Financial Executives
I t
International,
ti
l Boston
B t
Chapter – Recent
Developments in
Revenue Recognition
February 9, 2011
David Elsbree
Partner
Department of Professional Practice
ASU 2009-13,
M lti l D li
Multiple-Deliverable
bl
Revenue
Arrangements
(EITF 08-1)
2
EITF 0808-1, Revenue Arrangements with
Multiple
p Deliverables
Final Consensus reached
amending EITF 00-21
• EITF 00-21 required objective and
reliable evidence of fair value (VSOE
or TPE) to separate deliverables
• EITF 08
08-1
1 requires
i
selling
lli prices
i
tto
be based on the highest level of
evidence but requires a best estimate
of selling price to be made if VSOE
or TPE do not exist
Vendor Specific Objective
Evidence (VSOE)
Third Party Evidence (TPE)
Third-Party
• Will result in more separation of
deliverables – revenue recognition at
earlier p
point
• Could require significant judgment in
determining estimated selling price
Estimated Selling Price
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
3
EITF 0808-1, Revenue Arrangements with
Multiple Deliverables (continued)
•Final Consensus requires the relative selling price method of allocation
•Eliminates use of residual method
•Requires that companies determine VSOE, TPE or estimated selling
price
i ffor ALL deliverables
d li
bl th
thatt meett th
the other
th separation
ti criteria
it i
• Other separation criteria remain the same – standalone value and general
return rights
• Contingent revenue provisions unchanged
• Qualitative and quantitative transition disclosures and expanded ongoing
disclosures for all arrangements with multiple deliverables including prior
ttransactions
a sact o s tthat
at co
continue
t ue to be accou
accounted
ted for
o u
under
de EITF 00
00-21
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
4
Transition
Effective Date
Prospective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010
Earlier
E
li application
li ti iis permitted
itt d as off th
the b
beginning
i i off fi
fiscall year b
butt
can be applied in a period other than the first period of a fiscal year
by retrospective application to beginning of year
Option for retrospective application if meet practicability
requirements in Statement 154 for retrospective application
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
5
EITF 0808-1, Estimating a Standalone Selling
Price
• EITF provides no specific guidance but added two examples and
modified one example in EITF 00-21 to include considerations in
estimating a stand-alone selling price
• A best estimate of selling price shall be consistent with the objective
of determining VSOE
• Estimated selling price shall be the price at which the vendor would
transact if the deliverable were sold by the vendor regularly on a
standalone
t d l
basis
b i considering
id i
market
k t conditions
diti
as well
ll as entitytit
specific factors
best estimate and shall consider market conditions as well
• Must be “best”
as entity-specific factors
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
6
EITF 0808-1, Estimating a Standalone Selling
Price (continued)
Key question to start with is how do we establish prices?
• May require going outside the walls of finance
• Not necessarily a data-crunching VSOE-like exercise
g
judgment
j g
– Thorough
g documentation is critical!
• Often requires significant
• Consider sensitivity analysis to focus efforts
• Use of ranges versus point estimates
• Impact on processes, systems and controls – making it sustainable
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
7
EITF 0808-1, Estimating a Standalone Selling
Price – Practical Framework
Practical Framework (Five Steps) for establishing best estimate of
selling price:
STEP 1: Gather all reasonably available data points (e.g., limited or
widely-dispersed standalone sales, product costs and margins, published
price lists, available third-party or industry pricing data)
STEP 2: Consider adjustments based on:
Market Conditions (e.g., demand, competition, trends, constraints)
Entity-specific
Entity
specific Factors (e.g., pricing strategies and practices, market share and
position)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
8
EITF 0808-1, Estimating a Standalone Selling
Price – Practical Framework (continued)
Practical Framework (Five Steps) for establishing best estimate of
selling price:
STEP 3: Consider whether necessary to stratify selling prices into
meaningful groups (e.g., type of customer, deal size or customer volume,
geography, distribution channel, or other relevant groups)
STEP 4: Weight available information and make best estimate
STEP 5:
5 Establish
E t bli h process for
f ongoing
i monitoring
it i and
d evaluation
l ti
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
9
Standalone Value
• Now that evidence of standalone selling price for undelivered item is not
needed to separate, more focus will be placed on this criterion in many cases
• EITF 00-21 and EITF 08-1 both specify that a deliverable has standalone value
if it is sold separately by any vendor or could be resold by the customer on a
standalone basis
• Standalone value is not the same as “essential to the functionality”
• There continue to be q
questions in practice
p
around how to evaluate standalone
value relative to:
– Contractual restrictions on resale of delivered item
– Proprietary undelivered items
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
10
Standalone Value (continued)
Compare and contrast – do you have standalone value?
• License of undeveloped intellectual property with proprietary undelivered
R&D services
• License of undeveloped intellectual property with services that are not
proprietary but a lockup agreement that precludes resale of the license
• Sale of locked cell phone that only functions on the vendor’s service
• Sale of hosted “cloud computing” services with upfront implementation
services
• Sale of prepaid calling card
Is it ever appropriate to have a change in accounting policy related to
standalone value?
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
11
Contingent Revenue
• Under both EITF 00-21 and EITF 08-1, revenue recognized is limited to amount
that is not contingent on delivery of additional items
• Probability of delivery of additional items cannot be considered
• Consider both explicit and implicit contingent fees – may require input from
legal counsel
• This may in some cases negate the expected effect of applying the relative
selling price method under EITF 08-1. For example:
– Vendor sells computer system plus one year of PCS for $1 million. Relative
selling price allocation would result in $900k allocated to system, but stated
contract price is $800k with $200k nominally for PCS. Although the contract is
silent,
il t $200k would
ld b
be refundable
f d bl att llaw ffor ffailure
il
tto provide
id PCS
• Presentation of contingent revenue when recognized
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
12
ASU 2009-14,
C t i Revenue
Certain
R
Arrangements That
Include Software
Elements
(EITF 09-3)
13
EITF 0909-3, Certain Revenue Arrangements That
Include Software Elements
Scoping Principle
97 2 to exclude tangible products containing
• Modifies scope of SOP 97-2
both software and non-software components that function together to
deliver the product's essential functionality
• All tangible components now scoped out
• EITF 03-5 eliminated for tangible products, but concepts retained to
determine if service deliverables are considered software deliverables
• EITF 09-3 focus is on what software components will also be excluded
from SOP 97-2
• Software still scoped out if it is incidental to the products or services in
the arrangement as a whole
• EITF 08-1 applies to arrangements that are scoped out of SOP 97-2
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
14
EITF 0909-3, Certain Revenue Arrangements That
Include Software Elements (continued)
Rebuttable presumption that software elements are considered
essential to functionality
y of the tangible
g
product
p
if sales of the
tangible product without the software elements are infrequent
• Exceptions should be isolated
• A pattern of regular sales by the vendor of the hardware without the software
element would indicate that the software is not essential to the functionality of the
h d
hardware
• The following transactions do not taint this assessment:
•Standalone sales of replacement hardware
•Standalone sales of the software
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
15
EITF 0909-3, Certain Revenue Arrangements That
Include Software Elements (continued)
The hardware components must substantively contribute to the
tangible
g
product’s
p
essential functionality
y – not simply
p y a delivery
y
mechanism
• Does the tangible product have other functionality or is it merely a
storage device?
