FSA Consortium
Principles Under the New
Revenue Recognition Standard
May 2015
Deloitte Foundation/Federation of Schools of Accountancy Faculty Consortium
May 2015
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
2
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New Revenue Recognition
Standard Review
Preparing for Change - Key Participants
FASB & IASB Boards
• Amend standard clarifications &
practical expedients
SEC
• Staff announcements
PCAOB
AICPA
• 16 Industry specific working
groups
• Audit & Accounting Guides
TRG
• Inform the Boards of
implementation issues
• Quarterly meetings
Auditors
Preparers
Users
ASU 2014-09 / IFRS 15
Issued May 2014
4
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Joint Transition Resource Group (TRG)
Purpose
• To seek feedback on potential implementation issues that will
help the boards determine whether to take additional action
Hot Topics
•
•
•
•
•
•
•
•
5
Licenses of intellectual property
Identification of performance obligations
Collectability
Gross versus net presentation
Customer options
Variable consideration
Noncash consideration
Effective date
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Revenue Recognition
Scope
• Applies to an entity’s contracts with customers
• Some key aspects apply to transfers of non-financial assets that are not
businesses
• Does not apply to:
• Lease contracts
• Insurance contracts
• Transfers of financial assets/ contractual rights within financial assets
• Guarantees
6
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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.
7
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Step 1: Identifying the contract
Step 1
Step 2
Step 3
Step 4
Step 5
A legally enforceable contract (oral or implied) must meet all of the
following requirements:
The parties have approved the
contract and are committed to perform
The entity can identify each party’s
rights regarding goods or services
The entity can identify the payment
terms for the goods or services to be
transferred
The contract has commercial
substance
It is probable the entity will collect
the consideration to which it will be
entitled in exchange for the goods or
services that will be transferred to the
customer
A contract will not be in the scope if:
The contract is wholly unperformed
8
AND
Each party can unilaterally terminate
the contract without compensation
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FASB Clarifications
Step 1
Step 2
Step 3
Step 4
Step 5
Identifying the Contract - Tentative FASB Decisions:
Collectability
The standard would be amended to clarify that:
•
An entity would not simply assess the probability of collecting all the consideration in a
contract. Rather, collectibility would be assessed on the basis of the amount to which the
entity will be entitled in exchange for the goods or services that will transfer to the
customer (i.e., collectibility is not assessed on those goods or services that will not
transfer because the customer fails to pay).
•
A contract is considered terminated if the entity has the ability to stop (or has actually
stopped) transferring additional goods or services to the customer.
9
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Step 2: Identifying performance obligations
Step 1
Step 2
Step 3
Step 4
Step 5
The ASU defines a performance obligation as a promise
to transfer to the customer a good or service (or a bundle
of goods or services) that is distinct.
Identify all (explicit or implicit) promised goods and services in the contract
Are promised goods and services distinct from other goods and
services in the contract?
CAPABLE OF BEING
DISTINCT
Can the customer benefit
from the good or service on
its own or together with
other readily available
resources?
YES
Account for as a
performance obligation
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DISTINCT IN CONTEXT OF
CONTRACT
AND
Is the good or service
separately identifiable from
other promises in the
contract?
NO
Combine 2 or more
promised goods or services
& reevaluate
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Step 2: Identifying performance obligations
Distinct in the context of the contract
• In order for a promised good or service to be distinct it must be
“separately identifiable from other promises in the contract.”
• Factors that indicate that a promised good or service is distinct
include:
• No significant service of integrating the good or service (i.e., the
entity is not using the good or service as an input to produce or
deliver the combined output specified by the customer)
• The good or service does not significantly modify or customize
another good or service promised in the contract.
• The good or service is “” other promised gnot highly dependent
on, or highly interrelated withoods or services in the contract.
The FASB is providing clarification around identifying performance obligations.
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FASB Clarifications
Step 1
Step 2
Step 3
Step 4
Step 5
Identifying Performance Obligations- Tentative FASB Decisions:
ASU 2014-09: Distinct in the Context of the Contract
In order for a promised good or service to be distinct it must be “separately identifiable
from other promises in the contract.”
