Revenue from Contracts with Customers- Tom Eiseman

A Global Reach with a Local Perspective

www.decosimo.com

Revenue from Contracts with

Customers Tom Eiseman, CPA | Principal in Charge of Assurance

Single, principle-based revenue standard

More robust framework for recognizing revenue

Clarified principles

Simplified preparation of financial statements

Increased comparability across industries

Convergence of U.S. and International Standards

Better disclosures

Objective

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An entity will recognize revenue to depict the

transfer of goods or service to customers in an

amount that reflects the consideration to which the

entity expects to be entitled.

Underlying principle

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Applies to all contracts with customers except-

Leases

Financial instruments

Guarantees other than product warranties

Certain nonmonetary exchanges

Insurance contracts

Scope

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Public entities- Annual reporting periods beginning

after December 15, 2016, including interim periods

within that reporting period. Early application is not

permitted.

All other entities- Annual reporting periods

beginning after December 15, 2017, and interim

periods within annual periods beginning after

December 15, 2018.

Early application is permitted for nonpublic

companies, but no earlier than the effective date for

public companies.

Effective date

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Either

Retrospectively to each prior reporting period

presented

Retrospectively with the cumulative effect of initial

application recognized at the date of initial application

Initial application

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Identify contracts with customers

Identify the separate performance obligations in the

contract

Determine the transaction price

Allocate the transaction price to separate

performance obligations

Recognize revenue when (or as) each performance

obligation is satisfied

Five step approach

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A contract is an agreement between parties that

creates enforceable rights and obligations.

A contract can be written, oral or implied by an

entity’s customary business practice.

Identify contracts

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Required criteria-

Approval and commitment of the parties

Identification of the rights of the parties

Identification of the payment terms

The contract has commercial substance

Collection of the consideration is probable

Identify contracts

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Contracts are combined and accounted for as a

single contract if they are entered into at or near the

same time with one customer and one or more of the

following criteria are met-

The contracts achieve a single commercial objective

and are negotiated as a package

The price or performance of one contract influences

the amount of consideration to be paid in other

contracts

The goods or services in the separate contracts

represent a single performance obligation

Identify contracts

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A performance obligation is a promise in a contract

with a customer to transfer a good or service to the

customer.

If an entity promises to transfer more than one good

or service to the customer, the entity should account

for each promised good or service as a performance

obligation only if it is distinct or a series of distinct

goods or services that are substantially the same

and have the same pattern of transfer.

Identify performance obligations

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A good or service is distinct if both of the following

criteria are met

Capable of being distinct – The customer can benefit

from the good or service either on its own or together

with other resources that are readily available

Distinct within the context of the contract – The

promise to transfer the good or service is separately

identifiable from other promises in the contract

Identify the performance obligations

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Indicators that a good or service is distinct

The entity does not provide a significant service of

integrating the individual goods or services

The good or service does not customize or

significantly modify another contractually promised

good or service

The good or service is not highly dependent on or

highly interrelated with other goods or services in the

contract

Identify performance obligations

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The transaction price is the amount of consideration

to which an entity expects to be entitled for

transferring promised goods or services to a

customer, excluding amounts collected on behalf of

third parties.

Determine the transaction price

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Variable consideration

Constraining estimates of variable considerations

The existence of a significant financing component

Noncash consideration

Consideration payable to the customer

Determine the transaction price

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Variable consideration

Variable consideration is consideration that is

contingent on the outcome of future events.

Variable consideration includes incentives, penalties,

rebates, and discounts.

Variable consideration is estimated using either the

probability-weighted amount or most likely amount.

The approach that is expected to best predict the

amount of consideration should be used.

Determine the transaction price

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Constraining estimates of variable consideration

Variable consideration should be included in the

transaction price only to the extent it is probable that

a significant reversal in the amount of cumulative

revenue recognized will not occur when the

associated uncertainty is subsequently resolved.

Determine the transaction price

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Indicators that variable consideration could result in

significant reversal of cumulative revenue:

Amount is highly susceptible to factors outside of the entity’s

influence.

Resolution of uncertainty is not expected for a long time.

The entity has limited experience with similar contracts.

There is a large number and broad range of possible

outcomes.

Determine the transaction price

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Significant financing component

The transaction price should be adjusted for any

significant financing component. The entity should

consider:

The length of time between the transfer of goods or services

and payment

Whether the consideration would be different had the

customer paid cash at the time of transfer

The interest rate in the contract and prevailing interest rates

Entities may disregard the time value of money if the

period between transfer and payment is less than one

year.

Determine the transaction price

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Noncash consideration

Measured at fair value

Measured at standalone selling price of the goods or

services if fair value of the noncash consideration

cannot be reasonably be estimated

Determine the transaction price

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Consideration payable to a customer

Consideration paid to a customer or to a customer’s

customer reduces the transaction price unless the

payment is made in exchange for a distinct good or

service that the customer transfers to the entity.

