Wiley Revenue Recognition E-Book

Joanne M. Flood

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Regulatory Reporting
• Sprache: Englisch

Seitenzahl: 398

Veröffentlichungsjahr: 2017

Beschreibung

Everything you need to understand and implement the new converged FASB-IASB revenue recognition standard Wiley Revenue Recognition provides an overview of the new revenue recognition standard and instructs financial statement preparers step-by-step through the new model, providing numerous, helpful application examples along the way. Readers will grasp the many new disclosures that will be required through the use of detailed explanations and useful samples, while electronic tools will be available to aid the preparer in implementing the standards and making the proper disclosures. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the final stages of a decade-long project to clarify and converge revenue recognition standards. This new principles-based standard--which will affect the business practices of virtually every company worldwide--is designed to serve as one model applied consistently across most industries. This book guides professionals through the new standard. * Offers a full explanation of over forty topics superseded by the new standard * Includes digital ancillaries featuring measurement tools and GAAP and IFRS Disclosure Checklists * Provides all the tools needed to implement the new revenue recognition standard * Covers how the structure of contracts will be affected Wiley Revenue Recognition is a trusted, authoritative guide to the new FASB-IASB revenue recognition standard for CPAs and financial professionals worldwide.

Leseprobe

CONTENTS

Cover

Title Page

Copyright

Executive Summary

What Is Revenue?

The New Revenue Standard

Development of Revenue Guidance

The Revenue Recognition Project

Scope

Effective Dates

Implementation Options

Objective of the Standard

Core Principle and the Five Steps of the Revenue Recognition Model

Disclosures Required by the Standard

Disclosures Required for a New Standard

Other Changes Included in the Standard

SEC Response

Industry-Specific Guidance Superseded

AICPA Industry Committees

Changes to Industry-Specific Guidance

Transition Resource Group

Appendix: Status of Issues Brought to the Boards

Chapter 1: Step 1—Identify the Contract with the Customer

Overview

Assessing Whether Contracts are Within the Scope of the Standard

Collectibility Threshold

Contract Recognition

Arrangements where Contract Criteria are not Met

The Portfolio Approach and Combining Contracts

Identifying the Customer

Chapter 2: Step 2—Identify the Performance Obligations

Overview

Promises in Contracts with Customers

Determining Whether a Good or Service is Distinct

Series of Distinct Goods or Services that are Substantially the Same and have the Same pattern Of Transfer

Comparison with Legacy Standards

Chapter 3: Step 3—Determine the Transaction Price

Overview

Significant Financing Component

Variable Consideration

Noncash Consideration

Consideration Payable to the Customer

Chapter 4: Step 4—Allocate the Transaction Price

Overview

Determining Standalone Selling Price

Allocating the Transaction Price

Recognition

Changes in the Transaction Price

Comparison with Legacy Guidance

Chapter 5: Step 5—Recognize Revenue When (or as) The Entity Satisfies a Performance Obligation

Overview

Control of an Asset

Performance Obligations Satisfied Over Time

Performance Obligations Satisfied at a Point in Time

Measuring Progress Toward Complete Satisfaction of a Performance Obligation

Comparison to Legacy Guidance

Chapter 6: Other Issues

Right of Return

Warranties

Principal versus Agent

Customer Options to Purchase Additional Goods or Services

Customer's Unexercised Rights (Breakage)