• Do customers usually run the software on the tangible product or do they
typically load the software onto other hardware and then discard the
tangible
g
p
product?
• How are the tangible products described in the vendor’s marketing
materials?
• What is the extent of integration of the hardware and software
development teams?
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
16
Scoping – Is the Software Outside the Scope
of SOP 9797-2?
Software Sold with Hardware:
• EITF 09-3 provides the following scoping principle:
Tangible products containing software components and non-software components
that function together to deliver the tangible product’s essential functionality are
excluded
l d d from
f
th scope off SOP 97-2
the
97 2
• Rebuttable presumption exists that software elements are essential if sales of
the tangible
g
product
p
without the software elements are infrequent
q
• There have been questions in practice related to:
– Products with similar functionality (products vs.
vs models)
– Hardware loaded with multiple software products
– Products sold to different customer groups (e.g., OEM vs. end-user)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
17
Scoping – Is the Software Outside the Scope
of SOP 9797-2? (continued)
Software and Hosting Services:
• EITF 00-3 provides the following scoping principle:
A software element covered by SOP 97-2 is only present in a hosting arrangement
if the customer has the contractual right to take possession of the software at any
ti
time
d i
during
th hosting
the
h ti
period
i d without
ith t significant
i ifi
t penalty
lt and
d it is
i feasible
f
ibl for
f the
th
customer to either run the software on its own hardware or contract with another
party unrelated to the vendor to host the software.
• There has been a recent uptick in questions in practice related to:
– Scoping of hosting services when software is within SOP 97-2
– What is a significant penalty?
– Software sold separately but that does not function without certain
services
– Allocation methodology when software and hosting not both in SOP 97-2
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
18
Software and Hosting – Example 1
A vendor enters into an arrangement to provide services to host Software A for an
annual fee of $100K. The customer has the contractual right to take possession of
the software at any time without significant penalty so the software is within the
scope of SOP 97-2. There is no VSOE or TPE of fair value for the hosting services.
• Is the hosting service within the scope of SOP 97-2 or should it be separated from the
software
ft
via
i EITF 08-1?
08 1?
– Prior to EITF 08-1 it may not have mattered if no VSOE or TPE for hosting (ratable
whether in or out of SOP 97-2)
– If hosting not in SOP 97-2, under EITF 08-1 you separate hosting from software
using relative standalone selling prices (if no VSOE or TPE then best estimate)
– N
Need
d tto consider
id if software
ft
element
l
t is
i essential
ti l to
t the
th functionality
f
ti
lit off the
th services
i
(under guidance in former EITF 03-5)
– Judgment involved but it seems likely that software would be essential to services
if the
th services
i
are to
t host
h t Software
S ft
A (ratable
( t bl under
d SOP 97
97-2
2d
due to
t no VSOE for
f
hosting)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
19
Software and Hosting – Example 2
A vendor enters into a three-year arrangement to provide services to host Software
A for an annual fee of $100k. The customer has the contractual right to take
possession of the software at any time.
time However,
However the customer is committed to the
three years of hosting fees regardless of whether the vendor is hosting the software.
• Is the software within the scope of SOP 97-2 (i.e., is there a significant penalty)?
– Significant penalty contains two distinct concepts: (a) the ability to take delivery of
the software without incurring significant costs and (b) the ability to use the
software separately without a significant diminution in utility or value
– Regarding concept (a) - need to consider significance of committed hosting fees
(penalties for taking possession may not be explicitly stated as such)
– R
Regarding
di conceptt (b) – need
d to
t consider
id proprietary
i t
nature
t
off hosting
h ti
services
i
(i.e., how feasible it is for others to provide services without diminution of value)
– Often requires significant judgment
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
20
Software and Hosting – Example 3
A vendor regularly sells Software A to distributors and retailers. However, Software
A cannot function without certain services provided only by the vendor to the enduser customer.
customer There is no VSOE or TPE for the services.
services
• Even though Software A is sold to different customers than related services – should
software and services be linked?
– View A: Yes, they should be linked and software and services are both within the
scope of SOP 97-2 (because software sold separately and essential to the services)
- ratable revenue recognition due to lack of VSOE for services.
– View B: Software is not a substantive deliverable even though sold separately
(really just an arrangement to provide services and software provides access to the
services). Since can’t take possession of the software hosted by the vendor to the
provide the services
services, not in scope of SOP 97
97-2.
2 However
However, services arrangement
recognized ratably outside of SOP 97-2.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
21
Software and Hosting – Example 4
A vendor sells a five-year software subscription along with a three-year hosting
arrangement (to host software unrelated to the software subscriptions). The
subscription is within the scope of SOP 97-2
97 2 and the hosting is not.
not
• How should arrangement consideration be allocated between the subscription and
hosting?
