2015 Deloitte Foundation/Federation of
Schools of Accountancy
Faculty Consortium
Principles Under the New
Revenue Recognition Standard
May 2015
Principles Under the New Revenue Recognition Standard
Participant Guide
Dear Participants,
We look forward to discussing with you the principles under FASB’s new ASU
(ASU 2014-09) on revenue recognition (also, known as ASC 606 in the
Accounting Standards Codification).
As part of this discussion, we will use case studies to illustrate certain principles.
In order to make the most efficient use of our time, this guide contains the cases
we will discuss and relevant references within ASC 606. You can also find
relevant guidance in Deloitte’s Roadmap on Revenue at:
http://www.iasplus.com/en-us/publications/us/roadmap-series/revenue
Please review the cases and relevant Codification cites prior to the conference.
You should be prepared to discuss your views on application of the principles to
the particular fact patterns.
We hope you find this conference and discussion of these cases interesting and
helpful.
1
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Course Introduction
Agenda
Course flow
New Revenue Recognition Standard Review
Case Studies & Discussion
Session I: Step 1: Identification of a contract with a customer & Step 2:
Identifying the performance obligations
Session II: Step 3: Determining the transaction price & Step 4: Allocating the
transaction price
Session III: Step 5: Recognizing revenue & other issues
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New Revenue Recognition
Standard Review
The five steps revenue recognition process
Core principle: Recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects
the consideration the entity expects to be entitled in exchange for
those goods or services
Identify the
contract
with a
customer
(Step 1)
Identify the
performance
obligations
in the
contract
(Step 2)
Determine
the
transaction
price
(Step 3)
Allocate the
transaction
price to
performance
obligations
(Step 4)
Recognize
revenue when
(or as) the
entity satisfies
a performance
obligation
(Step 5)
This revenue recognition model is based on a control
approach which differs from the risks and rewards
approach applied under current U.S. GAAP.
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Case Studies
Session I
Step 1: Identifying the
Contract
Case study: Assessing collectability of contracts
Case facts
•
•
•
•
•
?
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Entity A enters into 1000 homogenous contracts with different customers for fixed consideration
of $1,000 each.
Before entering into a contract with a customer, Entity A performs procedures designed to
determine whether it is probable that the customer will pay the amount owed under the contract
(e.g., a credit check) and only enters into the contract if the entity concludes that it is probable
that customer will pay.
During the previous three years, Entity A has collected 98% of the amounts it has billed to
customers.
Based on an analysis of industry and historical collection data, Entity A has concluded that the
collection rate from the past three years is the probable outcome for future contracts.
Entity A intends to enforce its rights to the consideration to which it is entitled (i.e., it will not offer
any concessions to its customers).
o Accordingly, the only variability in the contract is due to customer credit risk.
Question
How should Entity A assess identification of contracts for revenue recognition?
• View A: Each of the 1,000 contracts qualify; resulting in $1,000,000 in revenue and
$20,000 in bad debt expense upon satisfaction of the performance obligation.
• View B: Only 98% of the portfolio of contracts is probable of collection; thus revenue
should be $980,000 when the performance obligation is satisfied.
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Case study: Assessing collectability of contracts
Relevant resources
Relevant Guidance in ASC 606
• ASC 606-10-25-1
• ASC 606-10-25-5 through 25-8
• ASC 606-10-10-4
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Step 2: Identifying the
Performance Obligations
Case study: Synthetic FOB destination
Case Facts
•
•
•
•
•
?
Entity T, a TV manufacturer, enters into contract to ship 100 TVs from San
Francisco to a customer in London for fixed consideration. The shipment from SF
to London, by a 3rd party carrier, will take approximately 3 weeks.
Terms are FOB shipping point. Legal title of the TVs transfers to the customer upon
delivery to carrier. Entity T arranges shipping and charges customer for shipping.
TVs were delivered to carrier 9 days before year end. Payment is due 30 days after
receipt of goods.
Entity T is not obligated to but has a history of replacing (or crediting customer’s
account for) any TVs damaged during shipment. Entity T historically pursue claims
against the carrier/insurance provider.
