2018-09-06 FASB ASC 606 - Revenue Recognition

Thrive. Grow. Achieve.
Revenue
Recognition
Eric Glantz
September 6, 2018
Raffa Learning Community

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COURSE UPDATE DATE: __SEPTEMBER 5, 2018
COURSE REVIEWED BY: _ERIC GLANTZ___________ ___
COURSE REVIEW DATE: __SEPTEMBER 8, 2018_________________
NASBA FIELD OF STUDY: _ACCOUNTING AND AUDIT______

COURSE AGENDA / PROGRAM CONTENT
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• Introduction to FASB ASC 606
• Applicability
• Summary of technical guidance
• Interpretation
• Questions and answers

LEARNING OBJECTIVES
Financial Accounting Standards Board (FASB)
Accounting Standards Update (ASU) No. 2014-09
(Topic 606), Revenue from Contracts with
Customers and subsequent ASUs
– Be informed about the new accounting guidance included
in ASC 606, and our interpretation of its impact to nonprofit
organizations
– Most of the changes do not significantly impact the
fundamental accounting utilized by nonprofits (certain
contracts not with customers are excluded from ASC 606)
– Course will discuss the timeline and practical steps for
implementing ASC 606
– See also ASU 2015-14, 2016-08, 2016-10, and 2016-12
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WHAT IS NOT COVERED IN THIS COURSE
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Financial Accounting Standards Board (FASB)
Accounting Standards Update (ASU) No. 2018-08
(Topic 958), Clarifying the Scope and Accounting
Guidance for Contributions Received and Made
– Clarifying guidance to distinguish between contributions
and exchange transactions to determine which treatment is
applied
– Clarifying guidance to distinguish if conditions exist
associated with a contribution
– If an exchange transaction treatment determined to be
appropriate, then must apply ASC 606

INTRODUCTION
WHY?
• Remove inconsistencies and weakness in revenue
requirements
• Provide a robust framework for addressing revenue
issues
• Improve comparability across entities, industries,
jurisdictions, and capital markets
• Provide useful information to financial statement
users through note disclosures
• Simplify the preparation of financial statements by
reducing the number of requirements to which an
entity must refer
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INTRODUCTION CONT.
WHO?
• Any entity that enters into contracts with customers
for the transfer of goods or services, or the transfer
of non-financial assets
– All entities: public, private, not-for-profit
• This guidance supersedes revenue recognition
requirements in Topic 605
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INTRODUCTION CONT.
WHEN?
• Public entities:
• Required to adopt the revenue recognition standards for
reporting periods beginning after December 15, 2017 and
interim and annual reporting periods thereafter (i.e. fiscal
year 2018 for public entities with a December 31 year-end)
• All other entities:
• Required to adopt the revenue recognition standard for
annual reporting periods beginning on or after December
15, 2018, and interim reporting periods within annual
reporting periods beginning after December 15, 2019 (i.e.
fiscal year 2019 for non-public entities with a December 31
year-end)
• Early adoption is permitted
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INTRODUCTION CONT.
WHAT?
• Core Principle:
• An entity should recognize revenue from contracts with
customers to depict the transfer of goods or services to
customers in an amount that reflects the consideration
(payment) to which the entity expects to be entitled in
exchange for those goods or services.
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APPLICABILITY
• All contracts with customers, except:
• Lease contracts
• Insurance contracts
• Financial instruments
• Guarantees
• Non-monetary exchanges in the same line of business to
facilitate sales to customers
• Certain contracts not with customers are excluded
• Contributions
• Collaborative arrangements
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CORE PRINCIPLE (TOPIC 606)
• Five Steps to Apply the Core Principle (FASB ASC
606-10-5-4):
– Step 1:Identify the contract with a customer
– Step 2: Identify the performance obligations in the
contract
– Step 3: Determine the transaction price
– Step 4: Allocate the transaction price across the various
performance obligations
– Step 5: Recognize revenue when or as the entity
satisfies a performance obligation
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STEP 1: IDENTIFY THE CONTRACT
(TOPIC 606)
What is a contract? (FASB ASC 606-10-25-2 through
25-8)
– An agreement between two or more parties that creates
enforceable rights and obligations
– Can be written, oral, or implied by an entity’s customary
business practices
– A contract does NOT exist if each party to a contract has
unilateral enforceable right to terminate a wholly
unperformed contract
– If an agreement does not meet the criteria to be
considered a contract, an entity shall continue to assess
the agreement to determine if the criteria are
subsequently met
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STEP 1: IDENTIFY THE CONTRACT CONT.
