50
Revenue Recognition Current Developments Developed and presented by Samuel A. Monastra, CPA

Revenue Recognition

  • Upload
    jania

  • View
    30

  • Download
    1

Embed Size (px)

DESCRIPTION

Revenue Recognition. Current Developments Developed and presented by Samuel A. Monastra, CPA. Revenue Recognition. SAMUEL A. MONASTRA, CPA - PowerPoint PPT Presentation

Citation preview

Page 1: Revenue Recognition

Revenue RecognitionCurrent Developments

Developed and presented by Samuel A. Monastra, CPA

Page 2: Revenue Recognition

SAMUEL A. MONASTRA, CPA

Mr. Monastra is a Director with McGladrey, LLP. He has extensive experience with publicly held companies and large privately held companies. Industry focus: manufacturing, life sciences & technology, financial services, and public sector.

Mr. Monastra served in executive roles with National CPA firms, and as a member of the Editorial Board of the Pennsylvania CPA Journal. He has also been a frequent speaker for numerous State CPA Societies, the Institute of Internal Auditors, and the Institute of Management Accountants on financial reporting topics.

Mr. Monastra has a focus on financial reporting with a particular emphasis on Revenue Recognition, IASB/FASB Convergence, IFRS, Business Combinations, Asset Impairments, and Fair Value.

Revenue Recognition

Page 3: Revenue Recognition

Revenue is usually one of the largest items on a company’s financial statements. Accordingly, both in substance and form, it may be one of the most important components to present fairly, in all material respects, in accordance with the applicable financial reporting framework. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are continuing to jointly define revenue recognition for what is truly becoming a worldwide economy

Revenue Recognition

Page 4: Revenue Recognition

FASB - rules based IASB – principles based

The FASB based the rules for revenue recognition on a document housed within the SEC reporting guidelines: SEC Staff Accounting Bulletin No. 104 (SAB 104)

Additional guidance is based upon SFAS No. 48 “Revenue Recognition When the Right of Return Exists” and AICPA Statement of Position No.97-2 “Software Revenue Recognition”

Revenue Recognition

Page 5: Revenue Recognition

Today, Revenue Recognition Codification 605Sub-section 10 Overall 15 Products 20 Services 25 Multiple Element Arrangements 28 Milestone Method 30 Rights to Use 35 Construction & Production Contracts 40 Gains & Losses 45 Principal Agent Considerations 50 Customer Payments & Incentives

Revenue Recognition

Page 6: Revenue Recognition

Here are the basics:

Revenue must be earned or realized before financial statement recognition

EARNED when an entity has substantially performed what is necessary to be entitled to the benefits of the revenue

REALIZED when assets received or receivable are readily convertible into known amounts of cash

Revenue Recognition

Page 7: Revenue Recognition

Recognize revenue when the transaction is consummated (revenue is both earned and realized)

The four “bedrock” principles:persuasive evidence of an arrangementprice is fixed or determinableability to paydelivery or performance has occurred

Revenue Recognition

Page 8: Revenue Recognition

Also consider: Right of return/ refund policy Parties must be independent of each other Must be an arms length transaction Seller has no further obligations Not a consignment

Revenue Recognition

Page 9: Revenue Recognition

Areas of concern include: “bill and hold” transactions Channel stuffing Early/ delayed shipments Segregation of goods Ignore customer acceptance provisions Side agreements

Revenue Recognition

Page 10: Revenue Recognition

Areas of concern include: Related party transactions Sales cut-offs Unusual terms – not typical for the company

or industry Fraud

Revenue Recognition

Page 11: Revenue Recognition

Areas of concern include with rights of return:

Allowed to return unsold items Inability to estimate or significant increase

in inventory in distribution channel New products and newness of products Shift in product demand or technology Long return periods

Goods become obsolete, used up, fulfill original purpose, break, etc.

Revenue Recognition

Page 12: Revenue Recognition

Present authoritative sources:

Accounting Standards Codification Topic 600 -- Revenues Topic 985 -- Software

Revenue Recognition

Page 13: Revenue Recognition

Industries with specific revenue recognition revenue recognition rules and exceptions include:

Section Industry 905 Agriculture 908 Airlines 910 Contractors- Construction 912 Contractors- Federal Government 915 Development Stage Companies 920 Entertainment- Broadcasters 922 Entertainment- Cable TV 924 Entertainment- Casinos 926 Entertainment- Film 928 Entertainment- Music

Revenue Recognition

Page 14: Revenue Recognition

Revenue recognition – sale of breeding livestock

The gain or loss on the sale of breeding livestock, regardless of whether purchased or raised, is included in gross revenue. This treatment recognizes the fact that the sale of breeding livestock, either as cull animals or as seed stock, is a normal, planned, and ongoing part of the business.