Nonrefundable Upfront Fees

Licenses

Repurchase Agreements

Consignment Arrangements

Bill-and-Hold Arrangements

Contract Modifications

Onerous Contracts

Chapter 7: Contract Costs

Overview

Incremental Costs of Obtaining a Contract

Costs of Fulfilling a Contract

Amortization of Costs

Impairment Loss

Comparison with Legacy Guidance

Chapter 8: Presentation and Disclosure

Presentation

Disclosure

Comparison with Legacy Guidance

Chapter 9: Implementation Issues

Effective Dates

Key Terms

Implementation Method Options

Change Management Aspects of Implementing the Standard

About the Companion Website

Index

End User License Agreement

List of Illustrations

Exhibit ES.1

Exhibit ES.2

Exhibit ES.3

Exhibit ES.4

Exhibit ES.5

Exhibit 1.1

Exhibit 1.2

Exhibit 1.3

Exhibit 1.4

Exhibit 1.5

Exhibit 2.1

Exhibit 2.2

Exhibit 2.3

Exhibit 3.1

Exhibit 3.2

Exhibit 3.3

Exhibit 3.4

Exhibit 3.5

Exhibit 3.6

Exhibit 3.7

Exhibit 3.8

Exhibit 3.9

Exhibit 3.10

Exhibit 3.11

Exhibit 3.12

Exhibit 4.1

Exhibit 4.2

Exhibit 4.3

Exhibit 4.4

Exhibit 4.5

Exhibit 5.1

Exhibit 5.2

Exhibit 5.3

Exhibit 5.4

Exhibit 5.5

Exhibit 5.6

Exhibit 5.7

Exhibit 5.8

Exhibit 5.9

Exhibit 6.1

Exhibit 6.2

Exhibit 6.3

Exhibit 6.4

Exhibit 6.5

Exhibit 6.6

Exhibit 6.7

Exhibit 6.8

Exhibit 6.9

Exhibit 6.10

Exhibit 6.11

Exhibit 6.12

Exhibit 6.13

Exhibit 6.14

Exhibit 6.15

Exhibit 6.16

Exhibit 7.1

Exhibit 7.2

Exhibit 7.3

Exhibit 8.1

Exhibit 8.2

Exhibit 8.3

Exhibit 8.4

Exhibit 8.5

Exhibit 8.6

Exhibit 9.1

Exhibit 9.2

Exhibit 9.3

Exhibit 9.4

Guide

Cover

Table of Contents

Begin Reading

Chapter 1

Pages

ii

iii

iv

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

Wiley Revenue Recognition

Understanding and Implementing the New Standard

Joanne M. Flood

Cover design and image: Wiley

Copyright © 2017 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com.

Library of Congress Cataloging-in-Publication Data

Names: Flood, Joanne M., author.Title: Wiley revenue recognition plus website : understanding and implementing the new standard / Joanne Flood.Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2017] | Includes index. |Identifiers: LCCN 2016053413 (print) | LCCN 2017018484 (ebook) | ISBN 9781119351696 (pdf) | ISBN 9781119351689 (epub) | ISBN 9781118776858 (pbk.)Subjects: LCSH: Financial statements–Law and legislation–United States. | Financial statements–Standards–United States. | Financial disclosure–Law and legislation–United States. | Revenue–Accounting–Standards–United States. | Accounting–Standards–United States.Classification: LCC KF1446 (ebook) | LCC KF1446 .F59 2017 (print) | DDC 346.73/063–dc23LC record available at https://lccn.loc.gov/2016053413

ISBN 978-1-118-77685-8 (paperback)

ISBN 978-1-119-35169-6 (ebk)

ISBN 978-1-119-35168-9 (ebk)

ISBN 978-1-119-35164-1 (ebk)

Executive Summary

What Is Revenue?

Revenue versus Gains

U.S. GAAP

IFRS

The New Revenue Standard

Development of Revenue Guidance

U.S. GAAP

IFRS

The Revenue Recognition Project

The New Standards

Project Goals

Customer Loyalty Programs

Scope

Scope Exceptions

Example ES.1: Nonmonetary Exchanges to Facilitate Sales to Customers or Potential Customers

Contracts Partially in Scope

Example ES.2: Contract Partially Out of Scope

Sale of Transfer of Nonfinancial Assets

Effective Dates

Changes to Effective Dates

U.S. GAAP

IFRS

Other Changes to the Standard

Implementation Options

Full Retrospective Approach

Modified Retrospective Approach

Objective of the Standard

Core Principle and the Five Steps of the Revenue Recognition Model

Example ES.3: Application of the Core Principle Through the Five Steps

Disclosures Required by the Standard

Forming and Documenting Professional Judgment

Disclosures Required for a New Standard

Other Changes Included in the Standard

SEC Response

Industry-Specific Guidance Superseded

AICPA Industry Committees

Changes to Industry-Specific Guidance

Transition Resource Group

Appendix: Status of Issues Brought to the Boards

What Is Revenue?

U.S. GAAP

Revenue: Influx or other enhancement of assets of an entity or settlements of liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. (ASC 606-10-20)

IFRS

Revenue: Income arising in the course of an entity's ordinary activities. (IFRS 15, Appendix A)

Income: Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases in liabilities that result in an increase in equity other than those relating to contributions from equity participants. (IASB Framework)

Revenue versus Gains

U.S. GAAP

The U.S. Financial Accounting Standards Board (FASB) distinguishes revenue from gains. Gains are defined in Statement of Financial Accounting Concept 6 (CON6), Elements of Financial Statements, as

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from revenues or investments by owners.

Revenue is commonly distinguished from gains in U.S. GAAP for the three reasons listed below.

Exhibit ES.1 Distinguishing between revenue and gains in U.S. GAAP

Revenue

Gains

Results from an entity's central operations.

Result from incidental or peripheral activities of the entity.

Is usually earned.

Result from nonreciprocal transactions (such as winning a lawsuit or receiving a gift) or other economic events for which there is no earnings process.

Is reported gross.

Are reported net.

IFRS

The IASB's definition of income includes revenue and gains. Gains are defined as increases in economic benefits and other items of revenue. They may or may not occur in the ordinary course of business.

The New Revenue Standard1

The revenue recognition standard represents a major milestone in our efforts to improve and converge one of the most important areas of financial reporting. It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance.

—Russell Golden, Chairman of the FASB

The successful conclusion of this project is a major achievement for both boards. Together, we have improved the revenue requirements of both IFRS and U.S. GAAP, while managing to achieve a fully converged standard. Our attention now turns to ensuring a successful transition to these new requirements.

—Hans Hoogervorst, Chairman of the IASBFASB/IASB Press Release May 28, 2014

In May 2014, the FASB and the IASB jointly issued Revenue from Contracts with Customers as, respectively,

Accounting Standards Update (ASU) 2014-09 and

IFRS 15.