• Factors that indicate that a promised good or service is distinct include:
• No significant service of integrating the good or service (i.e., the entity is not using
the good or service as an input to produce or deliver the combined output
specified by the customer)
• The good or service does not significantly modify or customize another good or
service promised in the contract
• The good or service is “not highly dependent on, or highly interrelated with” other
promised goods or services in the contract
To clarify the meaning of a promise that is separately identifiable, due to complexity
and judgment in application, the FASB has tentative plans to:
• Expand upon the articulation of “separately identifiable,”
• Reframe the separation criteria to focus on a bundle of goods or services, and
• Add examples to the standard’s implementation guidance
12
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FASB Clarifications
Step 1
Step 2
Step 3
Step 4
Step 5
Identifying Performance Obligations- Tentative FASB Decisions:
Immaterial Promised Goods or Service
•
Amend the standard to permit entities to evaluate the materiality of promises at the
contract level and that, if the promises are immaterial, the entity would not need to
evaluate such promises further.
Shipping and Handling Services
Add guidance that clarifies:
• Before Control Transfers - Shipping and handling activities that occur before control
transfers to the customer are fulfillment costs.
• After Control Transfers - When costs are incurred after control transfers, allow
entities to elect a policy to treat shipping and handling activities as fulfillment costs if
they do not represent the predominant activity in the contract and they occur after
control transfers.
13
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Step 3: Determining the transaction price
Step 1
Step 2
Step 3
Step 4
Step 5
Principle: The transaction price is the amount of consideration to
which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer (which excludes
estimates of variable consideration that are constrained).
Transaction price shall include…
– fixed consideration
– variable consideration (estimated and potentially constrained)
– noncash consideration
– adjustments for significant financing component
– adjustments for consideration payable to customer
Transaction price does NOT include…
– effects of customer credit risk
14
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Step 3: Determining the transaction price
Variable consideration
• Variable consideration includes all consideration that is subject to
uncertainty for reasons other than collectability.
o Examples include discounts, rebates, refunds, credits, incentives, performance bonuses/penalties,
contingencies, price concessions, or other similar items
•
When accounting for variable consideration an entity shall…
o Estimate using expected value (probability weighted) or most likely amount methods
Subject to the following “constraint”:
o Include some or all of the amount of variable consideration in the transaction price to the extent that
it is “probable” that a subsequent change in the estimate would not result in a significant revenue
reversal
o Consider the following factors in assessing whether the estimated transaction price is subject to
significant revenue reversal:
 Highly susceptible to factors outside entity’s influence
 Uncertainty not expected to be resolved for a long time
 Entity’s experience is limited
 Entity typically offers broad range of price concessions/payment terms
 Broad range of possible outcomes
The FASB is providing clarification around application of the royalty constraint.
15
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FASB Clarifications
Step 1
Step 2
Step 3
Step 4
Step 5
Determining the transaction price - Tentative FASB Decisions
Noncash Consideration
• The FASB decided to amend the standard to clarify that:
– An entity should measure FV of noncash consideration at contract inception.
– The constraint would not apply to variability in the form of consideration.
• Thus for noncash consideration, the constraint would apply only to variability resulting
from reasons other than the form of consideration.
Sales and Usage-Based Royalties
• The FASB agreed that an entity would apply the royalty constraint if the license is
the “predominant” feature to which the royalty relates.
• Implications of the tentative decision include:
– Permits broader application of the royalty constraint (than if it were limited to royalty
arrangements that contain only licenses) and would eliminate the potential need to apply
variable consideration and royalty constraint guidance to different portions of a single
royalty.
– Requires judgment to determine whether a license of IP, when “bundled” with other goods
or services (i.e., the license is not a distinct performance obligation), is the predominant
item to which the royalty relates.
16
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Step 4: Allocating the transaction price
Step 1
Step 2
Step 3
Step 4
Step 5
Allocate transaction price on a relative standalone selling price basis
(estimate standalone selling price if not observable).
• The expected cost-plus margin method, adjusted market assessment
method, or residual method (only if price is highly variable or uncertain)
are acceptable.
Allocate consideration (and changes) in the transaction price to all
performance obligations (based on initial allocation) unless a portion of (or
changes in) the transaction price relate entirely to one (or more) obligations
and certain criteria are met.
Do not reallocate for changes in standalone selling prices.
