experience clarity // CPAs & ADVISORS REVENUE RECOGNITION

2 // experience clarity Agenda OverviewEffective date Review of five-step model Significant changes Industry issues/ASUs issued to date What to do now

ASU , Revenue from Contracts with Customers Release date – May 28, 2014 Comprehensive approach Replaces virtually all industry guidance Core principle Entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for these goods and services 3 OVERVIEW

CREATING A ONE-STOP SHOP FOR REVENUE LITERATURE 4 Current Guidance New Principle General Recognition Concepts Industry-specific guidance Software (Subtopic ) Real Estate Sales (Subtopic ) Contractors - Construction Revenue Recognition (Subtopic ) Real Estate - General Revenue Recognition (Subtopic ) Real Estate - Retail Land - Revenue Recognition (Subtopic ) The transfer of a promised good or service determines when revenue is recognized and occurs when (or as) the customer obtains control of the asset. Transfer can be made either at a point in time or over time. Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered Price is fixed or determinable Collectibility is reasonably assured Construction and production type contracts (Subtopic )

REASONS FOR THE CHANGE Remove inconsistencies Provide more robust framework Improve comparability Enhance disclosures Simplify financial statement preparation Provide guidance for certain transactions 5

SCOPE Contracts with customers, except: Lease contracts Insurance contracts Financial instruments Certain guarantees (other than product warranties) Certain nonmonetary exchanges 6

EFFECTIVE DATE Original Effective DateRevised Effective Date Public EntitiesFiscal years beginning after 12/15/16, including interim periods therein Fiscal years beginning after 12/15/17, including interim periods therein Nonpublic EntitiesFiscal years beginning after 12/15/17 & interim periods in fiscal years beginning after 12/15/18 Fiscal years beginning after 12/15/18 & interim periods in fiscal years beginning after 12/15/19 7 July 9 th - FASB approved deferral of effective date by one year

REVENUE RECOGNITION – CHANGES TO EXPECT 8 // experience clarity Industry specific guidance Current Consistent principles regardless of industry New

REVENUE RECOGNITION – CHANGES TO EXPECT 9 // experience clarity Little disclosure information about revenue Current Cohesive set of disclosures New

REVENUE RECOGNITION – CHANGES TO EXPECT 10 // experience clarity - Separate obligations - No distinct revenue-generating transactions Current Entities must now go through five- step process New

REVENUE RECOGNITION – CHANGES TO EXPECT 11 // experience clarity Price allocated to a delivered item is limited to an amount not contingent on future delivery Current Transaction price is allocated to each performance obligation New

REVENUE RECOGNITION – CHANGES TO EXPECT 12 // experience clarity Accounting for variable consideration fluctuates Current Variable consideration is included in transaction price New

FIVE-STEP MODEL Step 1 Identify contract(s) with customer Step 2 Identify performance obligations Step 3 Determine transaction price Step 4 Allocate transaction price to performance obligations Step 5 Recognize revenue when (or as) performance obligation is satisfied 13

14 // experience clarity Step 1: Identify contract(s) with customer Step 2: Identify performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue

15 Contract = “agreement between two or more parties that creates enforceable rights & obligations” & meets following criteria: Commercial substance Approval & commitment by all parties Identifiable rights, obligations & payment terms Collectibility threshold Identify contract(s) with customer Step 1

Minimum requirements to recognize revenue under the standard: Arrangement must meet the definition of a contract Contract approval Identification of each party’s rights Clear payment terms Contract has commercial substance Collectibility is probable 16 // experience clarity Identify contract(s) with customer Step 1

Application to portfolio of contracts: Permitted if not materially different from application at contract level If criteria are not satisfied, revenue cannot be recognized until either: Entity has no remaining obligations or substantially all consideration has been received & is nonrefundable Contract has been terminated & consideration is nonrefundable 17 // experience clarity Identify contract(s) with customer Step 1

18 // experience clarity Step 1: Identify contract(s) with customer Step 2: Identify performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue

19 Performance obligation Promise to transfer goods/services to customer Can be explicitly identified in contract or implied by customary business practices One contract could equal one or many performance obligations Significant judgment may be required Step 2 Identify performance obligations

20 Separate performance obligations should be identified if good or services meet both of following: Customer can benefit from good/service on its own or with other readily available resources; & Distinct within context of contract, i.e., not highly dependent on, or highly interrelated with, other promised goods/services in contract Step 2 Identify performance obligations

21 // experience clarity Step 1: Identify contract(s) with customer Step 2: Identify performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue

22 Transaction price = amount of consideration entity expects to be entitled to (after collectibility threshold is met) Contract terms Customary business practices Time value of money (if significant financing component) Variable consideration (including consideration of constraint) Cash & noncash consideration Step 3 Determine transaction price

Entity should consider the terms of the contract & customary business practices to determine the transaction price Specific guidance for: Variable consideration Refund liabilities Financing components Noncash consideration Consideration payable to a customer 23 Step 3 Determine transaction price

24 // experience clarity Step 1: Identify contract(s) with customer Step 2: Identify performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue

Allocate based on relative standalone selling prices of separate performance obligations Observable price when sold separately (best evidence) Otherwise, estimate based on: o Adjusted market assessment o Cost plus margin o Residual value - only if highly variable or uncertain o Other 25 Step 4 Allocate transaction price to performance obligations

26 // experience clarity Step 1: Identify contract(s) with customer Step 2: Identify performance obligations Step 3: Determine transaction price Step 4: Allocate transaction price Step 5: Recognize revenue FIVE-STEP MODEL

Revenue recognized when (or as) control of good/service is transferred to customer Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service Can be recognized over time or at a point in time, depending on how performance obligations are satisfied 27 Step 5 Recognize revenue when (or as) performance obligation is satisfied

Control is transferred over time, if any of following criteria are met: Customer controls asset as it is created/enhanced Customer receives & consumes benefits of entity’s performance as entity performs Entity’s performance doesn’t create asset with alternative use to entity & customer doesn’t control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract 28 Step 5 Recognize revenue when (or as) performance obligation is satisfied

Measuring progress toward satisfaction of obligation Output methods o Milestones reached o Units produced o Only used if value of WIP & value of units produced but not yet delivered is immaterial Input methods o Costs incurred o Machine hours used o Time lapsed 29 Step 5 Recognize revenue when (or as) performance obligation is satisfied

Control transferred at a point in time indicated by following: Present right to payment from customer Customer has legal title Customer has physical possession Customer has significant risks/rewards of ownership Customer has accepted asset 30 Step 5 Recognize revenue when (or as) performance obligation is satisfied

INDUSTRY IMPACT - CONSTRUCTION 31 // experience clarity Percentage of completion eliminatedContract modificationsIdentifying performance obligations

INDUSTRY IMPACT – HEALTH CARE 32 // experience clarity Third-party payors Variable consideration Self-pay patients Variable consideration Collectibility Presentation of income statement Continuing care retirement communities Performance obligations Point in time or over time

INDUSTRY IMPACT - OTHERS 33 // experience clarity Financial institutions Standard does not apply to many revenue streams Power and utilities Standard will not apply to rate- regulated alternative revenue programs that follow ASC 980

INDUSTRY IMPACT - OTHERS 34 // experience clarity Retail & consumer products Biggest change will be estimating returns & loyalty programs Everyone else Still impacted with new documentation, estimates & disclosures

REVENUE RECOGNITION – TAKE ACTION 35 // experience clarity What to do now? Talk to customers Review in process and existing contracts Review technology, controls & processes Review and update estimation process Review the overall business effect Develop a transition plan

CROSS-FUNCTIONAL IMPLEMENTATION TEAM REQUIRED 36 Department Board of DirectorsApprove changes to compensation plans TaxImpact of changing in timing of revenue recognition LegalRedraft contract terms with customers ITSystem updates Internal AuditReview new internal controls & documentation Investor RelationsCommunication strategy, manage analysts’ expectations TreasuryReview debt covenants for impact of changes in revenue timing HRReview compensation & incentive plans MarketingReview advertising plans & sales incentive programs OperationsReview contract fulfillment costs for capitalization

37 // experience clarity Insurance Asset management Not-for-profit Oil & gas Power & utilities Software Gaming Time share Aerospace & defense Airlines Broker dealer Construction contractors Depository institutions Health care Hospitality Telecommunications AICPA TASK FORCES Report to FinRec Develop helpful hints/considerations for implementation Draft issues posted to AICPA Financial Reporting Center OR submitted to the FASB Transition Resource Group 16 Industry task forces:

38 Joint Transition Resource Group(TRG) Meetings Submission of potential implementation issues

ASU – REVENUE RECOGNITION The amendments are intended to reduce diversity in practice when entities adopt the new revenue standard and decrease the cost and complexity of applying the new guidance Licensing & Performance obligations (issued) Principal vs. agent (pending) Transition guidance (pending) 39 // experience clarity

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