Development of Revenue Guidance

Revenue numbers are a critical metric for investors. Revenue recognition has often been a source of restatements and comments from regulators, such as the U.S. Securities and Exchange Commission (SEC). Over the years, regulators have increased their enforcement activities in this area.

U.S. GAAP

Revenue recognition guidance in the U.S. was initially found in

CON 5, which specifies that an entity should recognize revenue when realized or realizable and earned, and

CON 6, which defines revenue as inflows or other enhancements of assets and/or settlements of liabilities from delivering goods or services as a result of the entity's ongoing major or central operations.

In 1999, the SEC provided additional guidance to public companies in Staff Accounting Bulletin (SAB) No. 101 (amended in 2003 by SAB No. 104 and codified in Topic 13).

U.S. GAAP related to revenue developed piecemeal, with specific, often industry-related requirements, but also has broad concepts. In some cases, the guidance resulted in different accounting for economically similar transactions. In addition to the guidance in ASC Topic 605, Revenue Recognition, U.S. guidance can be found in numerous pieces of industry-specific guidance, such as that for the software industry, construction contracts, real-estate sales, and multiple-element arrangements. Industry guidance often addressed narrow issues and was not built on a common framework. This led to economically similar transactions being accounted for differently. Even though in the U.S. there were 200 separate pieces of guidance, there were still transactions for which there was no guidance, in particular for service transactions.

IFRS

IFRS does not have as many rules, but the standards can be confusing and difficult to apply, and were sometimes based on different principles. The guidance was limited for some significant topics, like contracts with multiple-element arrangements. This lack of guidance made it difficult to account for some complex transactions. When IFRS guidance was absent, preparers at times turned to industry-specific U.S. literature.

The Revenue Recognition Project

Driven by the need to achieve simplification and consistency, the FASB and the IASB (the Boards) began a joint project in 2002.

The Boards issued an exposure draft (ED) in June 2010 that elicited over 1,000 comment letters. The Boards issued a revised ED in November 2011 and conducted numerous meetings and outreach activities before issuing the final Standard. The basically converged, new Standard is principles based, eliminating the existing transaction- and industry-specific guidance. This move away from prescriptive guidance and bright lines increases the need for professional judgment, which in turn increases the need for expanded disclosures. To compensate for the lack of rules, the revenue standard provides extensive application guidance.

The New Standards

In the U.S., ASU 2014-09

superseded 200 separate items of FASB Accounting Standards Codification® (ASC) guidance, most of it industry specific

created Topic 606,

Revenue from Contracts with Customers

and Subtopic 340-40,

Other Assets and Deferred Costs—Contracts with Customers

.

created Topic 610,

Other Income

ASU 2014-09 is over 700 pages long and was released in the following sections:

Amendments to the FASB Accounting Standards Codification

Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40)

Section B—Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables

Background Information and Basis for Conclusions

Appendix: Comparison of Topic 606 and IFRS 15

Amendments to XBRL Taxonomy.

IFRS 15 replaces the previous standards IAS 11, Construction Contracts and IAS 18, Revenue and several interpretations:

IFRIC 13,

Customer Loyalty Programmes

IFRIC 15,

Agreements for the Construction of Real Estate

IFRIC 18,

Transfers of Assets from Customers

SIC-31,

Revenue—Barter Transactions Involving Advertising Services

.

IFRS 15 is over 300 pages long and was released in these sections:

IFRS 15 with Appendices

Defined Terms

Application Guidance

Effective Date and Transition

Amendments to Other Sections

Basis for Conclusion with Appendices

Comparison of IFRS 15 and Topic 606

Amendments to the Basis for Conclusions in Other Sections

Illustrative Examples

Appendix

Amendments to the Guidance in Other Standards.

Project Goals

The FASB and the IASB believe that the final documents meet two major goals—simplification of revenue recognition guidance and consistency globally and across entities, jurisdictions, markets, and industries. According to FASB in Focus,2 the Boards believe that the Standard meets their goals to

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, and

simplify the preparation of financial statements by reducing the number of requirements to which an organization must refer.

The revenue standard provides a robust framework that is expected to simplify the preparation of financial statements by reducing the sources of guidance and replacing them with a single source that users can understand. The Standard adds new guidance for contract modifications and offers consistent application for service contracts. The Standard also provides guidance for related topics, such as warrantees, licenses, and when to capitalize the cost of obtaining a contract and some costs of fulfilling a contract.

Customer Loyalty Programs

In addition, the changes may affect customer loyalty programs. Companies will have to make new estimates. It is expected that entities will be reviewing their loyalty programs to evaluate their effects, if any, on revenue, and some companies may choose to amend their contracts with customers.

Exhibit ES.2 Key differences between ASU 2014-09 and IFRS 15

Source: Clarifications to IFRS 15, Appendix A; ASU 2014-12, Appendix.