If certain criteria are met, a discount or variable consideration may be
allocated to one or more, but not all, of the performance obligations in a
contract.
17
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Step 5: Recognizing revenue
Step 1
Step 2
Step 3
Step 4
Step 5
Evaluate if control of a good or service transfers over time, if not then control transfers at a
point in time.
An entity satisfies a performance obligation over time if…
The customer receives and consumes the benefit as the entity
performs. (e.g., cleaning service)
OR
OR
Performance creates or enhances a customer
controlled asset.
(e.g., home addition)
OR
Performance does not create an asset with an alternative use and
the entity has an enforceable right to payment for performance
OR
completed to date.
Measure progress toward completion using input/output methods
18
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Step 5: Recognizing revenue
For performance obligations satisfied at a point in time, indicators that
control transfers include, but are not limited to, the following:
The entity has a present right to payment.
The customer has legal title.
The entity has transferred physical possession.
The customer has the significant risks and rewards
of ownership.
The customer has accepted the asset.
19
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New Revenue Standard
Implementation Guidance - licenses
Step 2: Identifying the performance obligations
License is distinct. Account
for as a performance
obligation
License is not distinct.
Combine two or more
promised goods or services
Is the consideration in the form of a
sales- or usage-based royalty?
NO
YES
Recognize revenue
when subsequent
sales or usage
occurs
Does the license provide access?
YES
NO
Recognize
revenue over
time
Recognize
revenue at a
point in time
See next slide
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• Contract requires, or
customer reasonably
expects, the entity will
undertake activities that
significantly affect the IP.
• Rights granted by license
directly expose customer to
positive or negative effects
of the activities.
• Those activities do not result
in the transfer of a good or
service as those activities
occur.
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FASB Clarifications
Nature of IP License- Tentative FASB Decision
Does the IP have significant standalone functionality?
YES
Functional IP
Form or functionality of IP expected to
change as a result of activities of
licensor that do not transfer a promised
good or service to the customer, and the
customer has the right only to the most
current version of the IP?
YES
Right to Access License
Recognize revenue
over time
NO
Symbolic IP
Entity will undertake activities to
support and maintain the IP; activities
significantly affect the utility of the IP
Right to Access License
Recognize revenue over time
NO
Right to Use License
Recognize revenue at a
point in time
Sales and Usage-Based Royalties- An entity would apply the royalty constraint if the
license is the predominant feature to which the royalty relates (i.e. an entity would not
split a royalty and apply both the royalty and general constraints to it).
21
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New Revenue Recognition Standard
Other aspects
• Contract costs• Costs to obtain a contract
• Costs to fulfill a contract
• Amortization/impairment
• Transition
• Retrospective or modified retrospective
• Other proposed clarifications
• Contract Modifications – permits hindsight in transition
• Sales Taxes Presentation – Gross versus Net
– A practical expedient would be added to the standard that permits entities to present
sales taxes on a net basis.
22
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FASB Clarifications
Transition and Sales Taxes Presentation - Tentative FASB Decisions
Practical Expedients Upon Transition - Contract Modifications
• A practical expedient would be added to the standard that permits entities to use
hindsight in determining contract modifications for transition purposes (i.e. to
determine the transaction price and allocate the transaction price to all satisfied
and unsatisfied performance obligations on the basis of historical stand-alone
prices) as of the CMAD (see below).
• A new term, “contract modification adjustment date” (CMAD), would be added to
the standard and defined as the beginning of the earliest year presented upon
initial adoption of the standard.
Sales Taxes Presentation – Gross versus Net
• A practical expedient would be added to the standard that permits entities to
present sales taxes on a net basis. The expedient’s scope would apply to the
same sales taxes as those under existing U.S. GAAP.
23
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What is the effective date for public and non-public
entities?
Public entities:
• Annual reporting periods beginning after December 15, 2016, including
interim reporting periods therein (FY 2017)
• Early application not permitted
Nonpublic entities:
• Mandatory effective date:
– Annual reporting periods beginning after December 15, 2017 and interim
reporting periods thereafter (FY 2018)
• Option to use public entity effective date:
The FASB is proposing a one year delay of effective date (option to adopt
as of original effective date).
