new revenue recognition standard – overview paul munter, partner

New Revenue Recognition Standard – Overview

Paul Munter, Partner

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. FOR INTERNAL USE.

Disclaimer

All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Any similarity between any depiction in this course and any actual event, person or entity is purely coincidental.

Objective and Scope of Standard

The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

Agenda

4

Objectives of the Revenue Standard

Remove inconsistencies and weaknesses in existing requirements to improve

comparability

Provide a more robust framework for addressing

revenue issues

Provide more useful information through improved disclosure

requirements

Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework

IASB / FASB Converged Standard



Agenda

The Core Principle and the Five-Step Model

Identify the contract(s) with a customer1

Identify the performance obligations in the contract 2

Determine the transaction price3

Allocate the transaction price to the performance obligations in the contract4

Recognize revenue when (or as) the entity satisfies aperformance obligation5

An entity recognizes 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

Core Principle

The Five-Step Model






7

8

Step 1: Identify the Contract(s) with A Customer

A legally enforceable contract can be written, oral or implied by an entity’s customary business practices, and needs to meet all of the following requirements:

It has commercial substance

The parties have approved the contract and are committed to

their obligations

The entity can identify each party’s rights regarding goods or

services

The entity can identify the payment terms for the goods or services

It is probable that the entity will collect the

amount of consideration to which it ultimately will

be entitled

The Five-Step Model






9

10

Step 2: Identify the Performance Obligations in the Contract

Distinct performance obligation

Not distinct – combine with other goods and services

Are promised goods and services distinct from other goods and services in the contract?

Capable of Being Distinct

Can customer benefit from good or service on its own or together with other readily available

resources?

Distinct Within the Context of Contract

Is promise to transfer good or service

separately identifiable from other promises in

contract?

AND

Yes No

Exception: A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer may be a single performance obligation

The Five-Step Model






11

12

Step 3: Determine the Transaction Price

Transaction price = Total amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer

(excluding amounts collected on behalf of third parties)

Noncash consideration

Consideration payable to a

customer

Significant financing

componentCollectibility

Variable consideration

and the constraint

The Five-Step Model






13

14

Step 4: Allocate the Transaction Price to the Performance Obligations

Transaction price allocated based on relative stand alone selling prices

A B C

Performance obligations

Observable price

Estimated price

How to determine the stand alone selling price?

Best evidence

If not available

Adjusted market assessment approach

Expected cost plus a margin approach

Residual approach (in limited circumstances)

The Five-Step Model

Identify the contract with a customer1





15

16

Step 5: Recognize Revenue When or as Entity Satisfies Performance Obligation

A performance obligation is satisfied over time if one of the following criteria are met:

Customer simultaneously receives and consumes the benefits as the entity performs

Entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced

Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

Revenue is recognized when or as the entity satisfies a performance obligation by transferring control of a promised good or service to a customer

Exception for distinct licences of intellectual property

17

Step 5: Recognize Revenue When (or as) Entity Satisfies Performance Obligation

If a performance obligation does not meet the criteria to be recognized over time, it is satisfied at a point-in-time

Indicators of point-in-time control transfers:

Entity has present right to payment for the asset Customer has legal title to the asset Entity transferred physical possession of the asset Customer has the significant risks and rewards of ownership of the asset Customer has accepted the asset



Agenda


Presentation

A contract asset or contract liability is recognized when:› Entity performs by transferring goods or services

› Customer performs by paying consideration to entity

(net) contract assetif rights > obligations

(net) contract liabilityif obligations > rights

Rights and obligations

or

Unconditional right to consideration is presented as a receivable May use alternative descriptions for contract assets and liabilities; however,

description must distinguish contract assets from receivables Contract costs capitalized are presented separately from contract assets

19


Disclosure Requirements

• Intended to assist users to understand nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers

Objective

• Disaggregation of revenue • Changes in contract assets, liabilities, and costs • Remaining performance obligations • Qualitative disclosures • Interim requirements • Some exemptions for certain entities

• Exempt from most of the quantitative disclosures• No specific requirements for interim reporting

Disclosures about contracts with customers

20



Agenda


22

Effective Date

• Fiscal years, and interim periods within those years, beginning after December 15, 2016 (no early adoption)

Public business entities and certain not-for-profit entities

• Fiscal years beginning after December 15, 2017, interim periods in fiscal years beginning after December 15, 2018 (can adopt at same time as public business entities)

All other entities


23

Transition Approaches

The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public business entities)

* In the five year financial data, the SEC staff would not object to an SEC registrant presenting three years of data retrospectively without restating the two earlier years.

Transition Approach

2015/2016 2017 Date of Cumulative Effect

Adjustment

Full Retrospective Restate for all contracts Apply to all contracts January 1, 2015*

Retrospective Using One or More Practical Expedients

Restate for all contracts except for contracts or estimates covered by the practical expedients elected by the entity

Apply to all contracts January 1, 2015*

Cumulative Effect at the Date of Adoption

No contracts restated; reported on the basis of legacy guidance

Apply to all contracts January 1, 2017



Agenda

Revenue Recognition – Some Potential Changes to Current Practice

• Limitation relating to allocation of revenue to delivered item is eliminated

Multiple Element Arrangements

• Residual approach is permitted in certain circumstances

Estimated Selling Price

• Evaluate whether each performance obligation is satisfied (a) over time or (b) at a point in time

Timing of Revenue Recognition


• Vendor-specific objective evidence is no longer required

Separation Criteria for Elements in Software

Arrangements

• Specific guidance to determine if distinct license is a promise to:• Transfer intellectual property at a point in time • Provide the customer access to intellectual

property over time

Licenses


• Decoupling of contract revenue and contract cost recognition

• Smooth margins only possible if cost-to-cost method is appropriate measure of progress

• Contract costs not eligible for capitalization are expensed as incurred

Construction-Type Contracts

• Elimination of specific requirements for full profit recognition

• May result in acceleration of revenue (or gains)Real Estate

What Questions Do You Have?

28


Resources Available

Financial Reporting Network

www.kpmginstitutes.com/financial-reporting-network/

· Links to publications

· Defining Issues No. 14-25, Revenue Recognition: Revenue from Contracts with Customers, June 2014

· Links to webcasts on demand

· Links to podcasts

· Information about upcoming public seminars (Executive Education)

· Individual pages for:

· Revenue Recognition

· Leases

· Accounting for Financial Instruments

http://www.kpmginstitutes.com/financial-reporting-network/

© 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Printed in the U.S.A.

new revenue recognition standard – overview paul munter, partner

Documents

performance obligations

services distinct

revenue standard

contract4recognize revenue

transaction price3allocate

swiss entity

series of distinct goods

step modelidentify