– Prior to EITF 08-1 – considered one deliverable recognized ratably over longer of
subscription or hosting period (in this case, five years)
– Under EITF 08-1
08 1 – need to separate 97-2
97 2 deliverables from non-97-2
non 97 2 deliverables
using relative standalone selling prices and recognize over different respective
terms (may be impacted by any contingent revenue – discussed on later slide)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
22
ASU 2010-17,
Mil t
Milestone
Method
M th d off
Revenue
Recognition
(EITF 08-9)
23
EITF 08-9, Milestone Method of Revenue
Recognition
EXAMPLE
Bi agrees tto perform
Bio
f
research
h and
dd
development
l
t services
i
on a new d
drug
candidate for Pharma. Under the agreement, Bio is compensated as follows:
$200 per hour, plus
$5 million upon the successful completion of Phase I clinical trials
trials. The
trials are expected to be completed by the expiration of approximately half
of the project’s expected total of 50,000 hours
During reporting period:
Bio performs 30,000 hours of services and payment of $6 million is
received
Clinical trials are successfullyy completed
p
((estimate of 50,000 hours of
service is still appropriate) and payment of $5 million is received
$4 million is expected to be received for remaining 20,000 hours of service in
future periods
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
24
EITF 08-9, Milestone Method of Revenue
Recognition (continued)
Milestone Method
$5 million milestone payment would be recognized as a performance
bonus when the phase I clinical trials are successfully completed
Total of $11 million recognized
g
in current p
period
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
25
EITF 08
08--9, Milestone Method of Revenue
Recognition (continued)
A milestone is:
• Event with substantive uncertainty
y at inception
p
of arrangement
g
• Event achievement based in whole or in part on vendor’s performance
or a specific outcome resulting from the vendor’s performance
• Achievement results in additional payments being due to the vendor
The milestone method is acceptable when the milestone is determined
to be substantive
• Determination
D t
i ti off whether
h th a milestone
il t
iis substantive
b t ti iis a matter
tt off
judgment and is assessed at the inception of the arrangement
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
26
EITF 08
08--9, Milestone Method of Revenue
Recognition (continued)
To be considered substantive, a milestone should be:
• Commensurate with the effort required,
q
, or enhancement of the value
of the delivered item
• Relate solely to past performance
• Reasonable relative to all other deliverables and payment terms in
the arrangement
No bifurcation of an individual milestone
Milestone payment cannot be refundable
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
27
EITF 08
08--9, Milestone Method of Revenue
Recognition (continued)
Scope
• Portion of consideration contingent
g
upon
p uncertain future events or
circumstances
• Research or development deliverables or unit of accounting with a
milestone payment if that payment is to be recognized in its entirety
in the period the milestone is achieved
• Does not conflict with other authoritative literature
O ti
Optional
l but
b t an accounting
ti
policy
li election
l ti for
f similar
i il transactions
t
ti
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
28
EITF 08-9, Milestone Method of Revenue
Recognition (continued)
Disclosures
• Accounting
gp
policy
y related to milestone arrangements
g
•
For each arrangement with a material milestone payment:
• Description of arrangement;
• Details about milestones including amount earned during the
period;
• Whether milestone is substantive and factors considered in that
assessment;
t and
d
• Contingent consideration
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
29
EITF 08
08--9, Milestone Method of Revenue
Recognition (continued)
Effective for interim and annual periods beginning on or after June 15,
2010
• Early adoption permitted
Accounting policy change to milestone method or modifications of
existing method to comply with new guidance
• Prospective basis with an option to apply retrospectively
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
30
Proposed ASU,
Revenue from
Contracts with
Customers
31
Background
Joint project between the FASB and
the IASB
• Objective of project:
– Develop a standard based on a
single model to deal with all types of
contracts and business sectors
– Converge
C
IFRS and
dU
U.S.
S GAAP
• Single revenue recognition standard
p
all U.S. GAAP and IFRS
would replace
revenue recognition standards
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
32
Timetable
Discussion Paper Issued
December 19, 2008
Exposure Draft
June 24, 2010
Commentt D
C
Deadline
dli to
t FASB (970
letters received)
October 22, 2010
Final Standard
2011
Eff ti Date
Effective
D t
Separate Discussion Paper Issued;
Current belief is no earlier than 2014,
although it may require retrospective
application beginning in 2012
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
33
Redeliberation Plans
February 2011
•
•
•
•
•
•
Transfer of control (continued)
Separating performance obligations (continued)
Measuring Progress
Contract Issues
Onerous test
Specific implementation guidance
March 2011
•
•
•
•
•
•
Transaction
T
ti price
i
Allocation
Contract costs (fulfillment costs)
Scope
Disclosure
S
Specific
ifi IImplementation
l
t ti guidance
id
A il 2011
April
•
•
•
•
•
•
•
Transaction price (continued)
Allocation (continued)
Disclosure (continued)
Ri ht tto use and
Rights
d lilicenses
Contract costs (continued)
Specific implementation guidance
Transition and effective date
May 2011
•
Other issues
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
34
Scope of the Proposal
Scope of the proposal is limited to revenue arising from contracts with
customers:
Entity
Contract
Customer
i.e., enforceable rights and obligations
Customer: party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
35
Scope Exceptions
The model applies to contracts with customers except for contractual
rights
g
and obligations
g
that are accounted for as:
• Financial instruments
• Insurance contracts
• Leasing contracts
• Guarantees (other than product warranties)
• Nonmonetary exchanges between entities in the same line off business to
facilitate sales to customers other than the parties to the exchange
A contract may be partially in the scope of the model
• Lease contract with embedded services
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
36
Sale of Assets That are Not Part of an Entity’s
Ordinary Activities
• Recognition and measurement principles of the exposure draft also apply
to sales of intangible assets and property, plant, and equipment including
sales of real estate
• Derecognize the asset when the counterparty obtains control of the asset
asset.
Resulting gain or loss would be based on the difference between the
transaction price and the carrying amount of the asset
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
37
Contracts Partially in the Scope of the
Proposed Standard
A contract can be partially in the scope of the proposed standard and partially in the
scope of another ASC Topic
For example, a contract to:
lease an asset to a customer
scope of ASC Topic 840
(
(formerly
y FAS 13))
deliver maintenance services on the
leased asset
scope of the proposed standard
In such a case, the entity considers whether the other Topic includes specific
guidance
id
on separation
ti and
d measurementt
•
If the other Topic includes guidance, then it would be applied first;
•
Otherwise, the proposed standard would be applied
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
38
Main Steps to Apply Model
1
Identify the contract with a customer
2
Identify the separate performance obligations in
the contract
3
Determine the transaction price
4
Allocate the transaction price to the separate
performance obligations
p
g
5
Recognize revenue when each separate
performance obligation is satisfied
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
39
Step 1: Identify the Contract with a Customer
A contract can be oral or implied by the entity’s customary business
practices,, but needs to meet all of the following
p
g requirements
q
for the p
purpose
p
of applying the proposed standard:
It has commercial substance
The entity can identify each party’s
enforceable rights
The parties have approved the contract
and are committed to satisfying their
respective obligations
The entity can identify the terms and
manner of settlement
In addition, the contract is disregarded for the purpose of applying the
proposed standard if:
It is wholly unperformed
and
The parties can terminate it
without penalty
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
40
Identify the Contract with a Customer
(continued)
Generally requirements are applied to a single contract with a customer.