(TOPIC 606)
Contract Modification (FASB ASC 606-10-25-10
through 25-13)
– A contract modification can be accounted for as a
separate contract if additional promised goods or
services are distinct AND the price of the contract
increases by the standalone selling prices of the
additional goods or services
– Modification my also be accounted for as a termination
of the original contract and a creation of a new contract
OR as part of the existing contract (if the remaining
goods or services are not distinct).
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STEP 2: IDENTIFY PERFORMANCE
OBLIGATIONS (TOPIC 606)
What are performance obligations? (FASB ASC 606-
10-25-14 through 25-22)
– Each promise to transfer to the customer either:
1. A good or service (or a bundle of goods or services) that is
distinct, or
2. series of distinct goods or services that are substantially the
same and that have the same pattern of transfer to the
customer
– May include implicit promises based on the entity’s
customary business practices, published policies, or
specific statements
– Does not include activities that an entity must undertake
to fulfill a contract, unless those activities transfer a good
or service to the customer.
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OBLIGATIONS CONT. (TOPIC 606)
A good or service is distinct if: (FASB ASC 606-10-
25-19 through 25-22)
– The customer can benefit from the good or service on its
own or together with other resources that are readily
available to the customer (i.e. the customer does not
need to obtain additional resources as well), AND
– The entity’s promise to transfer the good or service to
the customer is separately identifiable from the other
promises in the contract (i.e. the good or service is not
highly dependent on or highly integrated with other
goods or services in the contract)
If no distinct goods or services are identified, goods or
services should be combined until a distinct bundle is
identified
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OBLIGATIONS CONT. (TOPIC 606)
Satisfaction of Performance Obligations: (FASB ASC
606-10-25-23 through 25-30)
– Performance obligations are satisfied by the transfer of a
promised good or service to a customer (when or as the
customer obtains control over the asset)
– Performance obligations can be satisfied over time if one
of the follow criteria are met:
1. The customer receives and consumes the benefits provided
by the entity’s performance as the entity performs
2. The entity’s performance creates or enhances an asset that
the customer simultaneously controls
3. The entity’s performance does not create an asset with an
alternative use to the entity and the entity has an
enforceable right to performance completed to date
– Otherwise, performance obligations are satisfied at a
point in time
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STEP 3: DETERMINE THE TRANSACTION
PRICE (TOPIC 606)
Determining the Transaction Price: (FASB ASC 606-
10-32-2 through 25-27)
– The transaction price is the amount of consideration to
which an entity expects to be entitled in exchange for the
transfer of promised goods or services
1. Excludes amounts collected on behalf of third parties (i.e.
sales tax)
– Transaction price may include fixed amounts, variable
amounts, or both
– When determining transaction price, assume that all
goods or services will be transferred to the customer as
promised with the existing contract terms
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PRICE CONT. (TOPIC 606)
Variable Consideration: (FASB ASC 606-10-32-5
through 25-14)
– Consideration may vary because of discounts, rebates,
refunds, performance bonuses, conditions, etc.
– An entity shall estimate the amount of variable
consideration using either of the following methods
1. The expected value: sum of probability-weighted amounts in
a range of possible consideration amounts
2. The most likely amount: the single most likely amount in a
range of possible consideration amounts.