24
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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
25
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Case Studies
Session I
Step 1: Identifying the
Contract
Activity overview
For this activity, we will:
1. Review guidance on Step 1
2. Review case facts and question
3. Discuss at tables (5 minutes)
4. Debrief as a group (10 minutes)
Total time: ~20 minutes
29
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Step 1: Identifying the contract
Step 1
Step 2
Step 3
Step 4
Step 5
A legally enforceable contract (oral or implied) must meet all of the
following requirements:
The parties have approved the
contract and are committed to perform
The entity can identify each party’s
rights regarding goods or services
The entity can identify the payment
terms for the goods or services to be
transferred
The contract has commercial
substance
It is probable the entity will collect
the consideration to which it will be
entitled in exchange for the goods or
services that will be transferred to the
customer
A contract will not be in the scope if:
The contract is wholly unperformed
30
AND
Each party can unilaterally terminate
the contract without compensation
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Case study: Assessing collectability of contracts
Case facts
•
•
•
•
•
?
31
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
Relevant Sections in Deloitte’s Roadmap
• 3.1.1 Portfolio Approach
• 5.1 Collectibility
32
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Case study answer: Assessing collectability of contracts
How should Entity A assess collectability of the contracts?
• 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.
At the January 26, 2015 Transition Resource Group (TRG) Meeting, the TRG
members generally agreed that when collectability is probable for a portfolio of
contracts, the expected amount should be recognized as revenue and the
uncollectible amount should be recognized as an impairment loss in accordance
with ASC 310.
33
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Step 2: Identifying the
Performance Obligations
Activity overview
For this activity, we will:
1. Review guidance on Step 2
2. Review cases facts and question
3. Discuss at tables (5 minutes for each case)
4. Debrief as a group (10 minutes for each case)
Total time: ~60 minutes
35
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Step 2: Identifying performance obligations
Step 1
Step 2
Step 3
Step 4
Step 5
The ASU defines a performance obligation as a promise
to transfer to the customer a good or service (or a bundle
of goods or services) that is distinct.
Identify all (explicit or implicit) promised goods and services in the contract
Are promised goods and services distinct from other goods and
services in the contract?
CAPABLE OF BEING
DISTINCT
Can the customer benefit
from the good or service on
its own or together with
other readily available
resources?
YES
Account for as a
performance obligation
36
DISTINCT IN CONTEXT OF
CONTRACT
AND
Is the good or service
separately identifiable from
other promises in the
contract?
NO
Combine 2 or more
promised goods or services
& reevaluate
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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?
37
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Case study answer: Synthetic FOB destination
Is shipping a separate performance obligation?
• View A: Shipping is a separate performance obligation
– Title to the TVs transfer to customer at shipping point. Accordingly, shipping
the customer’s goods from the port (and potentially providing insurance on
such goods) represents a separate performance obligation.
• View B: There is only one performance obligation, the delivery
of undamaged TVs.
38
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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?
39
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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
Relevant Sections in Deloitte’s Roadmap
• 6.3 Distinct Goods or Services
40
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Case study answer: Identifying performance obligations
for a manufacturer
Does the contract have one or more performance obligations?
• The contract has multiple performance obligations because:
– The customer is able to benefit from the equipment and the parts on
their own.
• The equipment could be used by Entity M or another manufacturer to
produce parts for the customer and the parts are themselves an input in the
customer’s production process.
• Therefore, the equipment and parts are each capable of being distinct.
– The equipment and parts are not being used to produce a combined
item that is a distinct good that M has promised
– The entity’s promise to provide the parts does not significantly affect
the customer’s ability to derive benefit from the equipment.
• Therefore, the equipment and the parts are distinct in the context of the
contract (i.e., separately identifiable).
41
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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?
42
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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
Relevant Sections in Deloitte’s Roadmap
• 6.3.3 Nonrefundable Up-Front Fees
• 6.3.2 Customer Options for Additional Goods or Services
43
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Case study answer: Material right (Nonrefundable
upfront fees)
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?
•
Yes, the renewal option creates a material right
–
–
•
When comparing the renewal rate ($100) to the amount that a new customer would be
required to pay ($150), the upfront fee is material (quantitative factor).
The entity’s historical renewal experience suggests that not having to pay the upfront
fee is one of the factors customers consider when deciding whether to renew their
monthly contract (qualitative factor).
