1. Revenue from Contracts with Customers (FASB ASC Topic 606)
An Introduction for [Name of Client or Financial Statement User]
This presentation is to introduce you to the guidance from the Financial Accounting Standards Board on the accounting and reporting of revenue that is soon to be effective. This guidance is considered to be one of the most far-reaching and significant pieces of guidance issued by the FASB in recent years. For some entities, the accounting changes will be minimal and only new disclosures will be required. However, for other entities, significant accounting and reporting changes will be needed, in addition to the new disclosures.
[NOTE: This slide can be tailored to add the name of the specific client or financial statement user being addressed.]

2. Overview Where is the new guidance? Why the change?
What are the new requirements?
How do these requirements differ from existing GAAP?
When is it effective?
How do we begin to implement?
In today’s presentation, I’ll introduce you to the new guidance on the accounting and reporting for revenue, including where it may be found, why the change, what are the new requirements, how these requirements differ from existing GAAP, when it is effective, and how you might begin to implement it. I’ll also point you to additional resources that are available if you want more information, and provide an opportunity for you to ask questions.

3. Where Is the New Guidance?
Primarily contained in FASB ASU No , Revenue from Contracts with Customers (Topic 606)
Amended by six subsequent Accounting Standards Updates:
ASU No , Deferral of the Effective Date
ASU No , Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU No , Identifying Performance Obligations and Licensing
ASU No , Narrow-Scope Improvements and Practical Expedients
ASU No , Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU No , Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic )
The cornerstone of this guidance is found in FASB Accounting Standards Update (ASU) No , Revenue from Contracts with Customers (Topic 606), which was issued by the FASB in May This was the culmination of over six years of deliberations between the FASB and the International Accounting Standards Board (IASB). Since that time, six additional ASUs were issued for a variety of reasons: first, to delay the original effective date by one year based on requests for additional time to implement; then, to clarify, modify, or improve some of the original guidance, again based on feedback as they considered how to implement the new requirements.
The guidance was placed in a new Topic in the FASB Codification, Topic 606: Revenue from Contracts with Customers. This ASU supersedes most of the existing guidance that was in FASB ASC 605, Revenue Recognition, as well as many other portions of the Codification including most of Subtopic (Property, Plant, and Equipment) Real Estate Sales, Subtopic (Contractors—Construction), Revenue Recognition, and much of Subtopic (Health Care Entities), Revenue Recognition.

4. Why the Change?
Revenue is a critical financial measure for most entities and their owners, lenders, and other stakeholders.
The FASB and IASB both identified weaknesses and areas for improvement in the accounting for revenue. Both groups also concluded that current disclosure requirements were inadequate.
For many entities, revenue is the single largest amount in their financial statements. Management, lenders, shareholders, and other financial statement users focus on revenue to monitor an entity’s financial performance and general financial health. Trends in revenue from period to period are also important. Revenue is used in many financial ratios, debt covenants, and as a basis for determining certain employee compensation and benefits and stock-based compensation awards.
In the late 2000s, the FASB and the International Accounting Standards Board (IASB) undertook a project to try to converge portions of U.S. GAAP and International Financial Reporting Standards (IFRS) and selected revenues as one area to pursue. Both of the Boards had identified weaknesses in their existing accounting guidance for revenue, and both also recognized their existing disclosure requirements were not adequate to provide financial statement users with sufficient information to understand an entity’s revenue. The objectives of the project were to (1) create a more robust framework for addressing revenue issues; (2) simplify financial statement preparation; (3) improve comparability across entities, industries, jurisdictions, and capital markets; (4) remove the weaknesses and inconsistencies; and (5) improve the usefulness of financial statements through enhanced disclosures.

5. New Requirements A principles-based approach
Revenue should be recognized in a way that reflects the transfer of promised goods or services to customers, and
The amount of revenue recognized should equal the consideration to which an entity expects to be entitled for those promised goods or services.
Current GAAP utilized more of a rules-based approach to revenue recognition, so that revenue could be recognized if certain rules were met. However, the new guidance utilizes a principles-based approach that often requires you to apply more judgment when considering certain matters such as contract terms and other facts and circumstances. While Topic 606 attempts to address the accounting for various contract terms found across multiple industries, it does not address every fact pattern that may be present in specific industries. Those industries will now need to interpret and apply this principles-based guidance to their transactions.
There are two key principles to be applied when accounting for revenue:
Revenue should be recognized in a way that reflects the transfer of promised goods or services to customers. Thus, determining when a promised good or service is transferred to the customer is a critical factor.
The amount of revenue recognized should equal the consideration an entity expects to be entitled to for those promised goods or services. Determining the consideration in many transactions is not difficult because the amount is fixed and will not change. However, in other transactions where variable consideration may be involved or if there are multiple goods or services to be delivered, that determination can be much more difficult and require judgment.