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Variable Consideration: (FASB ASC 606-10-32-5
through 25-14)
– Only include variable consideration to the extent that a
significant revenue reversal is not expected to occur
once the uncertainty in variable consideration is resolved
– At the end of each reporting period, an entity should
update the estimated transaction price to represent any
changes during the reporting period
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Existence of a Significant Financing Component:
(FASB ASC 606-10-32-15 through 25-20)
– When determining the transaction price, adjust the
amount of consideration for the effects of the time value
of money
– The objective is for an entity to recognize revenue at an
amount that reflects the price that a customer would
have paid for the goods or services had the customer
paid cash when (or as) they transfer to the customer.
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Noncash Consideration: (FASB ASC 606-10-32-21
through 25-27)
– An entity shall measure any noncash consideration at
fair value
– If fair value cannot be reasonably estimated, the entity
shall measure the consideration by the standalone
selling price of the goods or services promised
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STEP 4: ALLOCATING THE TRANSACTION
PRICE (TOPIC 606)
Allocating the transaction price to performance
obligations: (FASB ASC 606-10-32-28 through 32-45)
– Objective: To allocate the transaction price to each
performance oobligation(or distinct good or service) in an
amount that reflects the amount of consideration the
entity expect to be entitled to in exchange for those
goods or services
– Transaction price should be allocated on a relative
standalone selling price basis, to the extent that variable
consideration is not used
– Allocation of transaction price may not apply if a contract
has only one performance obligation
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Allocation based on standalone selling prices:
(FASB ASC 606-10-32-31 through 32-38)
– Determine the standalone selling price at contract
inception of each distinct good or service underlying
each performance obligation and allocate the transaction
price on in proportion to those prices
– Standalone Selling Price: The price at which an entity
would sell a promised good or service separately to a
customer
1. Can be directly observable or estimated
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Allocation based on standalone selling prices
(cont.) – Estimating the standalone selling price of
a good or service: (FASB ASC 606-10-32-34)
– Adjusted market assessment approach: Entity
evaluates its market and estimates the price that a
customer would be willing to pay for the good or service
– Expected cost plus a margin approach: Entity
forecasts its expected cost and adds an appropriate
margin
– Residual approach: Estimation of the standalone
selling price of a good or service (or bundle of goods or
services) based on the total transaction price and
backing out all known standalone selling prices included
in the transaction price.
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Allocation of variable consideration: (FASB ASC
606-10-32-39 through 32-45)
– Variable consideration (and subsequent changes) should
be allocated entirely to a performance obligation if:
1. The terms of a variable payment related specifically to the
satisfaction of the performance obligation
2. Allocating the variable amount of consideration is consistent
with the allocation objective
– Subsequent changes to transaction price are allocated
on the same basis as at contract inception (recognize in
the period that the transaction price changes)
1. Amounts allocated to satisfied performance obligations are
recognized as revenue (or a reduction in revenue) in the
period which the transaction price changes.
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STEP 5: RECOGNIZE REVENUE
(TOPIC 606)
Recognize revenue as performance obligations are
satisfied.
– When revenue is recognized should have been
determined in Step 2 of this process
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OTHER PRESENTATION MATTERS
(TOPIC 606)
• Contract Liability: An entity’s obligation to transfer
goods or services to a customer for which the entity
has received consideration (or an amount of
consideration is due) from the customer.
• Contract Asset: An entity’s right to consideration in
exchange for goods or services that the entity has
transferred to the customer.
– 606-10-45-5: This guidance uses the terms contract
asset and contract liability but does not prohibit the use
of alternative descriptions. If alternative descriptions are
used, the entity shall provide sufficient information for a
user to distinguish between receivables and contract
assets
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OTHER PRESENTATION MATTERS CONT.
(TOPIC 606)
• Contract Asset Example: (FASB ASC 606-10-55-287
through 55-290)
On January 1, 20X8, an entity enters into a contract to transfer
Products A and B to a customer in exchange for $1,000. The contract
requires Product A to be delivered first and states that payment for the
delivery of Product A is conditional on the delivery of Product B, i.e. the
consideration of $1,000 is due only after the entity has transferred both
products to the customer. The entity does not have a right to
consideration that is unconditional (a receivable) until both products
are transferred.
