Revenue from Contracts with

Customers Session 1
Getting to Know the New Standard

January 20, 2016

General Information
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Meet Our Presenters

Jay Smith
National Director, Technical Accounting & Financial Reporting
Center of Expertise

Maurene Carlson, CPA

Director, Finance and Accounting Practice, Denver

Nicole Swenson
National Manager, Technical Accounting & Financial Reporting
Center of Expertise

Agenda
Session 1:
Getting To
Know the
Standard

Session 2:
Developing an
Implementation
Strategy

Overview of the New

Standard
The Five Step Model
Q &A

Implementation Roadmap
Implementation
Challenges
Industry Considerations
Q &A

January 20, 2016

February 24, 2016

Polling Question #1
To what extent are you technically aware of the standard?
A. I have read the new standard
B. I have participated on webcasts/ in trainings
C. Both A and B

Overview of the New Standard

Overview of the New Standard

Background
ASU 2014-09, Topic 606 Revenue from Contracts with Customers (the Standard) was
issued May 28, 2014
In July 2015, the FASB deferred the effective date for ASU 2014-09 by one year

Replaces virtually all U.S. GAAP guidance that currently exists on revenue recognition
with a single model to be applied to all contracts with customers
Results in substantial convergence with IFRS 15

Scope Exceptions
Lease contracts
Insurance contracts
Certain contractual rights or obligations within the scope of other standards, including
financial instruments
Certain guarantees within the scope of other standards, other than product warranties
Nonmonetary exchanges between entities in the same line of business to facilitate sales
to customers

Effective Date for Companies

Public: Annual reporting periods beginning after 12/15/2017 and interim periods therein
Private: Annual reporting periods beginning after 12/15/2018 and interim periods therein
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Overview of the New Standard (continued)

Core Principle
Revenue shall be recognized to depict goods or services transferred to
customers in an amount that reflects the consideration an entity expects to be
entitled to receive in accordance with the following five steps:
1

Identify the contract(s) with a customer

Identify the performance obligations in the contract

Determine the transaction price

4
5

Allocate the transaction price to the performance obligations in the

contract
Recognize revenue when (or as) the entity satisfies a
performance obligation

The Five Step Model

Step 1: Identify the Contract(s) with a Customer

A legally enforceable contract can be oral or implied by the entitys customary
business practices, but needs to meet all of the following requirements:

It has commercial
substance

The parties have

approved the contract
and are committed to
their obligations

The entity can identify

the payment terms for
the goods or services

The entity can identify

each partys rights
regarding goods or
services

It is probable that the

entity will collect the
amount of consideration
to which it ultimately will
be entitled

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Combination of Contracts

Contract 1

Contract 2

Combination of Contracts

Contracts are combined if entered into at or near the same time with the
same customer and one or more of the following criteria are met:

Negotiated as
package with a single
commercial objective

Consideration in one
contract depends on
the other contract

Goods and services

are a single
performance
obligation

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Step 2: Identify the Performance Obligations in the Contract

Are promised goods and services distinct from other goods and services in the
contract?
Distinct Within the
Context of Contract

Capable of Being Distinct

Can customer benefit from
good or service on its own
or together with other
readily available
resources?

Yes

Distinct performance
obligation

AND

Is promise to transfer good

or service separately
identifiable from other
promises in contract?

No

Not distinct Combine with

other goods and services

13

Can the Customer Benefit from the Good/Service?

To determine if customer can benefit from the good or service either on
its own or together with other resources that are readily available to it,
consider:
Is the good or service an asset that, on its own, can be used, consumed, sold
for an amount that is greater than scrap value, or otherwise held in a way that
generates economic benefits, or
Does the customer have readily available resources (goods or services) that
are sold separately by the entity or by another entity or resources that the
customer already has obtained from the entity or from other transactions or
events
Whether a good or service is regularly sold separately by the entity would be an
indicator rather than a criterion for determining whether a good or service provides
benefit to the customer on its own

14

Is the Good/Service Separately Identifiable?

Factors that the promise to transfer the good or service is separately
identifiable from other promises in the contract include:
Entity does not provide a significant service of integrating the good or service
into the bundle of goods or services for which the customer has contracted
Good or service does not significantly modify or customize another good or
service promised in the contract

Good or service is not highly dependent on, or highly interrelated with other
promised goods or services
For example, the customer could decide to purchase (or not purchase) the good or
service without significantly affecting the other promised goods or services in the
contract

15

Step 3: Determine the Transaction Price

Transaction Price = Total amount of consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer
(excluding amounts collected on behalf of third parties)

Variable
consideration
and the
constraint

Significant
financing
component

Collectability

Noncash
consideration

Consideration
payable to a
customer

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Variable Consideration
Variable consideration may be a result of discounts, rebates, refunds, credits, incentives,
performance bonuses/penalties, royalties, price concessions, rights of return, or other items

Initially estimate the transaction price using either of the following methods (use the more
predictive method):
The expected value, using a
probability-weighted estimate