Effective Dates

While the FASB and IASB standards are generally aligned, the implementation dates are different. (See the section in this chapter on effective dates.) Also, the IASB allows early implementation and has no relief for nonpublic entities. IFRS for small and medium-sized public entities is available for those entities. The FASB allows early implementation but only for annual reporting periods beginning after December 15, 2016. (ASC 606-10-65-1; IFRS 15.C)

Collectibility Thresholds

In order for an entity to apply the revenue standard to a contract, collectibility must be probable. The collectibility threshold for recognizing revenue, introduced late in the process, is an area of FASB/IASB difference. R. Harold Schroeder, the lone dissenter on the FASB, pointed out that “probable” does not mean the same under U.S. GAAP and IFRS because the definitions of probable are different under each. According to Schroeder's dissenting opinion, the IASB's threshold is lower because it defines probable as “more likely than not,” which is greater than 50%, whereas the FASB Topic 450 defines probable as “likely to occur,” which some have historically interpreted as a 75–80% threshold. The Boards acknowledged this difference, but decided to be consistent with their own definitions. The IASB's Mackintosh and the FASB's Golden both believe that the difference will have a small impact on results. [ASC 606-10-25-1(e); IFRS 15.9(e)]

The FASB, but not the IASB, amended its guidance to clarify that when assessing collectibility, an entity should evaluate the consideration for the goods or services it expects to receive rather than the consideration promised for all the goods or services.

In addition, the FASB subsequently decided to clarify that when assessing collectibility, an entity should consider its ability to mitigate its exposure to credit risk. The IASB concluded that its guidance and discussion in the Basis for Conclusions is sufficient. (Also, see the appendix to this summary for information on proposals to amend the Standard as originally issued.)

Interim Requirements

Disclosures are another source of FASB/IASB differences. The Boards generally kept their existing interim requirements. However, the IASB amended its guidance to require interim disclosure of disaggregated information. The FASB amended Topic 270 similarly for public entities, but also added requirements to disclose on an interim basis revenue recognized in the current period that was included in the contract balances at the beginning of the period, revenue recognized in the current period for performance obligations satisfied in previous periods, and remaining performance obligations. The FASB generally prescribes interim disclosures, whereas the IASB leans toward only annual disclosures. (ASC 270-10-50-1A; IAS 34.16A)

Promised Goods or Services Immaterial in the Context of the Contract

The FASB, but not the IASB, clarified that an entity is not required to assess whether promises that are immaterial in the context of the contract are performance obligations.

Presentation of Sales Taxes

The FASB, but not the IASB, provides an accounting policy election that allows an entity to exclude sales and similar taxes from the measurement of transaction price.

Shipping and Handling Activities

The FASB, but not the IASB, includes a practical expedient that allows entities to account for as fulfillment activities shipping and handling activities that occur after the customer has obtained control of a good.

Noncash Consideration

The FASB, but not the IASB, requires noncash consideration to be measured at fair value at contract inception. The FASB also specifies that the constraint on variable consideration applies only to the variability in the fair value of the noncash consideration that arises from reasons other than the form of the consideration.

Licensing

Both the FASB and the IASB made changes subsequent to the issuance of ASU 2014-09 and IFRS 15 on guidance regarding licenses. Those changes are incorporated into Chapter 6 and relate to

determining the nature of the entity's promise in granting a license of intellectual property

contractual restriction in a license and the identification of performance obligations

renewals of licenses of intellectual property

when to consider the nature of an entity's promise in granting a license.

Completed Contracts

The FASB amended its definition of a completed contract, but the IASB did not. (See Chapter 9.) The IASB contains a practical expedient to allow an entity applying the full retrospective method of adoption not to restate contracts that are completed contracts at the beginning of the earliest period presented.

Practical Expedient for Contract Modification—Date of Application

For entities applying the modified retrospective method, the FASB requires entities to apply the practical expedient at the date of initial application. The IASB allows entities to apply the expedient either at the beginning of the earliest period presented or at the date of initial application.

Disclosure Relief for Nonpublic Entities

The FASB provides specific relief related to disclosure, transition, and effective dates for nonpublic entities, while the IASB does not. IFRS 15 applies to all entities, except for small and medium-sized entities. (ASC 606-10-50-7, 50-11, 50-16, 50-21, 340-40-50-4; IFRS 15.5)

Impairment Loss Reversal

U.S. guidance does not permit impairment loss reversal for an asset that is capitalized under the guidance on costs to obtain or fulfill a contract. IASB guidance requires an entity to reverse an impairment loss, consistent with the guidance of IFRS 36, Impairment of Assets. (ASC 340-40-35-6; IFRS 15.104)

In addition to these major differences, the FASB and the IASB have some differences in the articulation of the principles of the Standard. Those differences and the differences above are included in the relevant chapters in this volume.

Scope

The scope of the Standard is wide. It affects all public companies, nonpublic companies, and nonprofit organizations. The Standard applies to contracts with customers and defines a customer as:

a party that has contracted with a company to obtain a good or service that is an output of the company's ordinary activities in exchange for consideration.

(ASC 606-10-20)

Practice Pointer: Care should be taken to determine whether a contract is with a customer or if it is a collaborative effort. To make the recognition and measurement consistent with revenue transactions, the Standard applies to transfers of nonfinancial assets, such as property and equipment, that give rise to revenue. Revenue can be generated by contracts that are not with customers. Examples are alternative revenue programs of utilities and not-for-profit contributions. The Standard is applicable to those transactions.