As a result, the contract contains two performance obligations (1) one month of service
and (2) a material right representing a prepayment for future services by the upfront fee.
– The upfront fee would be recognized over the service periods during which the
customer is expected to benefit from not having to pay an upfront fee upon renewal of
service. Determining the expected period of benefit often will require judgment.
*This issue was discussed at the October 2014 and January 2015 TRG Meetings. See Deloitte’s October
2014 and January 2015 TRG Snapshot for additional information.
44
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Session II
Step 3: Determining the
Transaction Price
Activity overview
For this activity, we will:
1. Review guidance on Step 3
2. Review case facts and question
3. Discuss at tables (5 minutes for each case)
4. Debrief as a group (10 minutes for each case)
Total time: ~40 minutes
47
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Step 3: Determining the transaction price
Step 1
Step 2
Step 3
Step 4
Step 5
Principle: The transaction price is the amount of consideration to
which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer (which excludes
estimates of variable consideration that are constrained).
Transaction price shall include…
– fixed consideration
– variable consideration (estimated and potentially constrained)
– noncash consideration
– adjustments for significant financing component
– adjustments for consideration payable to customer
Transaction price does NOT include…
– effects of customer credit risk
48
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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
•
49
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?
Copyright © 2015 Deloitte Development LLC. All rights reserved.
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
Relevant Sections in Deloitte’s Roadmap
• 7.1.1 Variable Consideration
• 7.2 Constraining Estimates of Variable Consideration
• 7.3.2 Existence and Significance of a Financing Component
• 7.3.3 Circumstances That Do Not Give Rise to a Significant Financing Component
50
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Case study answer: Accounting for contingent revenue
How much revenue should the entity recognize upon transferring
control of the equipment to the customer?
The entity should recognize $400,000
$1.6 million
x 5 years
Estimated annual sales (for which it is probable that there will
not be a significant revenue reversal)
Years for which the customer will pay a royalty
$8.0 million
x 5 percent Royalty percentage per the contract
$400,000
Transaction Price
Dr Contract Asset
Cr Revenue
51
$400,000
$400,000
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Case study answer: Accounting for contingent revenue
BTW- How did Entity P arrive at the conclusion that there is not a
significant financing component in the transaction?
Entity P considered the guidance in ASC 606-10-32-17(b) which
states that a contract with a customer would not have a significant
financing component if “a substantial amount of the consideration
promised by the customer is variable, and the amount or timing of
that consideration varies on the basis of the occurrence or
nonoccurrence of a future event that is not substantially within the
control of the customer or the entity (for example, if the
consideration is a sales-based royalty).”
52
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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)?
53
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Case study answer: Insignificant variable consideration
at contract level
Should the constraint on variable consideration be applied at the
contract level ($10.01 million) or the performance obligation level
($10,000)?
The constraint on variable consideration should be applied at the
contract level because the unit of account for determining the
transaction price (Step 3 of the new standard) is the contact, not the
performance obligation.
54
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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?
55
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Case study answer: Widgets for Stock
How should Entity W measure the transaction?
•
•
•
•
•
View A = $1000
View B = $950
View C = $1020
View D = $1050
View E = $1055
View A - $1000. The FASB is proposing to clarify that non-cash consideration is measured
at contract inception. [The IASB is not proposing a similar clarification; other views are to
measure when the non-cash consideration when received ($1050) or when the performance
obligation is satisfied ($1020)]
56
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Step 4: Allocating the
Transaction Price
Activity overview
For this activity, we will:
1. Review guidance on Step 4
2. Review case facts and question
3. Discuss at tables (10 minutes)
4. Debrief as a group (15 minutes)
Total time: ~30 minutes
58
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Step 4: Allocating the transaction price
Step 1
Step 2
Step 3
Step 4
Step 5
Allocate transaction price on a relative standalone selling price basis
(estimate standalone selling price if not observable).
• The expected cost-plus margin method, adjusted market assessment
method, or residual method (only if price is highly variable or uncertain)
are acceptable.
Allocate consideration (and changes) in the transaction price to all
performance obligations (based on initial allocation) unless a portion of (or
changes in) the transaction price relate entirely to one (or more) obligations
and certain criteria are met.
