The Amended RR ED – Part 6 Ashwinpaul (Tony) C. Sondhi President A. C. Sondhi & Associates, LLC June 13, 2012

The Amended RR ED – Part 6

Ashwinpaul (Tony) C. Sondhi

President

A. C. Sondhi & Associates, LLC

www.acsondhi.com

June 13, 2012

04/10/23 Copyright 2012 A. C. Sondhi & Associates, LLC 2

The Amended RR ED:Part 6

My objective in this webcast series is to discuss specific financial reporting risks to clarify industry specific issues relevant to financial statement preparers, auditors, and investors as the FASB and the IASB work to complete.

The Comment period for the Amended RR ED ended March 13, 2012. I strongly encourage everyone to review the comment letters the Boards have received to date.


The Amended RR ED:Part 6

Revenue Recognition Meetings: The FASB and the IASB hosted public roundtables in May 2012

on the amended revenue recognition proposals. Open to those who have submitted a comment letter, or intend to

submit a comment letter. The roundtables were held in London (UK), Norwalk(US), and

Tokyo (Japan) as well as an additional roundtable for US private companies in May 2012.

The IASB hosted outreach meetings in March in Sao Paulo (Brazil) and Kuala Lumpur (Malaysia).

See www.fasb.org and www.ifrs.org for details.


Proposed Revenue ASUThe Revenue Recognition Roadmap

Principles:

Step 1: Identify the contract(s) with the customer.Step 2: Identify the separate performance obligations in the contract.Step 3: Determine the Transaction Price.Step 4: Allocate the Transaction Price.Step 5: Recognize revenue when a performance obligation is satisfied.


Variable Consideration

If the promised amount of consideration in a contract is variable, an entity must estimate the transaction price at each reporting date by using either the expected value (the sum of probability-weighted amounts based on a large number of contracts with similar characteristics) or the most likely amount (when the contract has only two possible outcomes, e.g., it includes a performance bonus or a penalty), depending on which method the entity expects to better predict the amount of consideration to which it will be entitled.

Sources of variability (not an exhaustive list): Discounts, rebates, refunds, credits, Incentives, performance bonuses, Penalties, price concessions.



Constraint on Cumulative Amount of Revenue Recognized:

If the amount of consideration to which an entity is entitled is variable, the cumulative amount of revenue the entity recognizes to date would not exceed the amount to which it is reasonably assured to be entitled.



An entity is reasonably assured to be entitled to the amount of consideration allocated to satisfied performance obligations only if both of the following criteria are met:

1. The entity has experience with similar types of performance obligations (or has other evidence such as access to the experience of other entities).

2. The entity’s experience (or other evidence) is predictive of the amount of consideration to which the entity will be entitled to in exchange for satisfying those performance obligations.

An entity would be required to consider various factors when determining whether the entity’s experience (or other evidence) is predictive of the amount of consideration to which the entity is entitled.



Licenses of Intellectual Property:An entity may license intellectual property to a customer and the customer promises to pay an additional amount of consideration that varies on the basis of the customer’s subsequent sales of the product or service, the entity is not reasonably assured to be entitled to the additional amount of consideration until the uncertainty is resolved.

Licensing and Rights to Use:A license is an entity’s conveyance to a customer of a right to use, but not own, the entity’s intellectual property. Rights to use can vary by time, geography, or form of distribution.


Contingent Consideration

Paragraph 76:If a transaction price includes an amount of consideration that is contingent on a future event or circumstance (e.g., entity performance or a specific outcome of the entity’s performance), that contingent amount (and subsequent changes to that amount) must be allocated entirely to a distinct good or service if both of the following criteria are met:1.The contingent payment terms for the distinct good or service relate specifically to the entity’s efforts to transfer that good or service (or to a specific outcome from transferring that good or service).2.Allocating the contingent amount of consideration entirely to that good or service is consistent with the allocation principle in paragraph 70 when considering all of the performance obligations and payment terms in the contract.