Scope Exceptions

The following are outside the scope of the Standard:

Lease contracts in the scope of ASC 840,

Leases

and IAS 17,

Leases.

Insurance contracts issued by insurance entities within the scope of ASC Topic 944,

Financial Services—Insurance

or IFRS 4,

Insurance Contracts.

Note: Insurance contracts issued by entities that do not apply insurance industry-specific guidance under U.S. GAAP are in the scope of the revenue standard. Under IFRS, insurance contracts are scoped out no matter who issues them. Warranty contracts considered insurance contracts under IFRS I are also scoped out.

Financial instruments and other contractual rights or obligations in the scope of

ASC 310,

Receivables

ASC 320,

Investments—Debt and Equity Securities

ASC 323,

Investments—Equity Method and Joint Ventures

ASC 325,

Investments—Other

ASC 405,

Liabilities

ASC 470,

Debt

ASC 815,

Derivatives and Hedging

ASC 825,

Financial Instruments

ASC 860,

Transfers and Servicing

IFRS 9,

Financial Instruments

IFRS 10,

Consolidated Financial Statements

IFRS 11,

Joint Arrangements

IAS 27,

Separate Financial Statements

IAS 28,

Investments in Associates and Joint Ventures.

Guarantees other than product or service warranties, in the scope of ASC 460,

Guarantees.

Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

(ASC 606-10-15-2)

Revenue from transactions or events that do not arise from contracts with customers is not in the scope of the Standard, such as

dividends

non-exchange transactions, like donations or contributions

IFRS only:

changes in the fair value of biological assets, investment properties, and the inventory of broker-traders

U.S. GAAP only:

changes in regulatory assets and liabilities arising from alternative revenue programs for rate-regulated activities in the scope of ASC 930,

Regulated Operations.

The guidance included in new subtopic ASC 340-40 applies only if the costs incurred are related to a contract under ASC 606. (ASC 606-10-5)

The guidance in new topic ASC 610 specifies the standards for income that is not in the scope of ASC 606, including gains and losses from the derecognition of nonfinancial assets and from gains and losses on involuntary conversions.

Example ES.1: Nonmonetary Exchanges to Facilitate Sales to Customers or Potential Customers

ABC Road Salt sells road salt to municipalities. ABC determines the optimum amount of salt on hand to meet a typical winter's demand in New York State. ABC enters into a contract with Penn Road Salt to provide road salt to the other if needed. ABC and Penn are in different regions and rarely experience the same winter storms. The parties provide each other no other consideration.

This transaction is outside the scope of the Standard because it involves nonmonetary exchanges between parties in the same line of business to facilitate sales to customers or potential customers.

Contracts Partially in Scope

If a contract is partially within the scope of the Standard and partially within the scope of other guidance, the entity should apply the other guidance first. That is, if the other standard specifies how to separate or initially measure parts of the contract, then the entity should apply those requirements first. The remaining portion is accounted for under the requirements of the new Standard. If the other standard does not have applicable separate and/or initial measurement guidance, the entity should apply the revenue standard to separate and/or initially measure the contract. (ASC 606-10-15-4)

Example ES.2: Contract Partially Out of Scope

Power Rentals leases power equipment to builders and provides maintenance for the leased equipment. To record the transaction, Power Rentals must first separate the contract price related to leasing the equipment and account for that under the leasing guidance. The remaining maintenance portion would be accounted for under the revenue standard.

Sale of Transfer of Nonfinancial Assets

Transactions that are not part of the entity's ordinary activities, such as the sale of property, plant, and equipment, nonetheless fall under certain aspects of the Standard. An entity involved in such activities applies the guidance related to transfer of control (Chapter 5) and measurement of the transaction price (Chapter 3) to evaluate the timing and amount of the gain or loss. U.S. GAAP reporters should also apply the guidance in the Standard to determine whether the parties are committed to perform under the contract and, therefore, whether a contract exists (Chapter 1).

Effective Dates

In deciding on effective dates, the Boards wanted to strike the right balance between improving reporting standards as soon as possible and giving entities enough time to implement the broad and potentially significant changes. Ultimately, the Boards decided on a longer than usual implementation period because of the number of entities and line items affected. Despite that added time, soon after the release of the Standard, the Boards heard from many entities that they needed more time to implement the new guidance.

Changes to Effective Dates

U.S. GAAP

In response to constituent concerns, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Dates. The ASU allows for all entities a one-year deferral from the original effective dates and for early adoption using the original adoption dates.

The ASU is effective as follows:

For public entities, the guidance in the Standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period; that is, beginning in the first interim period within the year of adoption. Early application is permitted but not earlier than the original effective date of December 15, 2016.

For nonpublic entities, the new guidance is required for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. A nonpublic entity may elect early application, but no earlier than the original effective date for public entities.

IFRS

IFRS 15 was originally effective for annual periods beginning on or after January 1, 2017. Partly because in the near future some companies will transition from national to international standards, the IASB allows for early adoption for current IFRS preparers, provided that fact is disclosed and for first time preparers. In September 2015, the IASB issued an amendment to IFRS 15 deferring the effective date for one year until 2018. Entities still have the option of applying early.