Revenue Recognition

Page 15: Revenue Recognition

Theatres:

Recognize revenue at the time of exhibition unless nonrefundable guarantees are paid by the exhibitor (which may happen with a“hot” film when the exhibitor bears little risk), in which case revenue is recognized upon execution of the license agreement, provided all of the following criteria are met.

The license fee is known and collected or the cost can be reasonably determined and collected.

The licensee has accepted the film in accordance with the license agreement.

The film is available for its first showing.

Revenue Recognition

Page 16: Revenue Recognition

Casinos:Casino revenue is reported on the accrual basis.

Revenue recognized and reported by a casino is generally defined as a win from gaming activities, that is, the difference between gaming wins and losses, not the total amount wagered.

Base jackpots shall be charged to revenue ratably over the period of play expected to precede payout; however, if immaterial, they shall be charged to revenue when established. Any portion of the base jackpot not charged to revenue when the jackpot is paid shall be charged to revenue at that time.

Revenue Recognition

Page 17: Revenue Recognition

Industries with specific revenue recognition revenue recognition rules and exceptions include:

Section Industry 932 Extractive Industries- Oil & Gas 940 Financial Services- Brokers & Dealers 942 Financial Services- Depository & Lending 944 Financial Services- Insurance 946 Financial Services- Investment Companies 948 Financial Services- Mortgage Banking 952 Franchisors 954 Health Care Entities 958 Not-for-Profit Entities 970 Real Estate- General

Revenue Recognition

Page 18: Revenue Recognition

Franchise Revenue

Revenues include retail sales at Company restaurants and franchise and property revenues. Franchise revenues include royalties, and initial and renewal franchise fees. Property revenues include rental income from operating lease rentals and earned income on direct financing leases on property leased or subleased to franchisees. Retail sales at Company restaurants are recognized at the point of sale and royalties from franchisees are based on a percentage of retail sales reported by franchisees. Royalties are recognized when collectibility is reasonably assured. Initial franchise fees are recognized as revenue when the related restaurant begins operations. A franchisee may pay a renewal franchise fee and renew its franchise for an additional term. Renewal franchise fees are recognized as revenue upon receipt of the non-refundable fee and execution of a new franchise agreement. In accordance with SFAS No. 45, “Accounting for Franchise Fee Revenue,” the cost recovery accounting method is used to recognize revenues for franchisees for whom collectibility is not reasonably assured. Rental income on operating lease rentals and earned income on direct financing leases are recognized when collectibility is reasonably assured.

Revenue Recognition

Page 19: Revenue Recognition

Industries with specific revenue recognition revenue recognition rules and exceptions include:

Section Industry 972 Real Estate-Common Interest

Realty Associations 974 Real Estate-REIT’s 976 Real Estate-Retail Land 978 Real Estate-Time Sharing 980 Regulated Operations 985 Software

Revenue Recognition

Page 20: Revenue Recognition

Software Industry

Nuances Sales cycle Development costs Multiple deliverables Mode of delivery

Revenue Recognition

Page 21: Revenue Recognition

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRSs that would:Remove inconsistencies and weaknesses in existing revenue requirements.

Provide a more robust framework for addressing revenue issues.

Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.

Provide more useful information to users of financial statements through improved disclosure requirements.

Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

To meet those objectives, the FASB and the IASB are proposing amendments to the FASB Accounting Standards Codification® and to IFRSs, respectively.

Revenue Recognition

Page 22: Revenue Recognition

FASB vs. IASB

FASB - rules based IASB – principles based

What does it mean to have a rules based system? What Does it mean to have a principles based

system?

Revenue Recognition

Page 23: Revenue Recognition

FASB vs. IASB

Why the different systems?CultureGeographyLegal system

Revenue Recognition

Page 24: Revenue Recognition

FASB vs. IASB

What Does “International Convergence of Accounting Standards” Mean? The phrase international convergence of accounting standards refers to

both a goal and the path taken to reach it. The FASB believes that the ultimate goal of convergence is a single set

of high-quality, international accounting standards that companies worldwide would use for both domestic and cross-border financial reporting.

