Manufacturing
Insider
Insights & Observations for the Manufacturing Industry
In This Issue
Revenue Recognition:
Proposed changes
to accounting
standards.................1, 2, 3
Planning for
ISO 27001.................. 4, 5
Volume 2 :: Issue 3
Revenue Recognition:
Proposed changes to accounting standards may
have significant impact to business
Currently, U.S. Generally Accepted Accounting Principles (GAAP) has over 100 standards related to
revenue recognition. Many are industry specific and often produce conflicting results for economically similar transactions. International Financial Reporting Standards (IFRS), which cover standards
on revenue, are limited to only a handful of pages, providing very little detail. In June 2010, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)
published an exposure draft, Revenue from Contracts with Customers. The goal of this project is to
clarify the principles for recognizing revenue and to create a joint revenue recognition standard for
U.S. GAAP and IFRS. The new joint standard would remove inconsistencies and weaknesses in both
sets of standards and create standards that companies can apply consistently across various industries
and transactions. Continued on Page 2...
The Next Level Of Service
UHY LLP
Revenue Recognition: Proposed changes to accounting standards Continued from Page 1...
Manufacturers should take notice of this project, since it has the
potential to affect the day-to-day accounting, and possibly, the
way they do business through contracts with customers. The
proposed guidance specifies the principles that an entity would
apply to report useful information about the amount, timing, and
uncertainty of revenue and cash flows arising from its contracts to
provide goods or services to customers. The core principle of the
proposed revenue recognition standard is that an entity should
recognize revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration the entity
receives, or expects to receive, in exchange for those goods or
services.
Recognizing revenue under the new standards is driven by the
terms of its contracts with customers. Understanding those terms
and identifying all performance obligations within the contract
are essential first steps in determining how the new standards
would affect your company. To apply the proposed revenue
recognition standard, an entity should:
• Identify the contract(s) with a customer
• Identify the separate performance obligations in the
contract
• Determine the transfer price
• Allocate the transaction price to the separate performance
obligations
• Recognize revenue when the entity satisfies each
performance obligations
The proposed revenue recognition standard could have
significant accounting impact for manufacturers. Some of the
major differences and approaches from current standards are as
follows:
• Long term contracts. Continuous revenue recognition
would only occur if the customer controls the asset as
it is developed or manufactured. If not considered a
continuous transfer of goods, revenue is not recognized
until assets are transferred to the customer, similar to a
completed contract method.
• Multiple element arrangements. The requirement to
use available third party evidence of selling price in the
absence of vendor-specific objective evidence would be
eliminated. A difference also exists in the descriptions
of how to estimate a stand-alone selling price and in the
descriptions of different units of accounting for identifying
deliverables.
• Licensing and rights to use intellectual property.
The pattern of revenue recognition might differ from
current practice because the proposed revenue recognition
standard would require an entity to evaluate whether a
license to use the entity’s intellectual property (for less than
the property’s economic life) is granted on an exclusive or
nonexclusive basis. If a license is granted on an exclusive
basis, an entity would be required to recognize revenue
over the term of the license. Revenue for nonexclusive
license revenue would be recognized as soon as the
customer is able to use the right.
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• Effect of credit risk. Revenue will be adjusted to reflect
the customer’s credit risk. The company will estimate how
much of the amount charged to customers will not be
collected, and then reduce revenue by that amount.
• Time value of money. The amount of the promised
consideration from the customer should be adjusted to
reflect the time value of money if the contract includes a
material financing component to arrive at a “cash sales
price” of the underlying good or service.
• Product warranties. Revenue is deferred for the value
of the warranty included in a contract, and recognized as
the warranty services are performed.
• Customer loyalty programs. Benefits received by the
customer are treated as performance obligations because
the points provide a material right to the customer that
would not be received without entering into a purchase
transaction that result in earning points. Revenue is
deferred until the obligations are satisfied.
• Contract costs. Costs incurred in fulfilling a contract are
capitalized if they are eligible under another standard or if
they are directly related to a contract, generate or enhance
resources of the entity that will be used in satisfying
performance obligations in the future, and are expected
to be recovered. Under the proposed revenue recognition
standard, the following costs are expensed with incurred: 3
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Manufacturing Insider
Volume 2 :: Issue 3
costs of obtaining a contract, costs that relate to satisfied
performance obligations in the contract, and costs of
abnormal amounts of wasted material, labor, or other
resources used to fulfill the contract.
• Disclosure. An entity would be required to disclose more
information about its contracts with customers, including
more disaggregated information about recognizing
revenue and performance obligations remaining at the
end of the reporting period.