Other Changes to the Standard

In addition to the ASU deferring the effective date, the FASB responded to feedback by issuing several other EDs to amend ASU 2014-09:

Accounting Standards Update 2016-08,

Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

Accounting Standards Update 2016-10,

Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

Accounting Standards Update 2016-12,

Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients

Proposed Accounting Standards Update,

Technical Corrections and Improvements to Update 2014-09, Revenue from Contracts with Customers.

As this volume goes to press, the FASB expects to issue a final document in the fourth quarter of 2016.

Proposed Accounting Standards Update,

Technical Corrections and Improvements to Update 2014-09, Revenue from Contracts with Customers-Additional Corrections

As a purchaser of this book, you have exclusive access to a companion website, with the latest technical developments and other useful information. The website will contain updated information about exposure drafts and other technical guidance from the standards’ setters. See the back of the book for information on how to access the site.

The IASB decided to issue its changes in one comprehensive document: Clarifications to IFRS 15. For more on the FASB's and IASB's changes, see the appendix to this summary.

Implementation Options

Entities have the option to implement the guidance through

full retrospective application, or

modified retrospective application.

Full Retrospective Approach

Under this method, all prior periods presented must be restated in equity in accordance with ASC 250, Accounting Changes and Error Corrections. That is, entities must report the cumulative effect for the earliest year reported.

Modified Retrospective Approach

Using the modified retrospective approach, the entity recognizes the cumulative effect of initially adopting the standard as an adjustment to the opening balance of retained earnings in the annual period when the standard is adopted. If the entity issues comparative statements, then it reports revenue for prior years under the guidance in effect before adoption.

Objective of the Standard

The objective of the Standard is

…to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

(ASC 606-10-10-1)

The Standard provides principles to help entities meet this objective when measuring and reporting on revenue.

Core Principle and the Five Steps of the Revenue Recognition Model

The Standard takes an asset and liability approach and articulates a core principle on which the new guidance is based.

Exhibit ES.3 The five steps

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. (FASB ASC 606-10-05-3 et al., IFRS 15.IN7)

This core principle reflects the asset and liability approach that underlies the Standard. This approach recognizes revenue based on changes in assets and liabilities. The Boards believe that this is consistent with the conceptual framework approach to recognition and brings more consistency to the measurement compared with the “earned and realized” criteria in previous standards. To achieve the core principle, entities should follow the five steps above, explained through the following simple example.

Example ES.3: Application of the Core Principle Through the Five Steps

Assume that on May 1, 20X1, ACME enters into a contract to sell 50 desktop computers to XYZ Company for CU 50,000 with delivery promised on July 15, 20X1. On July 31, 20X1, ACME completes a performance obligation by delivering all the computers and makes the following entries:

Debit

Credit

Accounts Receivable

CU 50,000

Revenue

50,000

Cost of Goods Sold

CU 30,000

Inventory

30,000

On August 15, 20X1, the customer makes the payment and ACME makes the following entry:

Debit

Credit

Cash

CU 50,000

Accounts Receivable

50,000

Under the Standard, entities account for assets and liabilities arising from customer contracts. Entities must carefully analyze their contracts for

terms,

measurements, and

promises.

In reviewing a transaction, each of the five steps in Exhibit ES.4 may not be needed, and they may not always be applied sequentially. Be aware that the Standard is not organized by these five steps, but the Boards believe that the steps offer a methodology for entities to use when deciding on the appropriate accounting for a transaction. As mentioned, the model is based on an assets and liabilities or control approach as opposed to the risks and rewards approach under previous standards. However, risks and rewards are a factor when determining control for point-in-time revenue recognition.

Exhibit ES.4 Overview and application of the five steps in the revenue recognition model

Each of the steps encompasses new concepts, and entities will have to carefully analyze their contracts with customers as they transition to the new guidance.

Disclosures Required by the Standard

Because there is a greater need to estimate, there is a greater need to disclose.

—Russell Golden, FASB Chairman, May 2014

Revenue is arguably the most significant financial reporting metric, and the Standard requires all entities to make new disclosure requirements designed to provide better information to financial statement users about contracts with customers. The Standard requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The additional disclosures are partially driven by the increased judgment related to estimates required in the new guidance. The requirements are comprehensive and include quantitative and qualitative information. The FASB's ASU includes some exceptions for disclosure by nonpublic entities.

Forming and Documenting Professional Judgment

At a conference in September 2015,3 Wesley R. Bricker, the SEC's Deputy Chief Accountant, spoke of the Standard's increased need to exercise judgment and how preparers can be sure they are making reasonable judgments that will withstand scrutiny. Mr. Bricker suggested as a resource the Center for Audit Quality's Professional Judgment Resource.4 That document lists five elements of an effective process:

Identify and define the issue.

Gather the facts and information and identify the relevant literature.

Perform the analysis and identify alternatives.

Make the decision.

Review and complete the documentation and rationale for the conclusion.

Disclosures Required for a New Standard

IAS 8 requires an entity to disclose that it has not applied a new standard that has been issued but is not yet effective. The entity must also disclose:

The new standard's title.

The nature of the change in accounting policy.

The date the entity intends to apply the standard.