Today, the path toward that goal is the collaborative efforts of the FASB and the International Accounting Standards Board (IASB) to both improve U.S. generally accepted accounting principles (U. S. GAAP) and International Financial Reporting Standards (IFRS) and eliminate the differences between them.

Revenue Recognition

Page 25: Revenue Recognition

FASB vs. IASB

The FASB believes that there is demand for international convergence, driven by investors’ desire for high-quality, internationally comparable financial information that is useful for decision-making in our increasingly global capital markets.

The FASB and the IASB have been working together toward convergence since 2002. The two Boards have described what convergence means and their tactics to achieve it in two different documents—the Norwalk Agreement issued in 2002 and the Memorandum of Understanding (MOU) between the IASB and the FASB, originally issued in 2006 and updated in 2008.

Revenue Recognition

Page 26: Revenue Recognition

FASB vs. IASB

The main way the FASB and IASB collaborate is through joint projects to develop common standards. The FASB issues those standards as U.S. GAAP and the IASB issues them as IFRS; over time, the two sets of standards are expected to both improve in quality and become increasingly similar if not the same.

Revenue Recognition

Page 27: Revenue Recognition

FASB vs. IASB

Over 140 countries use IFRSArgentina, Australia, Austria, Belgium, Brazil,

Canada, Chile, China, Cuba, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, India, Ireland, Israel, Italy, Japan, Mexico, Russia, Spain, Switzerland, Taiwan, United Kingdom, to name a few.

Revenue Recognition

Page 28: Revenue Recognition

FASB vs. IASB

The future path of IFRS in the U.S. remains unclear. While over 170 foreign companies whose stocks trade in the U.S. are able to file their financial statements in IFRS with the SEC without reconciling them with U.S. GAAP, thanks to a rule change in 2007, it is unlikely at this point that the SEC will agree to allow U.S. companies to do the same this year.

Revenue Recognition

Page 29: Revenue Recognition

FASB vs. IASB

The long, arduous process of harmonizing IFRS and U.S. GAAP is continuing for now, but other countries are pushing the IASB to adopt a more multilateral approach, with greater involvement by Asian countries like China and India. U.S presence on the Monitoring Board may even be diminished, as another regulator from the Americas could take the place of the SEC. The priorities of the IASB are likely to shift toward other countries’ wish lists for standards in areas such as foreign currency exchange and agriculture, and those priorities are not likely to match up with U.S. demands.

Revenue Recognition

Page 30: Revenue Recognition

FASB vs. IASB

SimplificationTransparencyConsistency

Revenue Recognition

Page 31: Revenue Recognition

FASB vs. IASB

Overview Preliminary views document issued in

December 2008 Exposure draft issued in June 2010 Revised exposure draft issued in November

2011 with comments due March 13, 2012 Final standard expected in late 2012 / early

2013

Revenue Recognition

Page 32: Revenue Recognition

FASB vs. IASB

Scope Applicable to all industries and entities Specific contracts with customers outside of scope:

financial instruments, guaranties (other than warranties), insurance, leases, certain non-monetary transactions

Contracts with performance obligations in multiple standards

Recognition and measurement principles also applicable to sales of non-financial assets that are not classified as revenue

Revenue Recognition

Page 33: Revenue Recognition

FASB vs. IASB

Core principle: Recognize revenue to depict the transfer of

promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Revenue Recognition

Page 34: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Revised proposed revenue model Five Steps

Identify contract with the customer Identify separate performance obligations Determine the price Allocate the price to the performance obligations Recognize revenue as performance obligations are

satisfied

Revenue Recognition

Page 35: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps1) Identify contract with the customer Enforceable agreement between parties Can be written, oral or implied Combination: required for contracts entered into at or near the

same time if certain criteria are met Modifications are treated separately if separate performance

obligation is added and the consideration is consistent with the standalone price. Otherwise combine with remaining goods and services

Revenue Recognition

Page 36: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps2) Identify separate performance obligations Promise in a contract to transfer a good or service Account for separately if distinct because either of the following criteria

are met:good or service is regularly sold separately or customer can benefit from good or service on its own or together with other readily available services

However, bundle of promised goods or services accounted for as one performance obligation if both of the following criteria are met:

highly interrelated and require significant integration service and significantly modified or customized to fulfill contract

Revenue Recognition

Page 37: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps3) Determine the transaction price Amount of consideration to which an entity expects to be entitled

from a customer Variable consideration – estimate based on probability-weighted or

most likely amount. Time value of money

only affects transaction price if significant financing component existscan ignore if time between payment and transfer of services is one year or less