6. Scope and Scope Exceptions
Includes all contracts with customers to transfer goods or services; includes transfer of nonfinancial assets
Excludes transactions that are not a contract to transfer goods or services to a customer for consideration, such as fundraising contributions for health care and nonprofit entities
Also excludes the following:
Lease contracts
Insurance contracts
Financial instruments
This new guidance applies to all entities, regardless of industry, that enter into contracts to provide goods or services to their customers in the ordinary course of business, unless applicable guidance is included in other accounting standards. It also includes contracts to transfer certain nonfinancial assets such as real estate or equipment.
The following contracts with customers are specifically excluded from the scope:
Lease contracts
Insurance contracts
Financial instruments covered by other literature
Guarantees, except for product warranties or service warranties
Non-monetary exchanges between organizations in the same line of business to facilitate sales to customers

7. Five-Step Approach
Topic 606 establishes a five-step approach for recognizing and measuring revenue:
Step 1: Identify customer contracts.
Step 2: Identify performance obligations.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to performance obligations.
Step 5: Recognize revenue when or as performance obligations are satisfied.
The revenue recognition guidance includes a five-step approach to serve as a guideline to help you adhere to its key principles. We will explore each of these steps in a little more detail in the following slides, but here are the five steps:
Step 1 is to identify customer contracts. A contract is defined as an agreement between at least two parties that creates rights and obligations that are enforceable.
Step 2 is to identify performance obligations, which are promises in a contract to transfer distinct goods or services to a customer.
Step 3 is to determine the transaction price, which is what you expect to be entitled to for providing the promised goods or services to the customer.
Step 4 is to allocate the transaction price to the performance obligations. If there is only one performance obligation, the allocation is pretty easy.
Step 5 is to recognize revenue when or as performance obligations are satisfied.

8. Five-Step Approach (con’t)
Step 1: Identify customer contracts. A contract is an agreement between at least two parties that includes enforceable rights and obligations. Certain criteria must be met in this step to permit revenue recognition. For example, an agreement does not have to be in writing but there must be approval from all parties.
On step 1, we have to start with the basics, so we first have to identify the customer. The customer is the party that contracted with an entity to obtain goods or services from that entity. Most of the time, identifying the customer will be very easy. However, in some situations, such as multiple party arrangements or collaborative arrangements, identifying the customer can require more judgment.
Next is to identify the contract. There are at least two key words in the definition of a contract. The first is “agreement” and, while that might imply a written agreement, that is not required. It can be a written or verbal arrangement or an arrangement implied by your customary business practices. The second term is “enforceable,” and the new guidance states that enforceability is a matter of law. As a result, you will need to consider federal, state, and local laws to determine whether a contract is enforceable.

9. Five-Step Approach (con’t)
Step 2: Identify performance obligations. A performance obligation is a promise in a contract with a customer to transfer distinct goods or services to that customer. If multiple goods or services are promised in a contract, they may need to be combined into distinct bundles.
After you identify the customer contracts, you then have to identify the performance obligations. A performance obligation is a promise in a contract with a customer to transfer distinct goods or services to that customer. The concept is similar to the concept of a “deliverable” in prior revenue standards. In a basic transaction at a hardware store, the hardware store’s performance obligation is to provide the good, such as a hammer, that the customer decides to purchase. In a service industry, the performance obligation may be a one-time obligation such as preparing a tax return, or it may be a continued service such as providing lawn service on a weekly basis from April through September.
A good or service is considered to be distinct if both of the following are true: (1) the customer can use, consume, or sell the item either alone or together with other resources readily available to the customer, and (2) the good or service can be separately identified from other promises in the contract.