Any discussion of the anticipated impact of the new requirements on the financial statements or if unknown or if not reasonably estimable, a statement to that effect.

SEC registrants are required by SAB 74 to disclose the material impact of a recently issued accounting standard when it is expected to be implemented in the future. A public entity may predict the effect. If not able to do so, it may disclose that it has not yet assessed the impact. As the implementation deadline approaches, entities can anticipate that the SEC will expect more specificity.

Wesley R. Bricker, in remarks at the 2015 AICPA National Conference on Current SEC and PCAOB Developments, indicated that the SEC will be reviewing the disclosures about the expected effect. The SEC expects to see more robust and detailed disclosures and entities to provide more useful information to investors as the implementation dates near. Mr. Bricker further suggested registrants may consider advising investors when that assessment is expected to be complete.5

Other Changes Included in the Standard

In addition to the items mentioned above, the standard includes changes on

contract costs,

right of returns,

warranties,

principal versus agent considerations,

licenses,

repurchase agreements,

customer acceptance terms, and

other areas.

SEC Response

The revenue standard does not supersede the SEC guidance. In the US, the SEC is currently considering the new guidance. It is expected to adopt the changes, and significant changes are expected to SAB 13, Revenue Recognition. The SEC has indicated that it will be keeping a close eye on implementation. The Chief Accountant has indicated that registrants are expected to follow Transition Resource Group (TRG) conclusions, or discuss differing conclusions with the SEC staff.

Soon after the release of the Standard, the SEC offered relief on revenue recognition implementation. Entities electing full retrospective adoption will not be held to a five-year presentation of restated revenue figures. Shelley Luisi of the SEC's Office of the Chief Accountant has stated that the SEC “will not object if the retrospective application only applies to selected financial data in the years that are included in the audited financial statements. So any additional years included in selected financial data will not need to be retrospectively restated.” Ms. Luisi emphasized that disclosure will be critical to investors understanding the inconsistency. The SEC has also indicated that it will not object if entities

do not recast the ratio of earnings to fixed charges disclosures, while disclosing the lack of comparability;

continue to use the pre-transition significance test for equity method investors for S-X Rules 3-09 and 4-08(g).

Item 11(b) of Form S-3, Registration Statement Under the Securities Act of 1933, requires entities to recast annual financial statements upon adoption of a new accounting principle. The SEC has said that it is clear that retrospective revision of the financial statements is required for registrants applying the full retrospective method, provided the change is material. Therefore, a calendar-year registrant filing a Form S-3 registration statement in 2018 after adoption of the Standard retrospectively in a Form 10-Q would have to recast its prior-period 2015, 2016, and 2017 financial statements.

At the date of this publication, the SEC has announced rescission, effective upon an entity adopting the Standard, of four SEC Staff EITF Observer comments related to these four narrow issues.

EITF

Issue

90-22

Accounting for gas-balancing arrangements

91-09

Revenue and expense recognition for freight services in process

00-10

Accounting for shipping and handling fees and costs

01-09

Accounting for consideration given by a vendor to a customer (including a reseller of the vendor's products)

Industry-Specific Guidance Superseded

IASB Vice Chairman Ian Mackintosh and FASB Chairman Russell Golden both identified software, telecommunications, and real restate as industries that will be most affected.

—May 2014 Revenue Recognition Standard Announcement

Entities that currently apply industry-specific guidance will see the greatest impact and may face complex implementation challenges. Industries most affected include

telecommunication companies selling telephones and phone services,

computer software,

construction,

aerospace,

defense,

real estate, licensors (pharmaceuticals, film and entertainment, franchisors), and

asset management.

Vendor-specific objective evidence (VSOE) is no longer required for companies selling software. Entities can use it but if it is not available, estimates may be used. This is an area that will require a high degree of judgment.

For some, but not all, of the industries listed above, revenue recognition may be accelerated. For instance, revenue recognition in the telecommunications industry may be accelerated, but for the asset management industry, revenue generally may be recognized later under the new requirements.

AICPA Industry Committees

In response to the issuance of the Standard, the AICPA has established 16 industry task forces. The task forces are charged with identifying implementation issues and aiding in the development of an AICPA accounting guide on revenue recognition. The industries included in the project are

Aerospace and Defense

Airlines

Asset Management

Broker-Dealers

Construction Contractors

Depository Institutions

Gaming

Health Care

Hospitality

Insurance

Not-for-Profit

Oil and Gas

Power and Utility

Software

Telecommunications

Timeshare.

Comments submitted to the task forces can be viewed on aicpa.org.

Changes to Industry-Specific Guidance

Exhibit ES.5 lists the changes made by the ASU to industry-specific guidance.