However:
Contract 1
Contract 2
Combine if prices are
interdependent
Contract
Contract 1
Contract 2
Segment if goods or services are
priced independently
Indicators that prices are interdependent
(similar to existing standards):
• Entered into at or near the same time
“Priced independently” if:
• All goods and services are regularly sold
on a standalone basis;; and
• Negotiated as package
• Performed concurrently or continuously
• No significant discount given for buying
some goods or services together with
others in the contract
Contract modifications are accounted for as separate contracts if prices are not interdependent with
the existing contract
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
41
Comment Letter Observations
• Segmentation objective will not be achieved as segmentation requirements
rarelyy will be met in p
practice
• Some propose a model that allows for the allocation of changes in
transaction p
price to specific
p
p
performance obligations
g
if the changes
g clearly
y
or substantively relate only to one or certain (but not all) performance
obligations
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
42
Board Redeliberations
• In January 2011, the Boards tentatively decided to eliminate the proposed
requirement
q
to segment
g
a contract if g
goods or services are p
priced
independently
• Onlyy separation
p
of distinct p
performance obligations
g
would be required
q
(step 2)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
43
Step 2: Identify the Separate Performance
Obligations in the Contract
A performance obligation is an enforceable promise
(whether explicit or implicit) in a contract with a customer to
transfer a good or service to the customer
Evaluate the terms of the contract and customary business
practice to identify all promised goods or services
Separately
p
y account for each good
g
or service if customer
receives the goods or services at different times and if the
good or service is distinct from other goods or services in
the contract
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
44
Comment Letter Observations (continued)
• Definition of a performance obligation is limited to “an enforceable promise”
to transfer a g
good or service
• Some suggested that the definition should be expanded to include
constructive obligations
g
where an entity’s
y specific
p
statements or p
past
practices establish a valid expectation by the customer that performance
will occur
• Example 13—Free on board shipping point and risk of loss appears to support
a conclusion that an entity’s historical practices can create performance
obligations that are separately evaluated
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
45
Identify the Separate Performance Obligations
in the Contract (continued)
Are goods and services in the contract provided at the same time, resulting in the same
amount and timing of revenue recognition?
Yes
Account for as
single performance
obligation
No
Are
ep
promised
o sed goods and
a d services
se ces d
distinct
st ct from
o other
ot e goods and
a d
services in the contract ?
No
Identical or similar good
or service sold separately
by the entity or another
entity
OR
Could be sold separately
by
y the entity
y because:
 Distinct function, and

Distinct profit margin
Yes
Separate performance
obligations
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
46
Identify the Separate Performance Obligations
in the Contract (continued)
• Distinct function – if good or service has utility either on its own or together
with other g
goods or services that the customer has acquired
q
from the entity
y
or that are sold separately by the entity or by another entity
• Distinct profit margin – if good or service is subject to distinct risks and the
entity
tit can separately
t l identify
id tif the
th resources needed
d d tto provide
id th
the good
d or
service
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
47
Comment Letter Observations
• Many were unclear how the proposed requirement that a good or service
have a distinct p
profit margin
g is indicative that the g
good or service is distinct
• Focus should be on whether a good or service could be sold
separately; many believe the requirement for a distinct profit margin
should be eliminated
• Many observed that existing definition could lead to excessive number of
performance obligations in some industries (e
(e.g.,
g construction)
• Could further develop “contract management” notion to overlay ‘distinct’
definition to combine performance obligations that are integrated with a
substantive contract management service
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
48
Board Redeliberations
• In the January 2011 meeting, the Boards tentatively decided to retain the
principle
p
p of “distinct g
goods or services” as the basis for identifying
y g separate
p
performance obligations. The Boards tentatively decided that a distinct
good or service has the following attributes:
• Distinct function
• Separable risks
• Different p
pattern of transfer to the customer
• The Boards directed the staff to analyze these attributes further and
consider how an entity would apply them in various scenarios.
• The Boards decided not to provide guidance on perfunctory
perfunctory, incidental
incidental, or
similar performance obligations.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
49
Step 3: Determine the Transaction Price
• The amount of consideration that an entity receives, or expects to receive, from a customer, in
exchange for transferring goods or services (excluding amounts collected on behalf of third
p
parties)
)
• To determine transaction price, consider:
– the estimates of variable consideration;
• probability-weighted
b bilit
i ht d amounts
t th
thatt are reasonably
bl estimable
ti bl
– the effect of customer’s credit risk;
• probability-weighted amount expected to be collected
• changes in expectation once entity has unconditional right to consideration recorded
outside revenue
– the effect of time value of moneyy (payment
(p y
before or after g
goods/services transferred)) if the
contract includes a material financing component;
– the fair value of non-cash consideration; and
– the nature of consideration paid to a customer (discount and/or payment for other goods or
services)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
50
Determine the Transaction Price (continued) –
Estimate Variable Transaction Price
Is transaction price reasonably estimable because
• the entityy has experience
p
with similar types
yp of contracts ((or access to experience
p
of other
entities); and
• the entity’s experience is relevant since the entity does not expect significant changes in
circumstances?
