senior manager. Brian holds a Bachelor of Business Administration degree in accounting from Holfstra University in New York. He is a licensed CPA in Connecticut and New York, and a member of their respective state CPA societies along with the AICPA.

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Overview Preliminary views document issued in Dec. 2008

Exposure draft issued in June 2010

Revised exposure draft issued in Nov. 2011

Redeliberations began in July 2012

Final standard expected in early 2013

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Scope Applicable to all industries and entities

Specific contracts with customers outside of scope:

- Financial instruments - Guarantees (other than warranties) - Insurance - Leases - Certain nonmonetary exchanges

Contracts with performance obligations in multiple standards

Recognition and measurement principles also applicable to sales of nonfinancial assets that are not classified as revenue

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

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

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Five-step approach

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

• Approach to comply with the core principle

Identify the contract with a customer

(Step 1)

Identify the separate

performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate the transaction price to the

separate performance obligations

(Step 4)

Recognize revenue when (or as) each performance obligation is

satisfied (Step 5)

September 5, 2012

1. Identify the contract with a customer Enforceable agreement between parties

Can be written, oral or implied

Combination

- Required for contracts entered into at or near the same time if certain criteria are met

Modifications

- Treat separately if separate performance obligation is added and the consideration is consistent with its standalone selling price

- Otherwise combine with remaining goods or services

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

2. Identify separate performance obligations Promise in a contract to transfer a good or service

Account for good or service separately if distinct based on meeting both of the following

criteria: - Capable of being distinct because the customer can benefit from the good or

service on its own or together with other resources readily available to the customer; and

- Distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract

Indicators of distinct goods or services:

- No significant integration or modification services - Can be purchased without significantly affecting other promised goods or services

in the contract - Not part of consecutively delivered goods or services

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

3. Determine the transaction price Amount of consideration to which an entity expects to be entitled from a customer

Variable consideration

- Estimate based on probability-weighted or most-likely amount

Time value of money - Only affects transaction price if significant financing component exists - Can ignore if time between payment and transfer of goods or services is one year

or less

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

3. Determine the transaction price Noncash consideration

- Measure at fair value or by reference to standalone selling price of related goods or services

Consideration payable to a customer - Reduction of transaction price unless in exchange for distinct good or service

Collectibility - Not considered in transaction price - Generally record uncollectible amounts adjacent to revenue

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

4. Allocate the transaction price Generally based on relative standalone selling prices of separate performance

obligations

Standalone selling price - Observable price when sold separately (best) - Otherwise, estimate based on:

• Cost plus margin • Adjusted market assessment • Residual technique allowed if highly variable or uncertain • Others?

Subsequent changes in the transaction price are allocated on a relative standalone

selling price basis unless certain criteria are met

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

5. Recognize revenue Recognize revenue as performance obligations are satisfied based on transfer of control

Determine if satisfied (and revenue recognized) over time, based on whether entity’s

performance: - Creates or enhances an asset the customer controls; or - Benefits customer as entity performs and another entity would not need to

reperform work completed to date (for pure services contracts); or - Does not create an asset with an alternative use and vendor has right to payment

for performance to date

Select method of progress toward completion (output or input)

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

5. Recognize revenue If prior criteria not met, then satisfied at a point in time

Recognize revenue when customer obtains control based on following indicators:

- Entity has right to payment - Entity has transferred physical possession - Customer has legal title and risks and rewards of ownership - Customer has accepted goods or services

Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: - Experience with similar performance obligations - Whether that experience is predictive of outcome

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Contract costs Capitalize direct costs of fulfilling a contract or anticipated contract if those costs:

- Generate or enhance a resource that will be used to satisfy performance obligations in the future (e.g., setup costs); and

- Are expected to be recovered

Capitalize incremental costs to obtain a contract if expected to be recovered

Practical expedient to expense costs to obtain a contract as incurred if amortization period would have been one year or less

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Warranties Customer option to purchase separately

- Separate performance obligation recognized over time (warranty service)

No customer option to purchase separately and warranty does not provide an additional service - Recognize revenue and accrue expected costs - Consider following in determination of whether additional service is being

provided: • Whether warranty is required by law • Length of warranty period • Nature of tasks to be performed

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Other issues Onerous performance obligations