While the FASB and IASB has indicated an effective date for
this proposed change is not expected to be earlier than 2014,
a retrospective application would be required to restate prior
years for comparative statements. Entities are encouraged to
begin the process to determine the impact of this proposed
standard and how your business will be impacted by additional
data accumulation, estimates, financial reporting of supporting
processes and systems, internal controls, financial statement
metrics and communications, contract terms, and tax issues.
To learn more about these proposed changes and how they can
impact your business, please contact a UHY LLP professional in
your area today or visit us on the Web at uhy-us.com.
Article written by Stacey Massa (St. Louis, Missouri)
UHY LLP
The Next Level Of Service
Planning for ISO 27001
In the first installment of our series of articles on ISO 27001
we will explore ISO 27001/27002 and the associated costs and
benefits with its implementation.
To understand how “cheaper, easier and beneficial” a project it
might be to implement ISO 27001/27002, one needs to consider
the costs, project length and benefits. The costs and project
length is further influenced by the detailed understanding of
implementation phases.
On average, implementation of this type of system can take
between 4-9 months and largely depends upon:
• Standard of conduct and quality, and Management
Support (Tone at the top )
• Size and nature of organization
• Health/maturity of IT within organization
• Existing Documentation
Continued on Page 5...
“ISO/IEC 27001, part of the growing ISO/IEC 27000 family of
standards, is an Information Security Management System
(ISMS) standard published in October 2005 by the International
Organization for Standardization (ISO) and the International
Electrotechnical Commission (IEC). The full name is ISO/IEC
27001:2005 - Information technology - Security techniques Information security management systems - Requirements but it
is commonly known as ISO 27001.” Any cost is painful in tough economic times. In today’s cloudy
computing environment, the organizations that want to reduce
cost without compromising on information security are looking
at ISO 27001/27002 certification as a promising document to
provide knowledge about the organization’s IT security. The
certificate has marketing potential as well.
The perception of risk and how much risk you are prepared to
accept – will drive your implementation costs. Four costs need to
be considered when implementing this type of project:
• Internal resources costs - the system covers a wide
range of business functions including management, HR, IT,
facilities & security. These resources will be required during
the implementation of ISMS.
• External resources costs - an experienced consultant
will save a considerable amount of time and cost. They will
also prove a useful tool during internal audits and ensure
a smooth transition towards certification. • Certification costs - only a few approved certification
agencies currently assess companies against ISO 27001,
but fees are not significantly higher versus other standards.
• Implementation costs - largely depends on health of IT
within organization. If as a result of a risk assessment or
audit a gap appears, then implementation costs are bound
to increase based on the solution implemented.
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The Next Level Of Service
UHY LLP
Planning for ISO 27001 Continued from Page 4...
Potential benefits of ISO 27001 Certification are:
• Relevant information about IT security provided to vendors
and customers
• Efficient security cost management
• Compliance with laws and regulations
• Process framework for IT security implementation
• Assists in determining the status of information security
• Helps determine the degree of compliance with security
policies, directives and standards
• Comfortable level of interoperability due to common set of
guidelines followed by partner organization
• Information security system quality assurance
• Bench marking against the competitors
• Greater security awareness among the employees,
customers, vendors etc.
• Management can use the certificate to demonstrate the
due diligence
• Greater IT and Business alignment
ISO 27001 requires a company to establish, implement and
maintain a continuous improvement approach to manage its
Information Security Management System (ISMS). Like any other
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ISO compliance, ISO 27001 follows Plan Do Check Act
(PDCA) Cycle (explained in detail below).
All the above cost factors are directly impacted by the inventory
of IT initiatives within organization. An organization with COBIT
framework, Statement on Auditing Standards (SAS) No. 70 Type
I and Type II, Payment Card Industry (PCI) Security Standards,
National Institute of Standards and Technology (NIST), SarbanesOxley Act (SOX) capabilities in place provides a ready inventory
of a set of policies and procedures, risk assessment, control
objectives and operational controls which can often significantly
reduce time and expense to complete the project.
In the next series, we will understand more about PDCA, time
and cost saving on respective PDCA phases and ISO 27001
Certification Roadmap.
For more information on how you can ensure your organization
has a contingency plan in the event of a disaster, please contact:
Charu Pelnekar, Manager, ERAS/TAAS Group
cpelnekar@uhy-us.com • 713-407-3704
Alan Lund, Principal
alund@uhy-us.com • 248-204-9447
26200 American Drive, Suite 400
Southfield, MI 48034
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