1. New Revenue Recognition Standard – Overview
Paul Munter, Partner

2. 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.

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

4. 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

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

6. 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

7. 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

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

9. 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

10. 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

11. 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

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

13. 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

14. 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

15. 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

16. 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

17. 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

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

19. 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

20. 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

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

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)
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.

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

25. 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

26. 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

27. 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)

28. What Questions Do You Have?

29. Resources Available Financial Reporting Network
Links to publications
Defining Issues No , 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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