Determine the transaction price

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The transaction price is allocated to the separate

performance obligations based on the relative

standalone selling prices of the goods or services

promised.

The best evidence of standalone selling price is the

observable price when sold separately.

If no observable price is available, it is estimated

using expected cost plus margin, market prices for

similar goods or services, or the residual approach.

Allocating the transaction price

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An entity recognizes revenue when (or as) it satisfies

a performance obligation by transferring a promised

good or service to a customer.

Transfer occurs when (or as) the customer obtains

control of that good or service.

Control of an asset is the ability to direct the use of

and obtain substantially all of the remaining benefits

from the asset.

Recognize revenue

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Indicators of control-

The entity has a right to payment for the asset

The customer has legal title to the asset

The entity has transferred physical possession of the

asset

The customer has the significant risks and rewards of

ownership of the asset

The customer accepted the asset

Recognize revenue

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An entity will recognize revenue over time if one of the following criteria is met:

The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.

The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

The entity’s performance does not create an asset with an alternate use to the entity and the entity has an enforceable right to payment for performance completed to date.

Recognize revenue

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Measuring progress for revenue recognized over

time

Revenue is recognized over time by consistently

applying a method of measuring the progress toward

complete satisfaction of that performance obligation.

Methods used include

Output methods – units produced, contract milestones,

surveys of work performed

Input methods – costs incurred, labor hours expended, time

lapsed, machine hours used

Recognize revenue

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The objective is the disclosure of sufficient

information to enable users to understand the

nature, amount, timing and uncertainly of revenue

and cash flows arising from contracts with

customers.

Qualitative and quantitative information is required

about-

Contracts with customers

Significant judgments and changes in judgments in

applying guidance

Assets related to cost to obtain or fulfill a contract

Disclosures

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Key disclosures for nonpublic companies

Revenue recognized from contracts with customers

Impairment losses recognized on any receivables or

contract assets arising from contracts with customers

Opening and closing balances of receivables,

contract assets and contract liabilities

For performance obligations fulfilled over time, the

methods used to recognize revenue

Disclosures

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Key disclosures for nonpublic companies

Information about performance obligations including:

When the entity typically satisfies performance obligations

The significant payment terms including variable

consideration and significant financing component

The nature of goods or services that the entity has promised

to transfer including any transfer from a third party

Obligations for returns, refunds and other similar obligations

Types of warranties and related obligations

Judgments and changes in judgments made in

applying guidance that significantly affect amount and

timing of revenue recognition

Disclosures

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Incremental costs of obtaining a contract are

recognized as an asset to the extent the entity

expects to recover these costs.

This includes all costs that the entity would not have

incurred if the contract had not been obtained.

These costs can be expensed when incurred if the

amortization period is one year or less.

Costs to obtain a contract with a customer

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First, apply any applicable guidance from other

standards including standards addressing inventory,

property and equipment, internal-use software and

costs of software to be sold, leased or marketed

If no other applicable guidance exists, recognize an

asset for costs that meet all of the following criteria:

Relate directly to contract or specific anticipated

contract

Generate or enhance resources that will be used in

satisfying performance obligations in the future

Are expected to be recovered

Costs to fulfill a contract

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A warranty is accounted for as a separate performance obligation if the customer has the option to purchase the warranty separately.

A warranty is accounted for as a cost accrual if it is not sold separately, unless the warranty is to provide the customer with a service in addition to assurance that the product complies with agreed-upon specifications.

The portion of a warranty that provides a service in addition to assurance that the product complies with specifications is accounted for as a separate performance obligation.

Warranties

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The upfront fee is recognized as revenue when

goods or services are provided to the customer.

The period of revenue recognition could extend

beyond the initial contract period if the entity grants

the customer the option to renew the contract.

Nonrefundable upfront fees

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All of the following criteria must be met to recognize

revenue in a bill-and-hold arrangement:

The reason for the bill-and-hold arrangement must be

substantive (for example, the customer has requested

the arrangement)

The product must be separately identified as

belonging to the customer

The product must be currently ready for physical

transfer to the customer

The entity cannot have the ability to use the product

or to direct it to another customer

Bill and hold arrangements

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Questions?

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Tom Eiseman, CPA

Principal In Charge of Assurance

tomeiseman@decosimo.com

423-756-7100

Contact the Subject Matter Expert

Tom has experience with clients in a variety of industries, including manufacturing,

distribution, securities brokers and dealers, investment entities, oil and gas exploration,

restaurants, broadcasting and not-for-profit entities. He has been involved with initial public

offerings and periodic SEC filings for over 25 years. His experience includes clients with

extensive international operations. He is licensed to practice in Tennessee, Georgia and

Massachusetts. Tom is a member of the American Institute of Certified Public Accountants

(AICPA) and the Tennessee Society of Certified Public Accountants (TSCPA). He currently

is a member of the TSCPA’s Peer Review Committee.

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