IG 69 – Scenario 1:A contract contains two IP licenses that are two separate performance obligations: 1.License A has an estimated standalone selling price and contractually stated fixed price of $800.

2.For License B the contractual price is 3% of the customer’s future sales using License B and its standalone selling price is $1,000.

3.The seller estimates a total transaction price of $1,700.



IG 69 – Scenario 1:Application of Paragraph 76:

The seller allocates the contingent royalty payment entirely to License B because that contingent payment relates specifically to an outcome from the performance obligation to transfer License B.

This allocation is consistent with the allocation principle of paragraph 70.



IG 69 – Scenario 2:A contract contains two IP licenses that are separate performance obligations: 1.License A has an estimated standalone selling price is $800 and contractually stated fixed price of $300.

2.For License B the contractual price is 5% of the customer’s future sales using License B and its standalone selling price is $1,000.

3.The seller estimates a total transaction price of $1,800.



IG 69 – Scenario 2:Application of Paragraph 76:The seller cannot allocate the contingent royalty payment entirely to License B even though that contingent payment relates specifically to subsequent sales of License B because the contingent payment does not reflect the amount the entity expects to be entitled to in exchange for License B.

The total transaction price of $1,800 is allocated to License A and License B on a relative standalone selling price basis of $800 AND $1,000 respectively.


The Amended RR ED:Onerous Performance Obligations

Paragraph 86: Companies must recognize a liability and a corresponding expense for performance obligations deemed onerous.

Limited to:1.Performance obligations an entity satisfies over time, and2.The entity expects at contract inception to satisfy over a period of time greater than one year.

Note:Onerous obligations require the recognition of an expense not a loss.Change from current practice under contract accounting – no loss recognition.



A performance obligation is considered onerous when the lowest cost of settling the performance obligation exceeds the amount of the transaction price allocated to that performance obligation.

The lowest cost of settling a performance obligation is the lower of the following amounts:

a.The costs that relate directly to satisfying the performance obligation by transferring the promised goods or services (Paragraph 92).b.The amount the entity would pay to exit the performance obligation if the entity is permitted to do so other than by transferring the promised goods or services.



The liability for an onerous performance obligation is measured as the amount by which the lowest cost of settling the performance obligation exceeds the amount of the transaction price allocated to that performance obligation.

1.The measurement of the liability for onerous performance obligations must be updated at each reporting date for changes in circumstances.2.The change in the amount of the liability must be recognized as an expense or as a reduction of an expense.3.The liability for an onerous contract must be derecognized when the performance obligation has been satisfied.



Before recognizing a liability for an onerous performance obligation, the entity must apply the requirements of paragraphs 100-103 to test for an impairment of an asset recognized from the costs incurred to obtain or fulfill a contract with a customer.

Exception for Not-for-Profit entities:No recognition of a liability for onerous performance obligations is required if the purpose of the contract is to provide a social or charitable benefit.


Tony Sondhi’s Winter - Spring 2012 Seminar Schedule

Topic Dates Location

Advanced Topics in

Revenue Recognition

August 2 & 3 San Jose, CA

Advanced Topics in Software Revenue Recognition

July 12 & 13

August 20 & 21

San Jose, CA

Boston, MA

Contracts July-August Raleigh, NC

Please visit www.acsondhi.com or call 727-797-1515 for agenda and registration information.


Tony Sondhi’s Winter – Spring 2012 Seminar Schedule

Topic Dates Location

Revenue Recognition July-AugustJuly-August

San Jose, CABoston, MA

Software Revenue Recognition July-AugustJuly-August

San Jose, CABoston, MA

Revenue Recognition June 14 & 15 San Jose, CA

RR in Health Care and Bio-TechIndustries

June 1 San Diego, CA

Please visit www.acsondhi.com or call 727-797-1515 for agenda and registration information.

Documents

The Amended RR ED – Part 6 Ashwinpaul (Tony) C. Sondhi President A. C. Sondhi & Associates, LLC June 13, 2012