Do not reallocate for changes in standalone selling prices.
If certain criteria are met, a discount or variable consideration may be
allocated to one or more, but not all, of the performance obligations in a
contract.
59
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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?
60
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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
Relevant Sections in Deloitte’s Roadmap
• 8.1 Allocation Based on Stand-Alone Selling Price
• 8.2 Allocation of a Discount
• 8.3 Allocation of Variable Consideration
61
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Case study answer: Allocating a discount
For Scenario 1, how would the entity allocate the discount in the contract?
•
•
The entity does NOT have sufficient evidence to demonstrate that the discount in the
contract relates to any specific performance obligation (i.e., the evidence does not
support that the discount is not just a volume-based discount attributable to a
customer buying a bundle of items).
Accordingly, the discount of $15 should be allocated pro-rata to each of the
performance obligations based on their individual stand-alone selling prices.
The entity would recognize revenue as follows:
• When A is transferred, recognize revenue of $27 (30 – 3)
• When B is transferred, recognize revenue of $63 (70 – 7)
• When C is transferred, recognize revenue of $45 (50 – 5)
Item
SSP
% of Total SSP
Total Discount
to Allocate
Discount
Allocated
Item A
$30
20.0%
$15
$3
Item B
$70
46.7%
$15
$7
Item C
$50
33.3%
$15
$5
$150
$15
Total revenue recognized on contract = $135
62
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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?
63
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Case study answer: Allocating a discount
For Scenario 2, how would the entity allocate the discount in the contract?
•
•
In this scenario, the evidence supports that there is a discount of $15 when the
entity sells a bundle of two items that includes A and a discount of $0 for all other
bundles that contain products other than A.
Accordingly, it is reasonable to conclude that the discount of $15 should be
allocated entirely to item A in accordance with ASC 606-10-32-37.
The entity would recognize revenue as follows:
• When A is transferred, recognize revenue of $15 [$30 (SSP of A) – $15 (full discount)]
• When B is transferred, recognize revenue of $70
• When C is transferred, recognize revenue of $50
Total revenue recognized on contract = $135
64
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Session III
Step 5: Recognizing Revenue
Activity overview
For this activity, we will:
1. Review guidance on Step 5
2. Review case facts and question
3. Discuss at tables (5 minutes for each)
4. Debrief as a group (10 minutes for each)
Total time: ~40 minutes
67
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Step 5: Recognizing revenue
Step 1
Step 2
Step 3
Step 4
Step 5
Evaluate if control of a good or service transfers over time, if not then control transfers at a
point in time.
An entity satisfies a performance obligation over time if…
The customer receives and consumes the benefit as the entity
performs. (e.g., cleaning service)
OR
OR
Performance creates or enhances a customer
controlled asset.
(e.g., home addition)
OR
Performance does not create an asset with an alternative use and
the entity has an enforceable right to payment for performance
OR
completed to date.
Measure progress toward completion using input/output methods
68
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Step 5: Recognizing revenue
For performance obligations satisfied at a point in time, indicators that
control transfers include, but are not limited to, the following:
The entity has a present right to payment.
The customer has legal title.
The entity has transferred physical possession.
The customer has the significant risks and rewards
of ownership.
The customer has accepted the asset.
69
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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?
70
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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
Relevant Sections in Deloitte’s Roadmap
• 9.2.4 Right to Payment for Performance Completed to Date
71
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Case study answer: Right to payment (Over time vs.
point-in-time)
How should Entity X recognize revenue for contract A and B – i.e., over time or at a point-in-time?
Entity X needs to assess whether it has an enforceable right to payment for performance
completed to date under the context of ASC 606-10-25-27(c). Contract B only allows entity X to
recover its cost (without a margin) on parts in process upon termination. Therefore, Contract B
would not be considered to have “an enforceable right to payment for performance completed to
date” at all times during the contractual term. As such, Contract B does not meet the requirement
to recognize revenue over time (i.e., recognized at point in time when parts are transferred).
Contract A does meet criteria for recognition of revenue over time.
As a result, the financial statement impact differs
as follows
on March
31, 20X1:
Contract
A
Contract
B
Balance Sheet
Finished goods
Work in Process
Contract asset
Income Statement
Revenue
Cost of goods sold
72
$405,500
$360,000
5,000
-
$405,500
$365,000
-
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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?