10. Five-Step Approach (con’t)
Step 3: Determine the transaction price. The transaction price is the amount an entity expects to be entitled to for fulfilling its obligation to transfer the promised goods or services to a customer. This amount does not include amounts collected on behalf of third parties. The effects of variable consideration, the time value of money, noncash consideration, and consideration payable to the customer need to be considered when determining the transaction price.
The transaction price is the amount that ultimately will be recognized as revenue. The transaction price can be a fixed amount or it can also include variable consideration such as discounts, rebates, price concessions, incentives, penalties, etc. The consideration may be stated in cash, or it may include noncash items, such as shares of stock. If variable or noncash consideration is involved, significant judgment will be needed to estimate the transaction price.
Variable consideration depends on the occurrence of a future event, such as a performance bonus that depends on meeting deadlines. You are permitted to include your best estimate of the variable consideration to which you will be entitled in the transaction price. You do not have to wait for the uncertainty to resolve before starting to recognize it. That could result in recognizing revenue earlier than under prior guidance if you had a practice of waiting for uncertainty to resolve before recognizing certain items. When deciding how much variable consideration to include in the transaction price, however, you are limited to an amount that is not probable of resulting in a significant reversal of revenue when the future event occurs and the amount becomes known. That is, you can’t recognize an amount today knowing that you will probably have to reverse it tomorrow.
Noncash consideration should be included in the transaction price at its fair value.
The transaction price also should be adjusted for some other items. For example:
Collections on behalf of third parties, such as sales taxes, should be excluded. In other words, revenue should be recognized net.
Consideration payable to a customer, such as a coupon or sales incentive, that is more than the fair value of any goods or services received from the customer also should be deducted.
The transaction price should be adjusted for the time value of money if there is more than one year between delivery and payment.

11. Five-Step Approach (con’t)
Step 4: Allocate the transaction price to performance obligations based on the amount of consideration an entity expects to be entitled to in exchange for satisfying the performance obligation. Allocation is normally based on the relative standalone selling price of each performance obligation.
You earn revenue when you satisfy a performance obligation—that is, when a customer gets control of the goods or services that make up the performance obligation. Accordingly, you need to determine the appropriate amount of revenue to recognize for each performance obligation. Therefore, after you determine the transaction price for a contract, you need to allocate the transaction price to the various performance obligations that make up the contract. The goal of dividing the transaction price is to identify the amount a contract entitles you to in exchange for satisfying each performance obligation. If a contract has only one performance obligation, the entire transaction price can be attributed to that performance obligation. But, if there are two or more performance obligations, you have to allocate the transaction price to the performance obligations. That involves doing the following:
Determining the standalone selling prices of the goods and services.
Adding up the standalone selling prices of the goods and services that make up each performance obligation.
Calculating allocation ratios based on the totals of the standalone selling prices for each performance obligation.
Allocating the transaction price.
To determine the standalone selling price, it is preferable to use observable prices or estimates using an approach that maximizes observable inputs, such as adjusted market assessment, expected cost plus margin, or a residual approach. And you also need to consider any discounts or variable consideration. Sometimes those might apply to a specific performance obligation and other times they might need to be allocated.

12. Five-Step Approach (con’t)
Step 5: Recognize revenue when (or as) performance obligations are satisfied. Performance obligations are satisfied by transferring a promised good or service to a customer. The good or service is considered transferred when (or as) the customer obtains control. A performance obligation may be satisfied over time or at a point in time.
The amount of the transaction price allocated to a specific performance obligation is recognized as revenue when (or as) the performance obligation is satisfied. A performance obligation is satisfied when the customer gets control of the related goods or services. Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control can be transferred over time (which might be typical for a service or construction contract) or at a point in time (such as in a retail transaction).
Revenue is recognized by measuring the progress toward satisfying the performance obligation. A method that best depicts the transfer of goods or services should be used, such as an output or input method. One example of an input method is the cost-to-cost method, which measures progress based on costs incurred to total expected costs to complete a performance obligation. If you are unable to reasonably measure progress, then you should recognize revenue only to the extent of costs incurred. Something equivalent to the current completed-contract method is not allowed.
The timing of revenue recognition might be affected under certain types of arrangements that can affect the transfer of control. You will need to consider the effect of things like bill-and-hold arrangements, consignments, obligations to accept returns or give refunds, repurchase agreements, and gift card breakage if you enter into transactions involving those features. There are also special rules for recognizing revenue for licenses of intellectual property.

