The Amended RR ED – Part 7
Ashwinpaul (Tony) C. Sondhi
President
A. C. Sondhi & Associates, LLC
www.acsondhi.com
July 17, 2012
The Amended RR ED:
Part 7

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.

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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The Amended RR ED:
Part 7
Revenue Recognition Meetings:

The FASB and the IASB hosted public roundtables in May 2012 on
the amended revenue recognition proposals.

Open to those who have submitted a comment letter, or intend to
submit a comment letter.

The roundtables were held in London (UK), Norwalk(US), and
Tokyo (Japan) as well as an additional roundtable for US private
companies in May 2012.

The IASB hosted outreach meetings in March in Sao Paulo (Brazil)
and Kuala Lumpur (Malaysia).

See www.fasb.org and www.ifrs.org for details.
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Proposed Revenue ASU
The Revenue Recognition Roadmap
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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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Basic Principle – Paragraph 91: Where available, use existing
guidance for costs incurred in fulfilling contracts.
See for example, Topic 330 – Inventory, Topic 360 - PP&E, Topic
350-40 – Internal-use Software, and Topic 985 - Capitalized
software.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraph 91: An asset from the costs to fulfill a contract should be
recognized only for costs that:
a)
Relate directly to a contract (or to a specific anticipated contract);
b)
Generate or enhance resources of the entity that will be use din
satisfying performance obligations in the future;
c)
Are expected to be recovered.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraph 92 - Examples of Eligible Direct Costs:

Direct labor (e.g., salaries of employees providing services directly
to customers),

Direct materials (e.g., supplies used to provide services to
customers),
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraph 92 - Examples of Eligible Direct Costs (Continued):

Allocated overhead costs directly related to the contract or contract
activities (e.g., costs of contract management and supervision,
insurance, and depreciation of tools and equipment used in fulfilling
the contract) ,

Costs explicitly chargeable to the customer in accordance with
contractual terms, and

Other costs incurred explicitly for the contract (for example,
subcontractor costs).
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraph 93 - Examples of Costs that must be expensed as
incurred:

Costs of delivered goods and services (related to
performance, that is, fully or partially satisfied obligations),

Abnormal (not reflected in the contract) fulfillment costs and waste,
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraph 93 - Examples of Costs that must be expensed as
incurred (Continued):

General and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract – apply paragraph
91), and

Costs related to remaining performance obligations that the entity
cannot distinguish from costs that relate to satisfied performance
obligations.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Incremental Costs of Obtaining a Contract (ICOC):

Paragraph 94: ICOC must be capitalized costs if the entity expects
to recover those costs, subject to a practical expedient in
paragraph 97;

Paragraph 97 (Practical Expedient): ICOC may be expensed if the
amortization period for the asset would be one year or less.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Incremental Costs of Obtaining a Contract (ICOC):

Paragraph 95: ICOC costs include those that an entity would not
have incurred if the contract had not been obtained (e.g., sales
commissions).

Paragraph 96: Costs that would have been incurred regardless of
whether the contract was obtained must be expensed as incurred,
unless they are explicitly chargeable to the customer regardless of
whether the contract is obtained.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011

Amortization (Paragraphs 98 and 99):
Capitalized costs (Paragraphs 91 or 94) must be amortized as
related goods and services are delivered.

The capitalized costs may include costs related to goods or
services to be transferred under a specifically identifiable
anticipated contract (for example, services to be provided under
renewal of an existing contract or costs of designing an asset to be
transferred under a specific contract that has not yet been
approved).

The amortization should be updated to reflect significant changes
in the expected pattern of transfer of goods or services and the
changes should be accounted as a change in accounting estimate
(Subtopic 250-10).
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraphs 100-103 - Impairment:

Paragraph 100 - Impairment losses must be recognized to the
extent that the carrying amount of the deferred cost asset
(paragraphs 91 and 94) exceeds:

The remaining amount of the consideration to which an entity expects to be
entitled in exchange for goods or services to which the asset relates, less

The paragraph 92 costs that relate directly to providing those goods or
services.
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Contract Costs:
Proposed Revenue ASU Revised November, 2011
Paragraphs 100-103 - Impairment:

The amount the entity expects to be entitled is based on the
principles for determining the transaction price.

Paragraph 102 – Before recognizing impairments on paragraph 91
or 94 cost assets, an entity must recognize impairment losses
based on other applicable guidance, for example, Topic 330 –
Inventory except for impairment losses of asset groups under Topic
360 – PP&E, and Topic 350 – Goodwill and Other Intangibles.

Paragraph 103 – Previously recognized impairment losses may not
be reversed.
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Tony Sondhi’s Winter - Summer 2012
Seminar Schedule
Topic
Dates
Location
Advanced Topics in
Revenue Recognition
July 26 & 27
San Jose, CA
Advanced Topics in Software Revenue
Recognition
August 20 & 21
Boston, MA
Contracts
August
Raleigh, NC
Please visit www.acsondhi.com or call 727-797-1515 for agenda and
registration information.
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Tony Sondhi’s Winter – Summer 2012
Seminar Schedule
Topic
Dates
Location
Revenue Recognition
August
Boston, MA
Software Revenue Recognition
August
San Jose, CA
RR in Health Care and Bio-Tech
Industries
August
San Francisco, CA
Please visit www.acsondhi.com or call 727-797-1515 for agenda and
registration information.
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