EITF 08-1 and 09-3, Reporting Implications and Revenue Recognition Roadmap
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The document outlines updates to revenue recognition standards for corporate finance and accounting professionals, particularly EITF 08-1 and 09-3 which focus on reporting implications and allocation methods for contracts with multiple deliverables. It discusses implementation issues, the transition to these new standards, and the alignment of U.S. GAAP with international financial reporting standards. Additionally, it highlights necessary considerations for firms as they prepare for compliance with these accounting changes.
![Implementation Issues:
Elimination of Residual Method
Facts
• Total consideration $1,000
• Two deliverables
‒ Delivered product (Est. of selling price $800, No VSOE or TPE)
‒ Undelivered services (VSOE is $400)
ASC 605-25 [Issue 00-21] Issue 08-1
Residual Method: Relative Selling Price Method:
$1,000 (total consideration) $800 (delivered product selling
- price)
$400 (undelivered services selling ÷
price) $1,200 (aggregate selling price)
= x
$600 Allocated to delivered product $1,000 (total consideration)
=
$667 Allocated to delivered product
6
© Deloitte 2010](https://image.slidesharecdn.com/eitf08-1and09-3reportingimplicationsandrevenuerecognitionroadmap-100617221341-phpapp02/85/EITF-08-1-and-09-3-Reporting-Implications-and-Revenue-Recognition-Roadmap-6-320.jpg)
![Issue 09-3: Separation and Allocation
Some arrangements may include non-software components
and software components
• Separate non-software components from software components
using guidance in Issue 08-1
– Non-software components include software and software-related
elements scoped out of ASC 985-605 [SOP 97-2] by Issue 09-3
• Further separate multiple-elements within non-software component
using Issue 08-1
• Further separate multiple-elements within software component using
SOP 97-2
• Bifurcate undelivered items related to both software and non-
software components
11
© Deloitte 2010](https://image.slidesharecdn.com/eitf08-1and09-3reportingimplicationsandrevenuerecognitionroadmap-100617221341-phpapp02/85/EITF-08-1-and-09-3-Reporting-Implications-and-Revenue-Recognition-Roadmap-11-320.jpg)
EITF 08-1 and 09-3, Reporting Implications and Revenue Recognition Roadmap
- 1. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Revenue Recognition Update
- 2. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS EITF 08-1 and 09-3: Reporting Implications and Revenue Recognition Roadmap Joe Talley, Partner Deloitte
- 3. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Issue 08-1(ASU 2009-13), Revenue arrangements with multiple deliverables © Deloitte 2010
- 4. Issue 08-1: Amendments to Issue 00-21 (ASC 605-25) Issue 00-21 Issue 08-1 Criteria for Separation Criteria for Separation Delivered element(s) have standalone Delivered element(s) have standalone value value Undelivered element(s) have objective and reliable evidence of fair value If a general right of return exists for If a general right of return exists for delivered element, performance of the delivered element, performance of the undelivered element is probable and in undelivered element is probable and in vendor’s control vendor’s control Allocation Methods Allocation Method Relative fair value Relative selling price Residual 4 © Deloitte 2010
- 5. How is the Selling Price Determined under Issue 08-1? - Must establish the selling price at inception of an arrangement for ALL deliverables whether delivered or undelivered Selling Price Hierarchy Must use if it exists and if obtainable without VSOE Vendor-Specific Objective Evidence undue cost and effort If VSOE does not exist, use TPE if it exists and if obtainable without TPE Third-Party Evidence undue cost and effort. Can use only if VSOE and TPE do not exist – new concept under 08-1 ESP Estimated Selling Price 5 © Deloitte 2010
- 6. Implementation Issues: Elimination of Residual Method Facts • Total consideration $1,000 • Two deliverables ‒ Delivered product (Est. of selling price $800, No VSOE or TPE) ‒ Undelivered services (VSOE is $400) ASC 605-25 [Issue 00-21] Issue 08-1 Residual Method: Relative Selling Price Method: $1,000 (total consideration) $800 (delivered product selling - price) $400 (undelivered services selling ÷ price) $1,200 (aggregate selling price) = x $600 Allocated to delivered product $1,000 (total consideration) = $667 Allocated to delivered product 6 © Deloitte 2010
- 7. Qualitative Factors for ESP Entity Specific Factors Market Specific Factors Customer Demand Existence and Effect of Pricing Practices customers Discounts E Technological advancements Cost and Margin S Technological Required Rates of obsolescence Return P Economic conditions Fluctuation in Customers internal costs ANALYSIS & DOCUMENTATION 7 © Deloitte 2010
