mcgladrey revised revenue recognition exposure draft webcast – what does it mean for you?

Revised Revenue Recognition Exposure Draft

January 25 2012

Revised Revenue Recognition Exposure Draft – What Does It Mean for You?January 25, 2012

1

Today’s presenters

Rick Day, Partner, National Director of Accounting

Richard Stuart, Partner, National Accounting Standards Group

Brian Marshall, Partner, National AccountingBrian Marshall, Partner, National Accounting Standards Group

2 © 2012 McGladrey & Pullen, LLP. All Rights Reserved.

Agenda

Background and scope 10 min. R i d d d l 30 i Revised proposed revenue model 30 min. Other revenue issues 15 min. Closing remarks 5 min.


Objective

By the end of this webcast, you will be able to understand the key accounting concepts includedunderstand the key accounting concepts included in the revised exposure draft on revenue recognition and what it means for you.recognition and what it means for you.


Background and scopeBackground and scope


Overview

Preliminary views document issued in Dec. 2008 E d ft i d i J 2010 Exposure draft issued in June 2010 Revised exposure draft issued in Nov. 2011 with

comments d e March 13comments due March 13 Final standard expected in late 2012 / early 2013


Scope

Applicable to all industries and entities Specific contracts with customers outside of scope:Specific contracts with customers outside of scope:

- Financial instruments- Guarantees (other than warranties)- Insurance- Leases- Certain nonmonetary exchangesy g Contracts with performance obligations in multiple

standards R iti d t i i l l Recognition and measurement principles also

applicable to sales of nonfinancial assets that are not classified as revenue


Core principle

Recognize revenue to depict the transfer of promised goods or services to customers in anpromised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange forthe entity expects to be entitled in exchange for those goods or services


Revised proposed revenue modelRevised proposed revenue model


Overview

Approach to comply with core principle

Identify the Identify the Determine Allocate the Recognize contract with a customer

(Step 1)

separate performance obligations in the contract

Determine the

transaction price

(Step 3)

transaction price to the

separate performance

revenue when (or as) each performance obligation is

(Step 2)(Step 3) p

obligations (Step 4)

satisfied (Step 5)

10 © 2012 McGladrey & Pullen, LLP. All Rights Reserved.10 © 2012 McGladrey & Pullen, LLP. All Rights Reserved.

1. Identify the contract with a customer

Enforceable agreement between parties C b itt l i li d Can be written, oral or implied Combination

R i d f t t t d i t t th- Required for contracts entered into at or near the same time if certain criteria are met

ModificationsModifications- 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


2. Identify separate performance obligations

Promise in a contract to transfer a good or service Account for separately if distinct because either of the Account for separately if distinct because either of the

following criteria are met:- Good or service is regularly sold separately by the entity; org y p y y y;- Customer can benefit from good or service on its own or

together with other readily available resources

H b dl f i d d i i However, bundle of promised goods or services is accounted for as one performance obligation if both of the following criteria are met:g- Highly interrelated and require significant integration service;

andSignificantly modified or customized to fulfill contract


- Significantly modified or customized to fulfill contract

3. Determine the transaction price

Amount of consideration to which an entity expects to be entitled from a customerexpects to be entitled from a customer Variable consideration

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

Time value of moneyTime 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


3. Determine the transaction price

Noncash consideration M t f i l b f t t d l- Measure at fair value or by reference to standalone selling price of related goods or services

Consideration payable to a customerConsideration payable to a customer- Reduction of transaction price unless in exchange

for distinct good or service Collectibility

- Not considered in transaction price- Record uncollectible amounts adjacent to revenue


4. Allocate the transaction price

Generally based on relative standalone selling prices of separate performance obligationsprices of separate performance obligations Standalone selling price

- Observable price when sold separately (best)p p y ( )- Otherwise, estimate based on:

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

S b t h i th t ti i Subsequent changes in the transaction price are allocated on a relative standalone selling price basis unless certain criteria are met


p

5. Recognize revenue

Recognize revenue as performance obligations are satisfied based on transfer of controlsatisfied based on transfer of control Determine if satisfied (and revenue recognized)

over time, based on whether entity’s performance:, y p- Creates or enhances an asset the customer controls; or- Does not create an asset with an alternative use and one

of following criteria is met:of following criteria is met:• Customer receives a benefit as entity performs• Another entity would not need to reperform work completed to

datedate• Vendor has right to payment for performance to date

Select method of progress toward completion ( t t i t)


(output or input)

5. Recognize revenue

If prior criteria not met, then satisfied at a point in time Recognize revenue when customer obtains control 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- Customer has accepted goods or services

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


p p

Other revenue issuesOther revenue issues


Onerous performance obligations

Only applicable to performance obligations satisfied over a period greater than one yearover a period greater than one year Recognize liability if allocated transaction price is

less than lower of:- Direct costs to satisfy performance obligation; or- Amount to be paid to exit the performance obligation Direct costs include:

- Direct labor and materials- Allocated costs directly related to contract- Allocated costs directly related to contract- Costs explicitly chargeable to the customer- Other costs incurred only because contract entered into


y

Contract costs

Capitalize direct costs of fulfilling a contract or anticipated contract if those costs: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 contract if Capitalize incremental costs to obtain contract if

expected to be recovered Practical expedient to expense costs asPractical expedient to expense costs as

incurred if amortization period would have been one year or less


y

Warranties

Customer option to purchase separately S t f bli ti i d- Separate performance obligation recognized over time (warranty service)

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

additional service is being provided:Wh h i i d b l• Whether warranty is required by law

• Length of warranty period

• Nature of tasks to be performed


Nature of tasks to be performed

Other issues

Customers’ unexercised rights (“Breakage”)R l ti l i t t ith t U S GAAP ti- Relatively consistent with current U.S. GAAP practice

Licensing and rights to useS id f h d i- Same guidance as for other goods or services

- Revenue recognized at point in time when control transfers if separate performance obligationtransfers if separate performance obligation


Disclosures / transition / effective date

Disclosure objective:Q tit ti d lit ti i f ti di- 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


Questions?For more information, please contact:, p

Rick Dayrick day@mcgladrey [email protected]

Brian [email protected] 312 9329203.312.9329

Richard StuartRichard [email protected]


McGladrey thought leadership

Accounting publications and resource site: http://mcgladrey.com/Assurance/Accounting-Resourcesp g y g


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Publications subscription site: http://mcgladrey.com/Publications/Publication-Subscriptionp g y p


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Thank you!

The information contained herein is general in nature and based on authorities that are subject to change. McGladrey & Pullen, LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions or for results obtained by others as a result of reliance upon such information. McGladrey & Pullen, LLP assumes no obligation to inform participants of any changes in tax laws or other factors that could affect information contained herein. This presentation does not, and is not intended to, provide legal, tax or accounting advice and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Circular 230 DisclosureThis analysis is not tax advice and is not intended or written to be used and cannot be used for purposes of avoiding tax penalties that may be imposed on any taxpayer.


mcgladrey revised revenue recognition exposure draft webcast – what does it mean for you?

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