The entity identifies the promises to transfer Products A and B as
performance obligations and allocates $400 to the transfer Product A
and $600 to the transfer Product. The entity recognizes revenue for
each respective performance obligation when control of the product
transfers to the customer.
When transfer of Product A occurs the entity recognizes $400 in
revenue and $400 of Contract Asset (because entity does not have a
unconditional right to the consideration). When Transfer of B occurs,
the entity recognizes $1,000 in receivable, reduces contract asset by
$400, and recognizes revenue of $600.
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DISCLOSURE
(TOPIC 606)
• Objective: To disclose sufficient information to
enable users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows
arising from contracts with customers.
– Contracts with Customers (partially applicable to non-
profits)
– Significant judgements, and changes in the judgements,
made in applying the guidance (not applicable to non-
profits)
– Any assets recognized from the costs to obtain or fulfil a
contract with a customer (not applicable to non-profits)
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DISCLOSURE CONT.
(TOPIC 606)
• Contracts with Customers: (FASB ASC 606-10-50-
4 through 50-16)
– Disaggregation of revenue into categories
1. (unless it has issued bonds or is a conduit bond obligor) Not
required for not-for-profits
– Contract balances (opening and closing, activity during
the year)
1. Not required for not-for-profits (unless it has issued bonds or
is a conduit bond obligor)
– Performance obligations
1. See next slide for applicability to not-for-profits
– Transaction price allocated to the remaining
performance obligations
1. Not required for not-for-profits (unless it has issued bonds or
is a conduit bond obligor)
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DISCLOSURE CONT.
(TOPIC 606)
• Performance Obligations: (FASB ASC 606-10-50-
12) – An entity shall disclose the following:
– When the entity typically satisfies its performance
obligations (i.e. upon shipment, upon delivery, as
services are rendered, etc.)
– The significant payment terms
– Nature of goods or services that the entity has promised
to transfer
– Obligations for returns, refunds, and other similar
obligations
– Types of warranties and related obligations
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DISCLOSURE CONT.
(TOPIC 606)
• Significant Judgments in the Application of this
Guidance: (FASB ASC 606-10-50-4 through 50-16)
– For performance obligations satisfied over time: the
methods used to recognize revenue and an explanation
of why the methods provide a faithful description of the
transfer
– For performance obligations satisfied at a point in time:
significant judgments made in evaluating when a
customer gains control of promised goods or services
– Methods, inputs, and assumptions used to determine the
transaction price, assess the estimate of variable
consideration, allocation of the transaction price,
measure obligations for returns, refunds, etc.
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IMPLEMENTATION
(TOPIC 606)
• How does this apply to my organization?
– Contributions: This guidance will have no effect on the
method of recording contributions (conditional or
unconditional) (Topic 958)
– Grants: is the transaction reciprocal (i.e. does the donor
receive commensurate value in return for the resources
provided)? If yes, apply Topic 606. If no, treat as a
contribution.
– Member Dues: Treatment will be similar to before the
new standard is effective. Entities must determine the
extent to which the transaction is reciprocal. Revenue
will be bifurcated on that basis with the reciprocal portion
treated per Topic 606, and the remainder treated as a
contribution (Topic 958).
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PRACTICAL EXAMPLE
See example
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For information for and
about nonprofits visit
www.iknow.org
To become or find a nonprofit board
member visit
www.boardnetusa.org
CONTACT INFORMATION
• Visit our Web Site at www.raffa.com
• Eric Glantz, Partner Stacy Wu, Audit Manager
• Direct: 202-955-5412 Direct: 202-955-6706
• e-mail: EGlantz@raffa.com e-mail: SWu@raffa.com
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2018-09-06 FASB ASC 606 - Revenue Recognition

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