Revenue Recognition

Page 38: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps3) Determine the transaction price Noncash consideration

measure at fair value or by reference to standalone selling price of related goods or services

Consideration payable to a customerreduction of transaction price unless in exchange for a distinct good or service

Collectibilitynot considered in transaction pricerecord uncollectible amounts adjacent to revenue

Revenue Recognition

Page 39: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps4) Allocate the transaction price Generally based on relative standalone selling prices of separate

performance obligations Standalone selling price

observable selling price when sold separatelyotherwise, estimate based on cost plus margin, adjusted market assessment, or residual technique if highly variable or uncertain

Subsequent changes in the transaction price are allocated on a relative standalone selling price unless certain criteria are met

Revenue Recognition

Page 40: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps5) Recognize revenue Recognize revenue as performance obligations are satisfied based on

transfer of control Determine if satisfied (and revenue recognized) over time, based on whether

an entity’s performance: creates or enhances an asset the customer controls ordoes not create an asset with an alternative use and one of the following criteria is met: customer receives a benefit as entity performs, another entity would not need to re-perform work completed to date, vendor has right –to-payment for performance to dateselect method of progress toward completion (output or input)

Revenue Recognition

Page 41: Revenue Recognition

FASB vs. IASB

FASB and IASB Convergence Project- Revenue Recognition

Five Steps5) Recognize revenue If prior criteria not met, then satisfied at a point in time Recognize revenue when customer obtains control based on the following

indicators: entity has right to payment

entity has transferred legal possessioncustomer has legal title and risks and rewards of ownership customer has accepted goods or services

Recognize amount allocated to performance obligation except for certain variable consideration, which is limited to reasonably assured amount based on: experience with similar performance obligations, whether that experience is predictive of outcome

Revenue Recognition

Page 42: Revenue Recognition

Other revenue issues Onerous performance obligations Only applicable to performance obligations

satisfied over a period greater than one year Recognize liability if allocated transaction

price is less than lower of: direct costs to satisfy performance

obligation, or amount to be paid to exit the performance obligation

Revenue Recognition

Page 43: Revenue Recognition

Other revenue issues Onerous performance obligations Direct costs include: Direct labor and materials

Allocated costs directly related to contractCosts explicitly charged to the customerOther costs incurred only because contract entered into

Revenue Recognition

Page 44: Revenue Recognition

Other revenue issues Contract Costs Capitalize direct costs of fulfilling a contract or

anticipated contract if those costs:Generate or enhance a resource that will be used to satisfy performance obligations in the future (e.g. set-up costs) and Are expected to be recovered

Capitalize incremental costs to obtain contract if expected to be recovered

Practical expedient to expense costs as incurred if amortization period would have been one year or less

Revenue Recognition

Page 45: Revenue Recognition

Other revenue issues Warranties Customer option to purchase separately:

Separate performance obligation recognized over time (warranty service)

No customer option to purchase separately and warranty does not provide an additional service:Recognize revenue and accrue expected costsConsider following in determination of whether additional service is being provided: whether warranty is required by law, length of warranty period, nature of tasks to be performed

Revenue Recognition

Page 46: Revenue Recognition

Other revenue issues Other Issues Customer unexercised rights (breakage): Relatively consistent with current US GAAP Licensing and rights to use:

Same guidance as other goods and servicesRevenue recognized at point in time when control transfers if separate performance obligation

Revenue Recognition

Page 47: Revenue Recognition

Other revenue issues Disclosure / transition/ effective date Effective no earlier than 2015 for public

companies and 2016 for non-public companies

Revenue Recognition

Page 48: Revenue Recognition

FASB and IASB Convergence Project

Five Steps Identify contract with the customer Identify separate performance obligations Determine the price Allocate the price to the performance

obligations Recognize revenue as performance

obligations are satisfied

Revenue Recognition

Page 49: Revenue Recognition

FASB and IASB Convergence Project

Background and Development of the Thought Process

The convergence project has been established in order to ease the FASB transition to International Financial Reporting Standards

Revenue Recognition

Page 50: Revenue Recognition

FASB and IASB Convergence Project

International Financial Reporting Standards (IFRS) are based upon accounting principles as opposed to the FASB rules based approach.

Accounting principles used in the development of the revenue recognition model include: substance over form, monetary unit assumption, cost principle, full disclosure principle, matching, materiality, conservatism. Also, the revenue recognition principle indicates that revenue is recognized upon sale or service performance

Revenue Recognition