Yes
Revenue recognized
g
No
Revenue not recognized or
recognized
i d only
l for
f fixed
fi d amountt
Factors that reduce the relevance of an entity’s experience include:
•
•
•
•
Consideration amount is highly
g y susceptible
p
to external factors;
Uncertainty about amount not expected to be resolved for a long time;
Entity’s experience with similar contracts is limited; and
Contract has large number of possible considerations amounts
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
51
Determine the Transaction Price (continued)
Example – Variable Consideration
• A consultant enters into a contract and promises to provide cost management
consulting services to a customer over a six-month period
• The customer promises to pay $20,000 at the beginning of each month (total of
$120,000). At the end of the contract, the consultant either will give the customer a
refund of $10,000 or will be entitled to an additional $10,000, depending on the
customer’s level of cost savings
• The consultant has extensive experience with similar types of contracts and that
experience is relevant to the contract (i.e., the transaction price can be reasonably
estimated) and believes there is an 80% chance it will receive $120,000, a 15%
chance it will receive $130,000, and a 5% chance it will receive $110,000.
• Using the guideline in the proposed standard, the transaction price is initially
calculated as $121
$121,000
000 [(80% × $120,000)
$120 000) + (15% × $130,000)
$130 000) + (5% × $110,000)]
$110 000)]
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
52
Comment Letter Observations
• Many disagree with the use of probability-weighted amounts, particularly
when there are binary
y outcomes,, that could lead to recording
g revenue at an
amount that is not a possible outcome under the contract
• Some are uncomfortable with estimation of variable consideration and
would
ld prefer
f to
t retain
t i a fixed
fi d or d
determinable
t
i bl requirement
i
t
• Some suggest there should be a minimum threshold to meet reasonably
estimable requirement
• Many expressed concern about the ability to estimate royalties dependent
upon future sales or usage by a customer
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
53
Determine the Transaction Price (continued)
Example – Collectibility
• An entity enters into a contract with a customer to provide goods for $1,000. Payment is due
one month after the goods are transferred to the customer
• The entity can reasonably estimate the transaction price and assesses, on the basis of its
experience with similar contracts, that there is a 10 percent chance the customer will not pay.
Using the guideline in the proposed standard
standard, the transaction price is calculated as $900
[(90% × $1,000) + (10% × $0)]
• When the entity transfers the goods to the customer and satisfies its performance obligation, it
recognizes a receivable and revenue of $900
• If after transferring the goods to the customer, the financial condition of the customer
deteriorates and the entity determines that the receivable due from that customer is further
impaired, the entity will then recognize the impairment as an expense rather than as a
reduction of revenue
• Conversely, if the customer subsequently pays more than $900 (e.g., customer pays invoice
amount of $1,000), the difference is recognized as income separately from revenue
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
54
Comment Letter Observations
• Some suggest a minimum threshold for collectibility (e.g., reasonably assured) before
recognizing revenue even if collectibility is factored into the initial measurement of transaction
price
i
• Many believe collectibility should impact when revenue is recognized vs. how much
(consistent with current US GAAP) with credit risk reflected in bad debt expense
• For those that agree with the inclusion of credit risk in the measurement of the transaction
price:
– Manyy believe amount should be based on management’s
g
best estimate or expectation
p
of
most likely outcome rather than probability-weighted amount
– Many believe all changes in expectation (favorable and unfavorable) should be recorded
within revenue
– Others believe that favorable changes in the transaction price should be reflected as
revenue (collect more than expected) with unfavorable changes reflected as bad debt
p
expense
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
55
Step 4: Allocate the Transaction Price to the
Performance Obligations
Transaction price allocated based on
relative standalone selling prices
A
B
How to estimate the standalone
selling price?
C
Best
evidence
id
Performance obligations
Adjusted
Adj
t d market
k t
assessment
approach
Expected cost plus
a margin approach
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
Observable price
If not
available
Estimated price
56
Step 4: Allocate the Transaction Price to the
Performance Obligations (continued)
Changes in the transaction price after initial allocation
• Any change in the transaction price is allocated to all performance
obligations including satisfied performance obligations on a relative selling
price basis
p
• No reallocation of transaction price for changes in standalone selling prices
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
57
Comment Letter Observations
• Some propose retaining the residual method when there are difficulties in
reliablyy estimating
g the selling
gp
prices for some p
performance obligations
g
and
the residual method represents the best available evidence of selling price
• Some p
propose
p
a model that allows for the allocation of changes
g in
transaction price to specific performance obligations if the changes clearly
or substantively relate only to one or certain (but not all) performance
obligations
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
58
Step 5: Recognize Revenue When a
Performance Obligation is Satisfied
A performance obligation is satisfied when the customer obtains control of a
good or service. Control is transferred to the customer when:
g

The customer has the abilityy to direct
the use of the asset, i.e., the present
right to:
— use the asset for its remaining
economic life; or
— consume the asset in the customer’s
activities

and
The customer has the ability to
receive the benefit from the asset,
i.e., has the present right to obtain
substantially all of the potential cash
flows from that asset (either cash
inflow or reduction in cash outflow)
through use, sale, exchange, etc.
Control also includes the ability to prevent other parties from directing the
use of and receiving the benefit from the asset.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
59
Recognize Revenue (continued) – Indicators
that Control is Transferred
The customer has
physical
possession
The customer has
legal title
Indicators that the customer
has obtained control of a
good or service
The customer has
an unconditional
obligation to pay
The design or
function is
customer-specific
No single factor in isolation is determinative. For example, physical possession of goods by a
customer may not coincide with transfer of control in bill-and-hold and consignment
arrangements
t
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
60
Recognize Revenue (continued) –
Continuous Transfer
Does the customer control the asset as it is produced, manufactured or constructed
(i e have the present ability to direct the use of and receive the benefit from the WIP)?
(i.e.,
No
Yes
Continuous transfer
Transfer at one point in time and revenue
is recognized when customer obtains
control of a completed asset
When promised goods or services are transferred on a continuous basis,
the entity applies a single method that best depicts the transfer
• Output method (milestones)
• Input method (costs expended)
• Method based on the passage of time
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
61
Comment Letter Observations
• Some noted that not all of the indicators of control are consistent with the
definition of control (unconditional obligation to pay and customer specific
d i )
design)
– Difficult to apply indicators to assess continuous transfer involving the
construction of a g
good for a customer ((involving
g both services and
goods) because of the lack of alignment of the indicators with definition
• Many believe that indicators of control transfer are not effective for
assessing transfer of control for services
• Many agree that a model that results in delay of revenue until a final good
is delivered in long-term construction/production type contracts isn’t
decision useful
– A separate model or set of indicators may be necessary for construction
and service arrangements
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
62
Board Redeliberations
• At the January 2011 meeting, the Boards tentatively decided to establish
separate treatment for goods and services and to develop criteria for
distinguishing a service from a good. A performance obligation would be
considered a service if any of the following criteria are met:
– The customer controls the work
work-in-process
in process (e.g.,
(e g a constructed asset),
asset)
or
– Another entity
y would not need to reperform the task(s)
( ) if that other entityy
were required to fulfill the remaining obligation to the customer (e.g., a
transportation service), or
– The entity has a right to payment for the performed task(s) and the
entity’s performance to date does not have an alternative use to the
entity, that is, the performance to date has not created an asset that
could be transferred to another customer (e.g., an audit service).