Entity T has not elected the (proposed) practical expedient for shipping.
Question
Is shipping a separate performance obligation?
Bonus for Session III – when does control of TVs transfer?
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Case study: Synthetic FOB destination
Relevant resources
Relevant Guidance in ASC 606
• ASC 606-10- 25-14 through 26
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Case study: Identifying performance obligations for a
manufacturer
Case Facts
• Entity M, a parts supplier, enters into contract with an OEM (i.e.,
M’s customer) for fixed consideration of $30 million to (1) construct
equipment for the customer that M will use to make parts for the
customer and (2) supply 30 million parts to the customer.
• Legal title of the equipment transfers to the customer upon
completion of the construction of the equipment (i.e., prior to M
beginning production of the parts).
• M is one of many companies that have the ability to both construct
the equipment and subsequently produce the parts.
?
Question
Does the contract have one or more than one performance
obligation?
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Case study: Identifying performance obligations for a
manufacturer
Relevant resources
Relevant Guidance in ASC 606
• 606-10-25-20
• 606-10-25-21
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Case study: Material right (Nonrefundable upfront fees)
Case Facts
•
•
•
•
?
An entity enters into monthly contract with its customer to provide a service (e.g.,
fitness center) and charges monthly service fees. It also charges a one-time $50
nonrefundable upfront fee (equal to one-half of one month’s service fee of $100)
payable at contract signing.
Customers are under no obligation to continue to purchase the monthly service
after the first month. And the entity has not committed to any pricing levels for the
service in future months.
The activity of signing up a customer does not result in a transfer of a good or
service to the customer, as such, it does not represent a separate performance
obligation. The upfront fee should therefore be deferred and recognized as the
future service is provided.
Historical data indicates that the average customer life is two years.
Questions
1. Does the renewal option create a material right (gives rise to a performance
obligation) for a customer to renew the monthly service?
2. How should the entity account for the upfront fee based on your answer to
the first question?
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Case study: Material right (Nonrefundable upfront fees)
Relevant resources
Relevant Guidance in ASC 606
• ASC 606-10-55-50 through 55-53
• ASC 606-10-55-41 through 55-45
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Session II
Step 3: Determining the
Transaction Price
Case study: Accounting for contingent revenue
Case facts
•
•
•
•
•
•
•
?
On 1/2/20X1, Entity P, a manufacturer, sells a large piece of equipment to a
customer for consideration equal to five percent of the customer’s future net sales
for the next five years.
The entity has determined that the transaction meets the criterion in Step 1 to be
accounted for as a contract with a customer.
Control of the equipment transfers to the customer on the date of sale (1/2/20X1).
The consideration is payable after the customer issues its audited financial
statements for each year (and after Entity P issues financial statements each year).
Entity P has determined after careful analysis that there is not a significant financing
component in the transaction.
Based on the customer’s audited financial statements, the customer’s sales for the
last ten years have fluctuated from $1.4 million to $2.2 million with the probability
weighted average amount being $2.0 million.
Entity P is highly confident that the customer’s sales will not be less than $1.6
million in any of the next five years.
Question
•
20
How much revenue should the entity recognize upon transferring control of the
equipment to the customer? What should Entity P record on 1/2/20X1?
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Case study: Accounting for contingent revenue
Relevant resources
Relevant Guidance in ASC 606
• 606-10-32-5 through 32-9
• 606-10-32-11 through 32-13
• 606-10-32-15 through 32-20
• 606-10-45-1 through 45-5
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Case study: Insignificant variable consideration at
contract level
Case facts
An entity enters into a contract with a customer to provide the customer with
equipment and a consulting service. The contractual price for the equipment is
fixed at $10 million. The contract does not include a fixed price for the consulting
service, but if the customer’s manufacturing costs decrease by 5% over a oneyear period, the entity will receive $10,000 for the consulting service. Also
assume the following:
• The equipment and the consulting service are separate performance
obligations.
• The standalone selling prices of the equipment and consulting service are
determined to be $10 million and $10,000, respectively.
• The entity concludes $10,000 is the consideration amount for the consulting
service using the most likely amount method under ASC 606-10-32-8.