13. How These Requirements Differ from Current GAAP
The current revenue recognition guidance primarily looks at when the revenue is earned and realizable.
The new guidance applies the following common criteria:
Persuasive evidence an agreement exists
Delivery has occurred or service has been rendered
The price is fixed or determinable
Collectibility is reasonably assured
Current GAAP also has extensive industry-specific guidance that is not in the new guidance
As mentioned previously, the current revenue guidance is much more rules-based versus the new guidance being more principles-based. The current guidance focuses on when revenue is earned and realizable. When those two criteria are met, revenue is recognized. The new guidance looks at four criteria: (1) whether there is persuasive evidence that an agreement exists, (2) whether delivery of the goods has occurred or the service has been rendered, (3) whether the price is fixed or determinable, and (4) whether collectibility is reasonably assured. If all four of those criteria are not met, then revenue should not be recognized.
Current GAAP also has a great deal of industry-specific guidance, such as for software, construction contractors, entertainment, agriculture, airlines, health care, and many more. The new guidance does not include industry-specific guidance as the requirements were written in a way to address all industries.

14. How These Requirements Differ from Current GAAP (con’t)
Current GAAP requires very few disclosures about revenue; primarily accounting policy-related
New guidance includes many more required disclosures about revenue
The disclosure requirements in current GAAP are very limited, and more of the disclosures seem to involve accounting policy-type matters. That is about to change as the new revenue recognition guidance includes several required disclosures involving revenues. Some of the disclosures are optional for nonpublic entities, so we expect many nonpublic entities to not make those disclosures. However, if nonpublic entities elect not to make some of the optional disclosures, the FASB added other disclosures that nonpublic entities have to make in place of the primary disclosures. Those disclosures are generally less complex, but still there are new disclosures that will be required.
For example, all entities are required to disclose some information about the breakdown of revenue based on whether control transfers over time or at a point in time, as well as qualitative information about how economic factors (such as the types of customers, geographical locations, and types of contracts) affect the nature, amount, timing, and uncertainty of revenue and cash flows. In addition, you will have to disclose several pieces of information about your performance obligations, such as significant payment terms, obligations for returns, refunds, etc., and the amount of revenue recognized in the current year from performance obligations satisfied in a prior year. If revenue is recognized over time, it will be necessary to disclose the method used to measure progress and how it is applied. And if variable consideration is involved, information is required about how it is estimated.

15. Effective Dates
For a public entity, the guidance is effective for annual reporting periods beginning after December 15, 2017, and any interim periods that fall within that reporting period. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
[If you are presenting this information to a nonpublic entity, you may choose to remove this slide from the presentation.]
A public entity is defined in the Codification as a public business entity; a not-for-profit entity that has issued, or is a conduit bond obligor for, securities traded, listed, or quoted on an exchange or over-the-counter market; and an employee benefit plan that files or furnishes financial statements to the SEC.

16. Effective Dates (con’t)
For all other entities (i.e., nonpublic entities), the guidance is effective for annual reporting periods beginning after December 15, 2018, and any interim periods in the subsequent annual period. Early application is permitted, with certain limitations.
For nonpublic entities, the effective date is for annual periods beginning after December 15, Thus, for your entity, the guidance is first effective for your year ended [add appropriate year end].
If you should so choose, the early application dates are either for annual reporting periods beginning after December 15, 2016, including any interim periods within that reporting period; or for annual reporting periods beginning after December 15, 2016, and any interim periods within annual reporting periods beginning one year after the annual reporting period in which this guidance is first applied.

17. Implementation Options
FASB ASC 606 requires retrospective adoption using either:
A full retrospective adoption for all prior periods presented in the period of adoption, or
A modified retrospective adoption with a cumulative effect adjustment as of the date of initial application.
If full retrospective adoption is selected, the financial statements are presented as if the guidance has been applied to all contracts with customers presented in the financial statements since the inception of those contracts. For a nonpublic entity that presents the current year and prior year comparative financial statements, the guidance would have to be applied as of the beginning of the earlier year. There are, however, a few practical expedients that are permitted. For example, one practical expedient is to not restate completed contracts that begin and end in the same annual reporting period; another is for contracts that include variable consideration, the actual, rather than the estimated, consideration can be used to determine the contract’s transaction price in the comparative reporting periods.
If the modified retrospective approach is selected, the guidance is applied as of the beginning of the current year and then to subsequent periods. The prior periods presented in the financial statements, if any, are not restated. You apply the guidance retroactively only to contracts that are not completed at the date of initial application; those contracts have to be evaluated as if the requirements had been applied since the inception of the contracts. The cumulative effect is then recognized as an adjustment to beginning [retained earnings, net assets, or other appropriate component of net equity or net assets]. However, it is important to note that if you select this approach, you are required to disclose the amount that each line item in the financial statements is affected in the current period by applying FASB ASC 606 rather than prior GAAP. Thus, you will need to maintain your accounting records under both FASB ASC 606 and previous GAAP during the initial year of adoption.