OR

The most likely amount

Consider all information reasonably available when making the estimate

Update the estimate of transaction price at each reporting period

Exception: This guidance does not apply to sales or usage-based royalties on

licenses of intellectual property
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Constraint on Variable Consideration

Constraint on
Variable
Consideration

Assess whether it is probable that a

significant reversal in the amount of
cumulative revenue recognized will not occur
when the uncertainty associated with variable
consideration is subsequently resolved

Assessment

The likelihood of a downward adjustment in

the estimate of variable consideration
The magnitude of the possible reversal when
the uncertainty is resolved

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Polling Question #2
What methods has/will your company used to estimate transaction
price when it involves variable consideration?
A. Expected Value
B. Most Likely Amount

C. Not yet determined

Significant Financing Components

Factors to
Consider

Difference between promised consideration and cash selling price of the goods and
services
Combined effect of:
Expected length of time between transfer of goods or services and receipt of payment
Prevailing interest rates
Is the timing of transfer of goods or services at the customers discretion

May result in interest income or expense

Presentation

Rate used in a separate financing transaction between entity and customer at contract
inception

Discount Rate

Practical
Expedient

Not required if period between payment and transfer of good or service expected to be 1
year or less

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Consideration Payable to a Customer

Consideration Payable to a Customer

Account for as a
reduction of the
transaction price

No

Is the
payment for a
distinct good/
service?

To be recognized at the later of:

When entity recognizes

revenue for the transfer of the
related goods or services

Yes

Account for
payment under
other GAAP unless
amount is > fair
value of
goods/services
received (excess is
a reduction of
transaction price)

When entity pays or promises

to pay the consideration

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Step 4: Allocate the Transaction Price to the Performance

Obligations
Transaction price allocated based on
relative stand alone selling prices

How to determine the stand

alone selling price?
Best
evidence

Performance obligations

Expected cost plus a

margin approach

Adjusted market
assessment approach

Observable price

If not
available

Residual approach (in

limited circumstances)

Estimated price

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Step 5: Recognize Revenue When or as Entity Satisfies a

Performance Obligation
Revenue is recognized when or as the entity satisfies a performance obligation by
transferring control of a promised good or service to a customer
A performance obligation is satisfied over time if one of the following criteria are met:

Customer simultaneously receives and consumes the benefits as the entity performs
Entitys performance creates or enhances an asset that the customer controls as the
asset is created or enhanced
Entitys performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date

Licenses of intellectual property have separate application

guidance

23

Measuring Progress for Performance Obligations Satisfied

Over Time
Objective - To depict the entitys performance in transferring control of goods
or services promised to a customer

To meet the objective for each performance obligation an entity selects a

method that depicts its performance
Output method

Input method

Surveys

Costs incurred

Milestones reached

Labor hours

Units delivered

Machine hours

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Step 5: Recognize Revenue When (or as) the Entity

Satisfies Performance Obligation
If a performance obligation does not meet the criteria to be recognized over
time, it is satisfied at a point-in-time
Indicators of point-in-time control transfers:

1.

Entity has present right to payment for the asset

2.

Customer has legal title to the asset

3.

Entity transferred physical possession of the asset

4.

Customer has the significant risks and rewards of ownership of the asset

5.

Customer has accepted the asset

25

Licenses of Intellectual Property (IP)

The FASB is finalizing a proposed ASU that clarifies the guidance in
Topic 606 to distinguish between two types of licenses:
Functional IP: represents at right to use the IP and revenue would be
recognized at a point in time (e.g., software, biological compounds or drug
formulas, media content)
Stand-alone functionality

Does not include supporting or maintaining the IP during the license

period
Exception if there is a requirement to update the IP over the license
term, in which case it would be accounted for as a right to access and
revenue recognized over time
Symbolic IP: represents a right to access the IP and revenue is
recognized over time (e.g., brands, trade names, logos, franchise rights)
No stand-alone functionality
Does include supporting or maintaining the IP during the license period
26

Licenses of Intellectual Property (IP)

A promise to grant a license is generally considered a right to access
the entitys intellectual property if all of the following criteria are met:
The contract requires, or the customer reasonably expects, that the entity
will undertake activities that significantly affect the intellectual property to
which the customer has rights (see paragraph 606-10-55-61).
The rights granted by the license directly expose the customer to any
positive or negative effects of the entitys activities identified in paragraph
606-10-55-60(a).
Those activities do not result in the transfer of a good or a service to the
customer as those activities occur (see paragraph 606-10-25-17).

Final ASU expected in Q1 2016

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Polling Question #3
How have the clarifications provided by the FASB assisted in
your consideration or implementation of the new standard?
A. Very little
B. Somewhat

C. Greatly

Contact Information
Jay Smith
National Director, Technical Accounting & Financial Reporting
Center of Expertise
jay.smith@experis.com 972.866.9217

Maurene Carlson
Director, Finance and Accounting Practice, Denver
maurene.carlson@experis.com 303.887.4991

Nicole Swenson
National Manager, Technical Accounting & Financial Reporting
Center of Expertise
nicole.swenson@experis.com 303.570.3530

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Questions?

Thank You for Attending