Exhibit ES.5 Status of industry-specific guidance in ASU 2014-09 for affected industries

ASC Section

Status

Comments

905-605 Agriculture—Revenue Recognition

Retains a portion of the 905-605 guidance

908-605 Airlines

Superseded

910-605 Contractors—Construction

Superseded

912-605 Contractors—Federal Government

Superseded

For guidance on the presentation of a loss on a termination of a contract for default, see paragraph ASC 912-20-25-4

920-605 Entertainment—Broadcasters

Superseded

922-605 Entertainment—Cable Television

Superseded

924-605 Entertainment—Casinos

Superseded

926-605 Entertainment—Films

Superseded

928-605 Entertainment—Music

Superseded

932-605 Extractive Activities—Oil and Gas

Superseded

940-605 Financial Services—Brokers and Dealers

Superseded

942-605 Financial Services—Depository and Lending

Superseded

944-605 Financial Services—Insurance

Superseded

For guidance on recognizing revenue from contracts that are not within the scope of this topic by insurance entities, see ASC Subtopic 944-605

946-605 Financial Services—Investment Companies

Superseded

948-605 Financial Services—Mortgage Banking

Superseded

952-605 Franchisors

Superseded

954-605 Health Care Entities

Retains a portion of the 954-605 guidance

For guidance on determining whether a liability should be recognized for a continuing care retirement community for its obligation to provide future services and the use of facilities to current residents, see Sections 954-440-25 and 954-440-35For guidance on determining when to recognize a loss under prepaid health care services contracts, see paragraph 954-450-30-4

958-605 Not-for-Profit Entities

Retains a portion of the 958-605 guidance

For guidance on recognizing revenue from contracts that are not within the scope of this topic by not-for-profit entities, see Subtopic 958-605

970-605 Real Estate—General

Superseded

972-605 Real Estate—Common Interest Realty Associations

Superseded

974-605 Real Estate—Real Estate Investment Trusts

Superseded

976-605 Real Estate—Retail Land

Superseded

78-605 Real Estate—Time-Sharing Activities

Superseded

980-605 Regulated Operations

Retains a portion of the 980-605 guidance

For guidance on recognizing a loss on long-term power sales contracts, see paragraph 980-350-35-3

985-605 Software

Superseded

Transition Resource Group

The FASB and the IASB established a joint TRG to solicit, analyze, and discuss stakeholder issues and inform the Boards about potential implementation issues that could arise during the transition period. The Boards then consider whether amendments or additional guidance is needed. The TRG does not issue authoritative guidance. The TRG consisted of 19 members, representing U.S. and international preparers, auditors, users from various industries, and public and private companies and organizations. At its first meeting, the TRG defined its role as insuring that comparability actually occurs upon implementation.

Over 80 issues were brought to the TRG. For 98% of those issues, the TRG decided that they did not need action by the Boards or the issues were discussed with and resolved with the FASB and IASB staff. At a joint meeting of the Boards on February 18, 2015, two issues were discussed, and the Boards agreed to issue clarifying guidance on

licenses of intellectual property, and

identifying performance obligations.

However, the Boards came to different conclusions on the substance of some of the changes and the methods to communicate those changes. The FASB issued an ED in May 2015 on the two issues above—licenses and identifying performance obligations. On the latter, the ED aims to reduce cost and complexity. For the former, the ED seeks to increase the clarity and operability of the guidance.

The Boards held a second joint meeting on March 18, 2015 to discuss

practical expedients upon transition—contract modifications and completed contracts

sales tax presentation—gross versus net

noncash consideration

collectibility—accounting for cash received

principal versus agent—gross versus net reporting.

At the June 22, 2015 joint meeting of the FASB and the IASB, principal versus agent issues were discussed. In August 2015, the FASB issued an ED on principal versus agent considerations with comments due October 1, 2015. In addition, the FASB has directed its staff to draft an ASU on narrow scope improvements and practical expedients.

On July 30, 2015, the IASB issued a proposal with clarifications to IFRS 15. The proposal includes two practical expedients to help entities transition to the Standard and aims to clarify

how to identify the performance obligations in a contract,

how to determine whether a party involved in a transaction is the principal or the agent, and

how to determine whether a license provides the customer with a right to access or a right to use the entity's intellectual property.

The issues and actions being taken by the FASB and the IASB are summarized in the appendix to this summary.

On December 16, 2015, the Boards held a joint meeting and affirmed their proposals related to

principal versus agent, and

application of the control principle.

The Boards decided to eliminate exposure to credit risk as a control indicator [ASC 606-10-55-39(e); IFRS 15.B37(e)]. The FASB approved drafting of a final ASU.

At its January 2016 meeting, the IASB directed its staff to draft the final amendments to its clarification of IFRS 15, with expectation of publication of a final document in March 2016 and an effective date of January 1, 2018. The IASB also stated that it does not plan to schedule any more meetings of the IFRS constituents of the IASB. The TRG will not be disbanded. It will be available for consultation if needed. The IASB will continue to collaborate with the FASB and monitor future FASB discussions with the U.S. GAAP constituents of the TRG. The IASB pointed out that IFRS reporters are not required to consider FASB's pronouncements or public discussions when applying the Standard. The IASB did point out, however, that IAS 8 allows entities to consider the most recent pronouncements of other standards setters as long as that guidance does not conflict with IFRS standards and the Conceptual Framework.6

See the appendix to this summary for subsequent developments. For the most recent developments, readers should consult the FASB and IASB project pages.

Appendix: Status of Issues Brought to the Boards

The table that follows summarizes the issues and the path forward chosen by the FASB. Additional information and background papers can be found on the FASB website.

Issue