New Revenue Recognition Standard – Overview Paul Munter, Partner

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Agenda Objective and Scope of Standard The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

Objectives of the Revenue Standard IASB / FASB Converged 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

Agenda Objective and Scope of Standard The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

The Core Principle and the Five-Step Model 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 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

The Five-Step Model 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

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 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

Step 2: Identify the Performance Obligations in the Contract 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 Distinct performance obligation Not distinct – combine with other goods and services 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 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

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) Variable consideration and the constraint Significant financing component Collectibility Noncash consideration Consideration payable to a customer     

The Five-Step Model 1 Identify the contract(s) with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

Step 4: Allocate the Transaction Price to the Performance Obligations Transaction price allocated based on relative stand alone selling prices How to determine the stand alone selling price? A B C Best evidence Performance obligations Expected cost plus a margin approach Adjusted market assessment approach Observable price If not available Residual approach (in limited circumstances) Estimated price

The Five-Step Model 1 Identify the contract with a customer 2 Identify the performance obligations in the contract 3 Determine the transaction price 4 Allocate the transaction price to the performance obligations in the contract 5 Recognize revenue when (or as) the entity satisfies a performance obligation

Exception for distinct licences of intellectual property Step 5: Recognize Revenue When or as Entity Satisfies Performance Obligation Revenue is recognized when or as the entity satisfies a performance obligation by transferring control of a promised good or service to a customer 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 Exception for distinct licences of intellectual property

Indicators of point-in-time control transfers: 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 Objective and Scope of Standard The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

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 asset if rights > obligations (net) contract liability if 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

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

Agenda Objective and Scope of Standard The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

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

Transition Approaches The following chart summarizes the transition options available to entities (based on a calendar fiscal year for U.S. public business entities) 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 Cumulative Effect at the Date of Adoption No contracts restated; reported on the basis of legacy guidance January 1, 2017 * 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.

Agenda Objective and Scope of Standard The Five Step Model Presentation and Disclosure Effective Date and Transition Potential Changes

Revenue Recognition – Some Potential Changes to Current Practice Multiple Element Arrangements Limitation relating to allocation of revenue to delivered item is eliminated Estimated Selling Price Residual approach is permitted in certain circumstances Timing of Revenue Recognition Evaluate whether each performance obligation is satisfied (a) over time or (b) at a point in time

Revenue Recognition – Some Potential Changes to Current Practice Separation Criteria for Elements in Software Arrangements Vendor - specifi c objecti ve eviden ce is no longer require d Licenses 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

Revenue Recognition – Some Potential Changes to Current Practice Construction-Type Contracts 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 Real Estate Elimination of specific requirements for full profit recognition May result in acceleration of revenue (or gains)

What Questions Do You Have?

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 29

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