Revenue from Contracts with Customers- Tom Eiseman

1. A Global Reach with a Local Perspective
www.decosimo.com
Revenue from Contracts with
Customers
Tom Eiseman, CPA | Principal in Charge of Assurance

2.  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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3.  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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4.  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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5.  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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6.  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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7.  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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8.  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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9.  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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10.  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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11.  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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12.  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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13.  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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14.  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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15.  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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16.  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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17.  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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18.  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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19.  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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20.  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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21.  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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22.  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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23.  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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24.  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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25.  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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26.  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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27.  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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28.  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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29.  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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30.  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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31.  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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32.  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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33.  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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34.  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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35. Questions?
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36. 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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