• The entity allocates the performance-based fee of $10,000 entirely to the
consulting service in accordance with ASC 606-10-32-40.
?
Question
• Should the constraint on variable consideration be applied at the contract
level ($10.01 million) or the performance obligation level ($10,000)?
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Case study: Widgets for Stock
Case facts
On September 1, Entity W enters into a contract with a Customer C to provide the
customer with 100 widgets on December 15. In return, Customer C promises to
transfer to Entity W, upon inspection and acceptance of the widgets, but no later
than December 28, 10 shares of C stock. Customer C is a private company. The
transaction occurs as contracted and stock is delivered on December 28.
Assume these additional facts:
• On September 1 the selling price of a widget is $10. On November 1, Entity W
institutes a price increase of $0.55 per widget.
• The estimated fair value of a share of Customer C stock, based on limited
private transactions, is as follows:
•
•
•
•
?
September 1 = $100
November 1 = $95
December 15 = $102
December 28 = $105
Question
• How should the entity measure the transaction?
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Step 4: Allocating the
Transaction Price
Case study: Allocating a discount
Case facts
Entity W sells three items A, B, and C, respectively. The
standalone selling prices of A, B, and C are as shown to the
right: 
Product
Item A
Item B
Item C
Standalone Selling
Price
$30
$70
$50
Date
03/31/X1
06/30/X1
09/30/X1
Deliverable
Item A
Item B
Item C
Consider the following scenarios:
SCENARIO 1
On January 1, 20X1, the entity enters into a contract with a
customer to provide the customer with one of each item for
consideration of $135 (a $15 discount) based on the
schedule to the right: 
The following bundles are also regularly sold at the following combined prices: 
Bundle
A+B
A+C
B+C
?
Price
$85
$65
$105
Combined Standalone Selling Price
$30 + $70 = $100
$30 + $50 = $80
$70 + $50 = $120
Discount in Bundle
$15
$15
$15
Question
For Scenario 1, how would the entity allocate the discount in the contract?
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Case study: Allocating a discount
Relevant resources
Relevant Guidance in ASC 606
• 606-10-32-28 through 32-30
• 606-10-32-31 through 32-35
• 606-10-32-36 through 32-38
• 606-10-32-39 through 32-41
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Case study: Allocating a discount
Case facts
SCENARIO 2
On January 1, 20X1, the entity enters into a contract with a
customer to provide the customer with one of each item for
consideration of $135 (a $15 discount) based on the
schedule to the right: 
Date
03/31/X1
06/30/X1
09/30/X1
Deliverable
Item A
Item B
Item C
As a reminder, the standalone selling prices of A, B, and C
are as shown to the right: 
Product
Standalone Selling
Price
$30
$70
$50
Item A
Item B
Item C
The following bundles are also regularly sold at the following combined prices: 
Bundle
A+B
A+C
B+C
?
Price
$85
$65
$120
Combined Standalone Selling Price
$30 + $70 = $100
$30 + $50 = $80
$70 + $50 = $120
Discount in Bundle
$15
$15
$0
Question
For Scenario 2, how would the entity allocate the discount in the contract?
27
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Session III
Step 5: Recognizing Revenue
Case study: Right to payment (Over time vs. point-intime)
Case facts
January 1, 20X1, Entity X enters into two contracts with customers that are similar except for termination
provisions. Each is for the sale of 10,000 customized parts at $100 per part. The parts have no alternative
use to Entity X (ASC 606-10-25-28). On March 31, 20X1, Entity X produced and held a total of 4,000 parts
of finished goods and an additional 100 parts in WIP with costs-to-date of $5,000. The total cost to produce
each part is $90.
Contract A
Contract A states that if the contract is terminated, the customer is required to pay the full price for all
finished goods on hand. For parts in process, the customer is required to pay Entity X its cost plus 10%
which is the expected margin on the finished goods (and therefore a reasonable margin). As such, if the
contract is terminated on March 31, 20X1, Entity X would be entitled to $405,500 ($100 for the 4,000
finished goods and cost of $5,000 plus 10% for the 100 parts in WIP).