73
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Case study answer: Nature of a license
How should licensor recognize revenue– i.e., over time or at a point-in-time?
Is nature of license functional or symbolic?
Scenario 1 – Functional. Revenue for the license should be recognized at the point that control
transfers.
Scenario 2 – Symbolic. Revenue for the license should be recognized over the license period.
74
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Gross versus Net Presentation
Activity overview
For this activity, we will:
1. Review guidance on contract cost
2. Review case facts and question
3. Discuss at tables (5 minutes)
4. Debrief as a group (10 minutes)
Total time: ~20 minutes
76
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Gross versus Net Indicators
Is nature of the performance obligation to provide the specified
goods/services itself of arrange for another party to provide?
Presumption:
• Principal if control promised good or service before the transfer to
the customer
Indicators to consider in determining gross or net reporting:
• Primarily responsible for fulfilling the contract
• Latitude in establishing price
• Consideration in form of a commission
• Has physical loss inventory risk—after customer order or during
shipping
• Credit risk
77
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Case study: Gross versus Net
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?
78
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Case study answer: Gross versus Net
Question 1: Should ABC company report revenue gross or net?
ABC company should report gross revenue.
Indicators pointing towards gross presentation:
• Primarily responsible for fulfilling the contract
• Latitude in establishing price
• Credit risk
79
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Contract Costs
Activity overview
For this activity, we will:
1. Review guidance on contract cost
2. Review case facts and question
3. Discuss at tables (5 minutes)
4. Debrief as a group (10 minutes)
Total time: ~20 minutes
81
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Contract costs
Costs to obtain a contract
• Capitalize costs of obtaining a contract if they are
incremental and expected to be recovered (e.g., sales
commissions)
o 1 year practical expedient
Costs to fulfill a contract
• Recognize assets in accordance with other Topics (inventory, PP&E, software, etc.),
otherwise capitalize costs that:
o relate directly to the contract (or specific anticipated contract);
o generate/enhance a resource that will be used to satisfy obligations in the future;
and
o are expected to be recovered
• Costs that relate to satisfied performance obligations (or partially satisfied performance
obligations) must be expensed when incurred
Impairment
• Recognize immediately if costs not deemed recoverable
82
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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
•
•
83
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?
Copyright © 2015 Deloitte Development LLC. All rights reserved.
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
Relevant Sections in Deloitte’s Roadmap
• 12.1 Costs of Obtaining a Contract
• 12.3 Amortization and Impairment of Contract Costs
84
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Case study answer: Costs to obtain a contract
Question 1: What amount(s) should Entity G capitalize upon initial signing of the
contract and upon contract renewal?
•
Entity G should capitalize the $200 paid for the new customer contract at contract
inception as the commission represents an incremental cost of obtaining a contract
that would not have been incurred unless the contract was obtained and the
obligating event occurred (i.e. the contract was obtained which requires the
commission to be paid to the salesperson).
•
The Entity should not recognize any portion of the $120 at contract inception as it
does not yet meet the definition of a liability and also does not meet the
requirements to be capitalized as an incremental cost of obtaining a contract.
Instead, Entity G should capitalize the $120 when the contract is subsequently
renewed.
85
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Case study answer: Costs to obtain a contract
Question 2: What is the amortization period for both the initial commission and the
renewal commission?
There are two views that could be acceptable under ASC 340-40.
Amortization of Initial Commission:
View A – Amortize the initial amount capitalized over the contract period that includes the
specific anticipated renewals - that is, over the four year period.
View B – Bifurcate the initial $200 commission into two components and amortize: (1) $120
over the original contract term (i.e., the amount commensurate with renewal commissions)
and (2) $80 over the contract period that includes the specific anticipated renewals.
Year 1
Year 2
Year 3
Year 4
View A
$50
$50
$50
$50
View B
(=$200/4)
$80
(=$200/4)
$80
(=$200/4)
$20
(=$200/4)
$20
(=$120/2 + $80/4)
(=$120/2 + $80/4)
(=$80/4)
(=$80/4)
Amortization of Renewal Commission ($120):
In either case, the renewal commission is amortized over renewal period ( additional $60 in
each years 3 & 4).
86
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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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