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
63
Board Redeliberations (continued)
• The Boards tentatively decided that revenue is recognized for a service
onlyy if the entity
y can reasonablyy measure its progress
p g
toward successful
completion of the service.
• The Boards asked the staff to analyze further which method an entity
should use to measure its progress toward completion of a service (e
(e.g.,
g an
output method, an input method, or a method based on the passage of
time). We expect additional discussion of this point at a future Board
meeting.
g
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
64
Board Redeliberations (continued)
• For determining the transfer of a good, the Boards affirmed their proposed
approach in the Exposure Draft that an entity should recognize revenue
when
h th
the customer
t
obtains
bt i control
t l off th
the good.
d
• The Boards also tentatively decided to:
• Carry forward from the Exposure Draft most of the proposed guidance
on control
• Describe rather than define control
• Add “risks and rewards of ownership” as an indicator of control
• Eliminate “the design or function of the good or service is customerspecific” as an indicator of control.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
65
Board Redeliberations (continued)
The Boards tentatively decided that if an entity promises to transfer both
goods and services,, the entityy should first determine whether the goods
g
g
and
services are distinct (in accordance with the guidance on identifying separate
performance obligations).
•If the goods and services are distinct, the entity would account for them
as separate performance obligations.
•If the goods and services are not distinct, the entity would account for
the bundle of non-distinct goods and services as a service.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
66
Contract Costs
• Costs of obtaining a contract (e.g., sales commissions would be expensed as
incurred)
• If the costs incurred in fulfilling a contract do not create an asset that is eligible for
recognition under another standard, recognize an asset only if specified criteria
under the proposed standard are met
• Contract fulfillment costs would be capitalized if they:
– Relate directly to an existing contract or a specific contract under negotiation;
– Generate or enhance resources of the entity that would be used to satisfy
performance obligations in the future; and
– Are expected
p
to be recovered
• If unable to distinguish the costs that relate to future performance from the costs
that relate to past performance, recognize those costs as expenses when incurred
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
67
Contract Costs (continued) – Examples of
Contract Costs
Direct costs that would be eligible for
capitalization
it li ti if other
th criteria
it i are mett

Direct labor (e
(e.g.,
g employee wages)
Direct materials (e.g., inventory to
customer)
Allocation of costs that relate directly to the
contract (e.g., depreciation)
Cost that are explicitly chargeable to the
customer under the contract
Costs expensed when incurred


Cost of obtaining a contract (e.g.,
(e g
marketing, bid and proposal, commissions)
Cost that relates to satisfied performance
obligation (i
(i.e.,
e transfer of control already
occurred)
Abnormal amounts of wasted materials,
labor or other contract costs
labor,
Other costs that were incurred only
because the entity entered into the contract
(e.g., subcontractor costs)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
68
Comment Letter Observations
• Some believe the cost guidance needs to be expanded to clarify how costs
associated with a contract should be recognized/amortized
g
– Consistent margin
– Treatment of learning curve costs
• Some disagree with expensing the costs of obtaining a contract (e.g., sales
commissions)
• Some noted that the requirement to expense costs of obtaining a contract is
inconsistent with other exposure drafts and the Boards should consider
whether they should be aligned
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
69
Board Redeliberations
• In February 2011, the Boards decided tentatively that:
• An entity should recognize an asset for the incremental costs of
obtaining a contract that the entity expects to recover.
• That asset should be presented separately on the statement of
financial position and subsequently measured on a systematic basis
consistent with the pattern of transfer of the goods or services to which
the asset relates.
• Incremental costs of obtaining a contract are costs that the entity would
not have incurred if the contract had not been obtained.
• At a future meeting, the Boards will discuss the costs of fulfilling a contract.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
70
Changes in Terms and Estimates
• Contract modification
• A contract modification is any change in the scope or price of an existing
contract initiated by the entity or the customer;
• Account as a separate contract if the existing contract and the contract
modification are p
priced independently
p
y ((see step
p 1);
)
• Otherwise, account for contract modification together with original
contract. Cumulative effect of the contract modification is recognized in the
period in which the modification occurs as if contract modification was
known.
