The Amended RR ED – Part 8
Ashwinpaul (Tony) C. Sondhi
President
A. C. Sondhi & Associates, LLC
www.acsondhi.com
August 14, 2012
The Amended RR ED:
Part 8
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My objective in this webcast series is to discuss specific financial
reporting risks to clarify industry specific issues relevant to
financial statement preparers, auditors, and investors as the
FASB and the IASB work to complete.
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The Comment period for the Amended RR ED ended March 13,
2012. I strongly encourage everyone to review the comment
letters the Boards have received to date. See www.FASB.org and
www.IASB.org for more information on and staff summaries of
comment letters.
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Proposed Revenue ASU
Revenue Recognition Road Map
Principles:
Step 1: Identify the contract(s) with the customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the Transaction Price.
Step 4: Allocate the Transaction Price.
Step 5: Recognize revenue when a performance obligation is satisfied.
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Proposed Revenue ASU
Allocation of the Transaction Price
Principle:
For a contract that has more than one separate performance
obligation, an entity shall allocate the transaction price to each
separate performance obligation in an amount that depicts the
amount of consideration to which the entity expects to be entitled
in exchange for satisfying each performance obligation.
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Standalone Selling Price:
Proposed Revenue ASU Revised November, 2011
Basic Principle – Paragraph 71: To allocate an appropriate amount
of consideration to each separate performance obligation, at
contract inception, an entity shall determine the standalone selling
price of the good or service underlying each separate performance
obligation and allocate the transaction price on a relative
standalone selling price basis.
Definition of standalone selling price:
The price at which an entity would sell a promised good or service
separately to a customer.
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Standalone Selling Price:
Proposed Revenue ASU Revised November, 2011
Paragraph 72: The best evidence of a standalone selling price is
the observable price of a good or service when the entity sells that
good or service
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Separately,
in similar circumstances, and
to similar customers.
A contractually stated price or a list price for a good or service may be
(but shall not be presumed to be) the standalone selling price of that
good or service.
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Estimation of a Standalone Selling Price:
Proposed Revenue ASU Revised November, 2011
Paragraph 73 – If a standalone selling price is not directly
observable, an entity shall estimate it.
Estimation of a standalone selling price should consider all of the
following information when it is reasonably available to the entity:
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Market conditions,
Entity-specific factors, and
Information about the customer or class of customers.
An entity shall:
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Maximize the use of observable inputs, and
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Apply estimation methods consistently in similar circumstances.
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Examples of Suitable Estimation Methods:
Paragraph 73 (a)
Adjusted market assessment approach:
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Estimate the price that customers would be willing to pay goods or
services in the market in which it sells those goods or services.
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The entity may also consider prices charged by its competitors for
similar goods or services adjusting those prices as necessary to
reflect its own costs and margins.
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Examples of Suitable Estimation Methods:
Paragraph 73 (b)
Expected costs plus a margin approach:
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An entity would begin with a forecast of the expected costs of
satisfying a performance obligation and add an appropriate margin
for that good or service.
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Examples of Suitable Estimation Methods:
Paragraph 73 (c)
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Residual approach:
If the standalone selling price of a good or service is highly variable
or uncertain, the standalone selling price may be estimated using
the residual approach.
Residual approach: Total transaction price less the sum of the
observable standalone selling prices of other goods or services
promised in the contract.
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Residual Approach:
Paragraph 73 (c)
Highly variable:
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At or near the same time, the same good or service is sold to
different customers for a broad range of amounts.
Uncertain:
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The entity has (1) not yet established a price for the good or
service, and (2) the good or service has not previously been sold.
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Discounts:
Proposed Revenue ASU Revised November, 2011
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Basic Principle - Paragraph 74: Discounts shall be allocated to all
separate performance obligations on the basis of the relative
standalone selling prices.
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See Exceptions in Paragraphs 75 and 76.
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Discounts:
Proposed Revenue ASU Revised November, 2011
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Paragraph 75:
A discount shall be allocated entirely to one (or some) separate
performance obligation(s) if both of the following criteria are met:
a)
The entity regularly sells each good or service (or each bundle of
goods or services) in the contract on a standalone basis, and
b)
The observable selling price from those standalone sales provide
evidence of the performance obligation(s) to which the entire
discount in the contract belongs.
Question: Can a discount be allocated entirely to one (or some)
separate performance obligation(s) if the residual approach
was used to establish the selling price of one or more goods or
services in the contract?
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Discounts:
Proposed Revenue ASU Revised November, 2011
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Paragraph 76:
If the transaction price includes an amount of consideration that is
contingent on a future event or circumstance (for example, an
entity’s performance or a specific outcome of the entity’s
performance), the entity shall allocate that contingent amount (and
subsequent changes to the amount) entirely to a distinct good or
service if both of the following criteria are met:
a)
The contingent payment terms for the distinct good or service relate specifically
to the entity’s efforts to transfer that good or service (or to a specific outcome
from transferring that good or service).
b)
Allocating the contingent amount of consideration entirely to the distinct good
or service is consistent with the allocation principle in Paragraph 70 when
considering all of the performance obligations and payment terms in the
contract.
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Tony Sondhi’s Summer and Fall 2012
Seminar Schedule
Topic
Dates
Location
Advanced Topics in Software Revenue
Recognition
August 20 & 21
Boston, MA
Contracts
September 14
October 8
November 19
Raleigh, NC
San Jose, CA
San Diego, CA
Software Revenue Recognition
September 17 & 18
September 24 & 25
San Jose, CA
Boston, MA
Revenue Recognition
August 23 & 24
October 1 & 2
Boston, MA
Boston, MA
Cloud Computing (SaaS)
Advanced Topics in Cloud Computing
October 15
October 16
San Jose, CA
San Jose, CA
Please visit www.acsondhi.com or call 727-797-1515 for agenda and
registration information.
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Tony Sondhi’s Summer and Fall 2012
Seminar Schedule
Topic
Dates
Location
NEW! Statement of Cash Flows
October 22
October 29
San Jose, CA
Boston, MA
NEW! Financial Reporting & Risks in
Gaming and Social Software
November 9
November 16
San Jose, CA
Boston, MA
Advanced Topics in Software Revenue
Recognition
December 10 & 11
December 17 & 18
Boston, MA
San Jose, CA
Advanced Topics in Revenue Recognition
December 13 & 14
San Jose, CA
Please visit www.acsondhi.com or call 727-797-1515 for agenda and
registration information.
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