Contract B
Contract B states that if the contract is terminated, the customer is required to pay the full price for all
finished goods on hand and only Entity’s X’s cost for any parts in process. As such, if the contract is
terminated on March 31, 20X1, Entity X would be entitled to $405,000 ($100 for the 4,000 finished goods
and cost of $5,000 for the 100 parts in WIP).
?
Question
How should Entity X recognize revenue for contract A and B – i.e., over time or at a point-in-time?
30
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Case study: Right to payment (Over time vs. point-intime)
Relevant resources
Relevant Guidance in ASC 606
• ASC 606-10-25-27(c)
• ASC 606-10-25-29
• ASC 606-10-55-11 through 55-15
31
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Case study: Nature of a license
Case facts
Scenario 1: A film distribution entity licenses a new hit film to a movie
theater for showing over a 3 month period (December through
February) for fixed consideration of $50,000. Historically, the entity
has marketed the film (e.g., via television, radio, print advertising, and
billboards) in all regions in which it licenses the film.
Scenario 2: An entity licenses to licensee for fixed consideration of
$50,000 the right to use the trademark of a professional sports team
that no longer exists.
?
Question
How should licensor recognize revenue– i.e., over time or at a point-in-time?
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Case study: Nature of a license
Relevant resources
Relevant Guidance in ASC 606
• 606-10-55-54 through 58
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Gross versus Net Presentation
Case study: Gross versus Net Presentation
Case facts
ABC Company (the “Company”) provides a vacation rental program to individuals
(“Customers”) seeking to rent vacation homes and utilize the amenities (e.g., golf courses,
tennis courts, etc.) through the Company’s club and resort facilities. The Company does not
own the properties that it rents but rather enters into agreements with the homeowners that
allow the Company to rent their homes as part of a vacation package. Homeowners received a
percentage of the net rental income collected by the Company.
The Company does not market or promote a specific house/unit but rather markets/promotes a
vacation experience, manages all interactions with Customers and is the only entity with an
agreement with Customers. The Company has full discretion in determining the rental fee and
is primarily responsible for the entire customer experience (including housekeeping services,
concierge services, amenities, etc.). If a Customer is not satisfied with the house/unit, the
Company is responsible for finding a suitable replacement.
?
Questions
•
Should ABC Company report as revenue the gross amounts received from Customers for
vacation rentals? Would net revenue presentation be more appropriate?
•
What information do you think is relevant / needed for the analysis?
35
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Case study: Gross versus Net Presentation
Relevant resources
Relevant Guidance in ASC 606
• 606-10-55-36 through 40
36
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Contract Costs
Case study: Costs to obtain a contract
Case facts
•
Entity G, a janitorial services provider, enters into a contract with a customer to provide cleaning
services for a two year period.
Upon the initial signing of the contract, Entity G pays a salesperson a $200 commission for
obtaining the new customer contract. An additional commission of $120 is paid each time the
customer renews the contract for an additional two years.
The $120 renewal commission is not commensurate with the $200 initial commission (i.e., a
portion of the $200 initial commission relates to future anticipated contract renewals)
Based on its historical experience, 98% of customers renew their contract for at least two more
years or four years total (i.e., the contract renewal represents a specific anticipated contract).
The average customer relationship is four years.
•
•
•
•
?
Questions
•
•
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Question 1: What amount(s) should Entity G capitalize upon initial signing of the contract
and upon contract renewal?
Question 2: What is the amortization period for both the initial commission and the
renewal commission?
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Case study: Costs to obtain a contract
Relevant resources
Relevant Guidance in ASC 606
• 340-40-25-1 through 25-4
• 340-40-35-1 through 35-2
39
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Stay tuned!
• FASB, IASB, TRG, SEC, AICPA, and accounting firms are still in the
process of interpreting the guidance in the standard.
• Practice may evolve out of industry interpretations.
• Newest developments at FASB may result in the ASU being revised
before it comes effective.
Stay Tuned!
Things are changing. Read publications to keep
up to date on latest information.
USGAAPplus.com contains the latest news in financial reporting
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