• Changes in the transaction price after initial allocation
• Any change in the transaction price is allocated to all performance
obligations
bli ti
including
i l di satisfied
ti fi d performance
f
obligations
bli ti
• No reallocation of transaction price for changes in standalone selling
prices
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
71
Subsequent Measurement – Onerous
Performance Obligations
Evaluate each outstanding performance obligation, both at contract
inception
p
and at each reporting
p
g date,, to determine whether the unsatisfied
performance obligation(s) is onerous
Recognize a liability and corresponding expense if a remaining
performance obligation is onerous:
Transaction
price allocated
to remaining
performance
obligation
<
Present value of
probability
weighted direct
remaining costs
to satisfy the
performance
obligation
=
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
Onerous
performance
obligation and
related asset
impairment and/
or liability to be
recognized
72
Comment Letter Observations
• Most believe the onerous test should be performed at the contract level
rather than the p
performance obligation
g
level
• Some asked for clarification for how to apply the onerous test when an
individual contract with a customer is not designed
g
to recover all of the
directly-attributable costs of fulfilling the performance obligation (e.g.,
individual airline ticket)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
73
Other Considerations
• Product Warranties and Product Liabilities
• Rights of return
• Customer incentives including options for additional goods and
services
• Licensing of intellectual property
• Nonrefundable
N
f d bl upfront
f
fees
f
• Sale and repurchase of an asset
• Principal vs. agent
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
74
Product Warranties and Product Liabilities
•Coverage for latent defects (“quality assurance” warranty)
• Not a separate
p
p
performance obligation
g
• If delivered product is defective, performance obligation to deliver that product
free of defects is not satisfied
• Determine the likelihood and extent of defects in the products sold
• If entity is required to replace defective products, then related revenue is
deferred until replacement
• If entity is required to repair defective products, then a portion of revenue
related to product components to be repaired is deferred
f
•Coverage for faults post-delivery (‘insurance’ warranty)
•Separate performance obligation
•Revenue
Revenue recognized over the warranty period
• Legal requirement to pay compensation if products cause harm or damage - not a
performance obligation, accounted for under other literature (e.g., ASC Topic 450)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
75
Product Warranties and Product Liabilities
(continued)
Example – Product Warranty
• On December 31, an entity sells 1,000 products for $1,000 each. The cost of each product
is $600. The entity is required by law to warrant its products against defects existing at the
time of sale
• For any defective product, the entity promises to replace the product during the first 90 days
without additional charge. The entity’s experience suggests that 1 percent of products sold
contain defects at the time of sale and will be replaced
• At December 31, the entity would estimate that it has sold 10 (1,000 × 1%) defective
products that need to be replaced. For those products, the entity has not satisfied its
performance obligation at December 31. It defers revenue of $10,000 (10 products ×
$1,000) on the unsatisfied performance obligations
• The entity also would recognize an asset representing the inventory not yet transferred to
the customer measured at $6,000 (10 products × $600 per product). Revenue would be
recognized for the 10 defective products only when the customer obtains control of products
without defects
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
76
Comment Letter Observations
• Many believe it will be difficult in practice to draw a
meaningful
ea g u d
distinction
st ct o bet
between
ee latent
ate t de
defects
ects a
and
d post
postdelivery defects
• Could significantly impact accounting for major product
recalls
ll
• Many believe current cost accrual model should be retained
for warranty arrangements that are not separately priced
extended warranty or product maintenance contracts
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
77
Board Redeliberations
• In February 2011, the Boards decided that an entity should account for a
warranty
y as a separate
p
p
performance obligation
g
if either:
• A customer has the option to purchase a warranty separately from the
entity, or
• The warranty provides a service to the customer in addition to
assurance that the entity’s past performance was as specified in the
contract.
• All other warranties should be accounted for as a warranty obligation (that
is, on a cost basis) under FASB ASC Topic 450, Contingencies.
• The Boards also decided to develop implementation guidance to help an
entity determine when a warranty provides a service to the customer in
addition to assurance that the entity’s past performance was as specified in
the contract.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
78
Rights of Return
• Not applicable to returns for faulty goods and replacements (see product
warranties))
• Not a separate performance obligation
• If an entity can reasonably estimate probability of a refund to the customer
• Revenue not recognized for goods expected to be returned
• Refund liability is recognized for refunds and credits to customers for
the g
goods that are expected
p
to be returned. Liability
y should be
remeasured at each reporting date with a corresponding adjustment to
revenue
• Asset is recognized
g
for the right
g to recover g
goods and measured at
cost
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
79
Customer Incentives
V l
Volume
rebates/early
settlement
discounts
Free or
discounted
goods or
services
included in a
sales
transaction
Customer
options for
additional
goods or
services
Does the
option provide
a material
right to the
customer?
See next slide
Examples of
customer
incentives
Upfront
payments to
customers
Accounting
issues
R d ti off
Reduction
transaction
price or
payment for
di ti t goods
distinct
d
or services?
Estimate of
the
transaction
price
i
Separate
performance
obligations?
How to
allocate
transaction
price?
Accounting
issues
Step 3
Step 3
Steps 2 and 4
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
80
Customer Incentives – Option to Acquire
Additional Goods or Services
The entity grants the customer an option to acquire additional goods or services
Does the option give the customer a
material right to acquire additional
goods or services (e.g., at an
incremental discount to market)?
Yes
The option gives rise to a
separate
t performance
f
obligation
No
The option does not give
rise
i tto a separate
t
performance obligation
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
81
Licensing and Rights to Use
Intellectual Property
Does the customer obtain control of substantiallyy all rights
g
associated with the entity’s intellectual property?
Yes
The transaction is a sale rather than
licensing
No
Are the rights granted exclusive?
Yes
Revenue recognized
when customer is
able to use and
benefit from rights
(i.e., at the
beginning of the
licensing period)
Revenue
recognized
over the
licensing
period
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
No
Revenue recognized
when customer is
able to use and
benefit from rights
(i.e., at the
beginning of
licensing period)
82
Comment Letter Observations
• Most constituents oppose the distinction between exclusive and nonexclusive licenses as inconsistent with the transfer of control model for
determining when a performance obligation is satisfied
• Most constituents believe that control of a license to intellectual property
t
transfers
f
to
t the
th customer
t
att the
th same time
ti
in
i both
b th cases
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
83
Application to Nonrefundable Upfront Fees
• May be charged at or near contract inception (e.g., initiation fees in health
club membership
p contracts))
• Consistent with current practice, revenue recognized at or near contract
inception if the fee relates to a separate performance obligation in the
contract that has been satisfied (i.e., the promised goods or services have
been transferred to the customer)
• Oth
Otherwise,
i
revenue recognized
i d over th
the expected
t d service
i period
i d ((which
hi h
may extend beyond the initial contract period)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
84
Sale and Repurchase of an Asset
A put option,
i.e., a customer’s
unconditional right to
require the seller to
repurchase the asset

in the scope of the
proposed standard
( i il tto sale
(similar
l with
ith right
i ht
of return)
A forward,
f
forward
d
i.e., a seller’s
unconditional obligation
to repurchase the asset

A callll option,
option
ti
i.e., a seller’s
unconditional right to
repurchase the asset
out of the scope of the proposed standard,
and can either be:
a right of use in
accordance with ASC
Topic 840 (the customer
pays a net amount of
consideration to the
seller)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
a financing arrangement
((the seller p
pays
y a net
amount of
consideration to the
customer)
85
Principal Versus Agent
If the entity obtains control
of the goods or services
in advance of transferring
those goods or services
to the customer
then
The other party is
primarily
responsible for
the fulfilment of
the contract
The entity does not
have latitude in
establishing
prices
The entity
y does not
have inventory
risk
The entity
entity’ss
consideration is in
the form of a
commission
The entity does not
have credit risk
The entity is principal in the
transaction
Indicators that the entity is agent in the transaction
Revenue recognized gross
Revenue recognized net
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
86
Presentation and Disclosures
•A contract asset or contract liability is recognized when
•The entityy performs
p
by
y transferring
gg
goods or services,, or
•The customer performs by paying consideration to entity.