- Removed from model during July redeliberations - FASB decided to retain existing guidance regarding the recognition of losses from

contracts with customers, including ASC 605-35

Licensing and rights to use - Same guidance as for other goods or services - Revenue recognized at point in time when control transfers if separate

performance obligation

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Disclosures / transition / effective date Disclosure objective:

- Quantitative and qualitative information regarding nature, amount, timing and uncertainty of revenue and related cash flows

Retrospective transition with certain practical expedients

Effective date no earlier than 2015 for public entities and 2016 for nonpublic entities

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

McGladrey thought leadership FASB and IASB Issue Revised Exposure Draft on Revenue Recognition

Revised Revenue Recognition Exposure Draft – What Does It Mean For You?

http://mcgladrey.com/Assurance/Accounting-Resources

http://mcgladrey.com/Publications/Publication-Subscription

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

For more information, please contact:

Brian H. Marshall brian.marshall@mcgladrey.com 203.312.9329

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SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

Introduction

Susan D. Resley is a partner in Morgan Lewis's Litigation Practice. Ms. Resley represents companies, brokerage and accounting firms, as well as individual directors, officers, and employees in investigations and proceedings brought by the Securities and Exchange Commission, the PCAOB, FINRA and in related shareholder and derivative litigation. She has been retained by a number of audit and independent board committees to conduct internal investigations on a variety of issues, including accounting, disclosure, and FCPA.

Prior to joining Morgan Lewis, Ms. Resley was a partner in the securities litigation group of an international law firm in its Silicon Valley office; before that, she was a partner at another international firm. Previously, she was with the SEC's Division of Enforcement in its Pacific Regional Office, where she led and conducted investigations involving insider trading, accounting practices, broker-dealer practices, market manipulation, municipal bond offerings, and offering fraud.

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

REGULATOR PERSPECTIVE • Which Regulators • Focus of Regulators • Potential Landmines/Red Flags

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

REGULATORS • Securities and Exchange Commission

• Division of Corporate Finance

• Office of Chief Accountant

• Division of Enforcement

• PCAOB

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

POTENTIAL FOCUS AREA NO 1: DISCLOSURE

• More Expansive • Additional requirements for Annual Disclosures

• Customer contracts

• Significant judgments and changes in judgments to apply current guidance

• Assets recognized from costs incurred to obtain or fulfill a contract

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

POTENTIAL FOCUS AREA NO. 2: JUDGMENT • Key Area: “Determining the Transaction Price”

• Collectibility???

• Other issues

• Software Revenue Recognition

• Use of Estimates

• Multiple Element Arrangments

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

POTENTIAL FOCUS AREA NO. 2: JUDGMENT • Key Area: “Allocating the Transaction Price”

• Selling price of a good or service may be “highly variable or uncertain”

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

WHY IS JUDGMENT A CONCERN • “[R]eliable accounting judgments are most dependent on good faith…other

enforcement actions where documentation was produced were the result of certain inputs or assumptions being fraudulently developed, such as through reverse engineering to meet earnings targets.”

– Jason Flemmons, Associate Chief Accountant, SEC Division of Enforcement, December 9, 2009

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

REVENUE RECOGNITION IS ALWAYS A FOCUS • SEC PRIORITY • SEC Enforcement Division evaluates judgment in questioning whether it is made in

good faith or is “accounting hocus pocus”

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

LANDMINES/THEORIES OF LIABILITY • Section 10(b): Fraud

• Managing earnings or revenue • Disclosures are materially false • SEC and private plaintiffs can bring this claim

• Deceit to Auditors

• Books and Records/Internal controls

ALL BASED ON HINDSIGHT

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SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

September 5, 2012

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type

your question in the box that appears and click send.

► Questions will be answered in the order they are received.

Q&A:

36

SEGMENT 2:

Susan D. Resley Partner Morgan, Lewis & Bockius LLP

SEGMENT 1:

Brian H. Marshall Partner, National Accounting Standards Group McGladrey LLP

September 5, 2012

37

• No Commitment Unlimited CLE/CPE for one low monthly fee $49! • Access Hundreds of Live Webcasts in 2011, 1,000+ Hours Archived

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pages course materials You get a code which will allow you to register for any program or

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September 5, 2012

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