18. How Do You Begin to Implement?
This new guidance may affect your revenue recognition, measurement, and disclosures, as well as your operations, systems, processes, and internal controls.
Some entities will be able to implement with very little effort; however, others may need significant effort from several employees.
As we have discussed, the new revenue recognition guidance may affect how and when you recognize revenue, how you measure the revenue, and how you disclose information about your revenue. However, some entities have found that it also requires changes in their operations, information technology systems, processes, and internal controls. For example, you may need to implement or modify procedures for how information and documentation will be gathered to make required estimates and judgments. Or, you may need to make changes to your automated systems to estimate variable consideration or determine standalone selling prices.
The level of effort that will be required to implement will vary by entity and especially by industry. Some industries will require only minimal efforts to implement the guidance, and others will need a significant amount of time and effort by multiple employees, including some management, for a successful implementation. There will likely be a more significant effect on entities that currently follow industry-specific guidance, such as software, real estate, asset management, wireless carriers, etc.; companies with longer contracts with more components; and companies with significant variable consideration.

19. How Do You Begin to Implement? (con’t)
Implementation typically involves:
Assigning responsibility and developing awareness
Determining the impact of the guidance
Selecting a transition method
Making needed changes to operations, systems, processes, and internal controls
Training staff
Discussing expected changes with financial statement users and stakeholders
For some entities, responsibility for the implementation may be assigned to an individual while other entities may assign responsibility to a cross-functional team. The person or group assigned responsibility will become your entity’s expert on revenue and take the lead in the implementation. [We or Your accounting firm] may be heavily involved in the implementation process. It is also helpful to make sure that management and employees throughout most departments are aware of the new guidance and what is needed to implement it.
Next, those responsible will need to carefully consider the entity’s operations and financial statements to assess the potential effects of the implementation. They will need to consider existing contracts and identify any contract features or terms that may require additional analysis, such as contracts that include both goods and services to identify the separate performance obligations. It is also important to identify the key estimates and judgments that need to be made.
Selecting the transition method is important as that drives how far back information has to be gathered and assessed.
It may be necessary to make changes to your operations, IT systems, processes, and internal controls, so it is important to identify those needed changes as early as possible to allow time for revisions to be made and adequately tested.
At some point before implementation, it will be necessary to train staff that will be involved and those whose job responsibilities will change. Finally, it is important to discuss the expected changes in your financial statements with those who use the financial statements and your stakeholders.

20. Additional Resources
Read FASB ASC Topic 606, including the new disclosure requirements in Section 50 and the implementation guidance in Section 55
Visit our website at [URL address]
Read our newsletter
I hope this introduction to the new revenue recognition guidance has provided you with a good overview of the new requirements. If you haven’t already, we strongly encourage you to read the new Topic 606 found in the FASB Codification, which may be accessed at The implementation section (FASB ASC ) provides many useful illustrations. If you would like more information, this slide presents a list of additional resources that I would be happy to make available to you.
[NOTE: This slide can be tailored to add additional resources available from the firm or to delete resources, such as the firm’s website or newsletter, if they do not include information about the new revenue recognition guidance. If the entity operates in one of the industries that the AICPA has addressed in its AICPA Audit and Accounting Guide, Revenue Recognition, you might consider getting them access to that publication as well. If you are presenting to a client or potential client, you may want to include an offer to help them implement the new guidance and/or draft their new disclosures.]

21. [CPA Firm Logo]
Our firm is also available to provide more information, discuss your particular situation, or help with implementation. For example, we can– [NOTE: This list can be tailored to the specific client or financial statement user being addressed.]
Assist with determining the impact of the new guidance
Assist with identifying the key estimates and judgments that need to be made
Further explain the implementation process and what to expect
Consult with you on selecting a transition method

22. Questions?
Thank you for your time today. And now I would be happy to address any questions that you have.