Rights and
obligations
( t) contract
(net)
t t assett
if rights > obligations
or
(net) contract liability
if obligations > rights
• Contract costs capitalized are presented according to their nature or function and
separately from contract assets. Liability for onerous obligations is presented separately
from contract liabilities.
receivable.
• Unconditional right to consideration is presented as a receivable
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
87
Disclosures
High level disclosure objective
amount, timing and uncertainty of
• Intended to assist users to understand amount
revenue and cash flows arising from contracts with customers
Disclosures about contracts with customers
• Disaggregation of revenue
• Reconciliation from opening to closing aggregate balances of contract
assets and liabilities
• Information
I f
ti about
b t onerous performance
f
obligations
bli ti
iincluding
l di a
reconciliation from opening to closing balance of onerous performance
obligations
• Information
I f
ti about
b t performance
f
obligations
bli ti
iincluding
l di a maturity
t it analysis
l i off
remaining performance obligations in contracts longer than one year
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
88
Disclosures (continued)
Disclosures about significant judgments and related changes
• Judgments in determining the timing
of satisfaction of performance
obligations
• For performance obligations satisfied
• Judgments in determining the
transaction price and allocating it
to performance obligations
• An entity would disclose the methods,
continuously, an entity would disclose:
inputs and assumptions used to:
— the methods used to recognize
revenue (output method, input
method…)
— estimate the transaction price
— an explanation of why such
methods faithfully depict the
transfer of goods or services
— estimate standalone selling prices
— measure obligations for returns,
refunds, etc.
— measure the liability for onerous
performance obligations
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
89
Comment Letter Observations
• Most agree with stated objectives
• Many preparers commented on the prescriptive nature of the specific
disclosure requirements which is inconsistent with a principles-based
standard
– Many commented on individual specific disclosure requirements as
either not useful or that costs of implementing outweigh benefits
– Many expressed concern over disclosing the expected timing of
satisfaction of performance obligations in the future (some suggested
this would be better suited for MD&A)
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
90
Changes in Revenue Recognition Hallmarks
(Pending Completion of Redeliberations)
Current GAAP
 Persuasive evidence of an
arrangement exists
 Delivery has occurred or services
have been rendered
 Price is fixed and determinable
 Collectibility
C ll tibilit is
i reasonably
bl assured
d
Bridge to ED
An agreement that creates enforceable
rights and obligations (may be written, oral
or implied by customary business practice
with a customer))
Revenue is recognized when performance
obligations are satisfied – customer
obtains control of goods or services
Transaction price must be reasonably
estimated – more flexibility than “fixed”
criteria
Co ec b y will ge
Collectibility
generally
e a y not
o p
prevent
e e
revenue from being recognized, but will
impact amount recognized
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
91
Summary of Potential Changes to Current Practice
(Pending Completion of Redeliberations)
Note: The Boards’ trend in redeliberations to date has been to reduce the
differences between the Exposure Draft and U
U.S.
S GAAP
•Identifying the contract with a customer
•Written
Written vs
vs. verbal (what is legally enforceable?)
•Identifying the separate performance obligations
•Enforceable
Enforceable promises – impact on implied deliverables?
•The definition of “distinct function”
•Software subscriptions
•License
Li
remix
i rights
i ht
•Software development arrangements
•Long-term construction contracts
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
92
Summary of Potential Changes to Current Practice (continued)
(Pending Completion of Redeliberations)
•Determining the transaction price
•Estimating
g variable consideration ((eliminates contingent
g
revenue
provisions)
•Potential to record royalties earlier?
•Impact
Impact of rebates and incentives currently under ASC 605-50
605 50
(formerly EITF 01-9)
•Considering the effect of customer’s credit risk
•Time value of money complexity
•Identifying Performance Obligations
•Material rights versus “significant incremental discounts”
•Allocating the transaction price to performance obligations
• Software transactions would no longer require VSOE for separation
• Residual method prohibited
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
93
Summary of Potential Changes to Current Practice (continued)
(Pending Completion of Redeliberations)
•Recognizing revenue
transfer of control”
control
• The concept of “transfer
• Delivery of keys and first copy of software license
• Consideration of FOB terms
• Treatment of service contracts and long
long-term
term construction contracts
•Other
• Contract costs (capitalize certain contract acquisition and fulfillment costs)
• Contract modifications (may result in cumulative adjustment)
• Onerous performance obligations recognized in more circumstances
• Product warranties may result in revenue deferral in more circumstances
• Agent
A
t vs. principal
i i l
• Presentation and disclosures
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
94
Proposed Transition
• Retrospective application proposed
• Early adoption would not be allowed under U.S. GAAP
• Comment letter observations
– Most believe full retrospective application would be costly and some
believe that this requirement will not be practicable
– If full retrospective required, many believe that preparers will need
additional time to implement standard
– Many believe that a transition method that allows the option to choose
prospective or retrospective application would be acceptable (consistent
with recent ASUs 2009-13/14))
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
95
Operational Considerations
• More estimates and complexity
– Estimated selling prices and relative selling price allocation
– Variable consideration estimates and true-ups
– Probability weighting
– Collectibility
– Time value of money
– Onerous performance obligations
• Significantly expanded disclosure requirements
• Retrospective adoption
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
96
Operational Considerations (continued)
• Impact on systems and processes and internal controls
• Training of employees
• Impact on business arrangements that include financial measures (e
(e.g.,
g
debt covenants)
• Impact on management compensation metrics
• Impact on income tax reporting
• Communications and education of stakeholders about impacts
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG
and the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.
97
Q
Questions?
ti
?
98
Thank you
Presentation by David Elsbree
212-909-5245
delsbree@kpmg.com
Department of Professional Practice
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative (“KPMG
( KPMG
International”), a Swiss entity. All rights reserved.
The information contained herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity. Although we endeavour to provide
accurate and timelyy information,, there can be no guarantee
g
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 on such information without appropriate professional advice after a thorough examination
of the particular situation.