- 8. Issue 08-1: Transition • New or materially modified arrangements in fiscal years beginning on or after June 15, 2010 • Prospective application: Significantly expands current disclosure requirements • Description of change in allocation method Transition • Description of change in pattern of revenue recognition • Determine whether adoption will materially affect future periods • Current year revenue that would have been recognized under Issue 00-21 or prior year revenue that would have been recognized under Issue 08-1 • Optional retrospective application • If adopted in an interim period, retrospectively adjust to beginning of fiscal year Early Adoption • Disclose effect on revenue, income before taxes, net income, earnings per share, effect of the change for appropriate captions presented, etc. © Deloitte 2010 8
- 9. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Issue 09-3 (ASU 2009-14) , certain revenue arrangements that include software elements © Deloitte 2010
- 10. Issue 09-3: Scope Arrangements excluded from the scope of software guidance: “Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality” Software and non-software deliver essential functionality? • Use factors and professional judgment Yes No Apply Issue 08-1 Apply Software Guidance • Non-software • Software • Software • Undelivered elements • Undelivered elements 10 © Deloitte 2010
- 11. Issue 09-3: Separation and Allocation Some arrangements may include non-software components and software components • Separate non-software components from software components using guidance in Issue 08-1 – Non-software components include software and software-related elements scoped out of ASC 985-605 [SOP 97-2] by Issue 09-3 • Further separate multiple-elements within non-software component using Issue 08-1 • Further separate multiple-elements within software component using SOP 97-2 • Bifurcate undelivered items related to both software and non- software components 11 © Deloitte 2010
- 12. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Bridging the gap between U.S. GAAP and IFRS © Deloitte 2010
- 13. SEC Statement on Convergence and Global Standards February 24, 2010 - SEC issued statement expressing continued support for development of single set of globally accepted accounting standards and recognized IFRS as being best positioned to serve that role. Summary SEC Statement on Convergence and Global Standards • Summarizes some of the public feedback on the IFRS roadmap • Directs the staff to carry out a “Work Plan” that sets forth specific areas and factors for consideration before potentially transitioning to IFRS • Withdraws the proposal on early use − Does not rule out an ability to early adopt in the future (presumably once a decision is made next year) • Execution of the Work Plan, combined with the completion of the convergence efforts would position the Commission to make an informed decision on a mandate next year 13 © Deloitte 2010
- 14. Next steps and expectations Work Plan + Convergence = SEC decision in 2011 Final rulemaking necessary in order to implement any mandate • Will be exposed for public comment • Adequate time will be allowed for adoption ‒ Any mandate would not be effective until approximately 2015 or 2016 • Early adoption may be allowed once a mandate is decided Future role of the FASB to be determined • Liaison between IASB and U.S. constituents? • Provide technical advice to SEC on endorsement of IFRSs? 14 © Deloitte 2010
- 15. Possible Timeline for Adoption The SEC anticipates providing four to five years for IFRS adoption 2011 2012 2013 2014 2015 2016 Potential IFRS Early Adoption U.S. GAAP Reporting First IFRS Financial Statements 1/1/2013 Transition Date 12/31/2015 Reporting Date Opening statement of 3 years of financial financial position statements 15 © Deloitte 2010
- 16. What are companies currently doing to plan for IFRS? • Analyze impacts of IFRS on financials, systems, processes and IFRS organization broadly Assessment • Support dialog within (and outside) the organization • Assess impacts of converged standards Convergence • Potentially comment on exposure drafts • Prepare for adoption of US GAAP changes • Understand statutory reporting landscape Statutory • Plan for countries converging or converting in near term Reporting • Begin to centrally manage global reporting requirements • Identify key impacts of IFRS on systems projects System • Inform design decisions considerations • Determine whether or not to build in IFRS elements …and monitoring SEC progress on the workplan. 16 © Deloitte 2010
- 17. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS This presentation contains general information only and should not be relied upon for accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional advisor. The information contained in this presentation likely will change in material respects; we are under no obligation to update such information. Neither Deloitte & Touche, LLP, Deloitte Touche Tohmatsu nor any of their affiliates or related entities shall have any liability to any person or entity who relies on this presentation. © Deloitte 2010
- 18. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS Thank You