Revenue Recognition: The New Guidelines - v11 (Course Id 1306)

Accounting - Accounting for Course Id 1306

In 2014, after years of deliberations, the Financial Accounting Standards Board (the FASB) and the International Accounting Standards Board (the IASB) jointly issued the Accounting Standard Update (ASU) No. 2014-09 (codified primarily in ASC 606) and IFRS 15, respectively. ASC 606, the new revenue standard, replaces virtually all (including industry-specific) U.S. GAAP revenue guidance with a single model. The standard does not just change the amounts and timing of revenue but potentially affects organizations’ financial statements, business processes, and internal control over financial reporting. The standard also affects other related accounting topics such as contract modification, rights of return, licensing, principal-versus-agent considerations, and income tax. Moreover, the standard creates new and expanded disclosure requirements.

In light of the new revenue standard, organizations need to reassess their current revenue accounting processes and systems and implement changes required to maintain compliance with the new guidance. This course reorganizes the guidance contained in ASC 606, to follow the five-step revenue recognition model along with other guidance impacted by this standard. It also provides examples to illustrate the application. The course is designed to help you navigate the complexities of this standard, identify the implications of it, and prepare for implementation. It also shares insights to help you evaluate the effect of required changes to the internal control environment.  It provides a working knowledge of the fundamentals of revenue standard that can be applied, regardless of the company size, in the real world.  

NASBA QAS - Text - Technical - NASBA Registry - 1306

Course Learning Objectives

1. Recognize the improvements over the revenue accounting through the release of ASC 606
2. Cite the key changes of the revenue recognition practice compared to former ASC 605
3. Recognize the impact of the revenue standard on the organizations
4. Identify the applicability of the revenue standard
5. Recognize the steps involved in implementing the new revenue guidelines
6. Identify the presentation and disclosure requirements
7. Recognize the requirements for other revenue topics (e.g., warranties, principal-versus agent, licensing) 8. Recognize the indicators for potential misstated revenue recognition
9. Identify control activities that reduce the risk of misstatement in revenue

Table of Contents

Chapter 1 - Revenue Recognition: The New Guidelines

Part I -  The Fundamentals of the Revenue Standard

I. Background

A. Rising to the Challenge

B. Key Changes of Revenue Recognition Practice

C. Consideration for SEC Registrants

II. Applicability

A. Scope of Revenue Standard

B. Collaborative Arrangements

III. Practical Expedients

IV. Key Concepts of ASC 606

A. Attributes of a Contract

B. Essence of a Performance Obligation

C. Determination of the Transaction Price

D. Allocation of the Transaction Price

E. Recognition of Revenue

1. Transfer of Control

2. Satisfaction of Performance Obligations

3. Measures of Progress

V. Significant Impacts

A. More Efforts to Determine the Contract Existence

B. Differing Revenue Streams and Related Activities

1. The Revenue Transactions

2. Tax Implications

3. General Considerations

C. Additional Estimates and Judgment

D. More Comprehensive Presentation and Disclosure Requirements

E. Practices of Certain Industries

1. Real Estate

2. Entertainment and Media

VI. U.S. GAAP vs. IFRS

Review Questions - Group 1

Part II -  The Application of the Revenue Recognition Model

Step 1: Identify the Contract with a Customer

A. Required Criteria - Contracts with Customers

1. Approval and Commitment

2. Rights

3. Payment Terms

4. Commercial Substance

5. Collectibility of the Consideration

B. Reassessment of Criteria

C. Combining Contracts

D. Modifying Contracts

1. Definition of a Contract Modification

2. Types of Contract Modifications

Step 2: Identify the Performance Obligations

A. Identification of Promises in a Contract

B. Determination of Distinct Goods or Services

Review Questions - Group 2

Step 3: Determine the Transaction Price

Components of the Transaction Price

1. Variable Consideration

2. Significant Financing Component

3. Noncash Consideration

4. Consideration Payable to a Customer

Step 4: Allocate the Transaction Price to the Performance Obligations

A. Definition of Standalone Selling Prices

B. Estimating Standalone Selling Prices

1. Adjusted Market Assessment Approach

2. Expected Cost Plus a Margin Approach

3. Residual approach

C. Allocating Discounts

D. Allocating Variable Consideration

E. Changes to the Transaction Price

Step 5: Recognize Revenue

A. Transfer of Control

B. Satisfaction of Performance Obligations

1. Performance Obligations Satisfied Over Time

2. Measures of Progress over Time

3. Performance Obligations Satisfied at a Point in Time

Review Questions - Group 3

Part III - Other Revenue Topics

I. Contract Costs

A. Costs to Obtain a Contract

B. Costs to Fulfill a Contract

II. Sale with a Right of Return

III. Accounting for Warranties

IV. Principal versus Agent Considerations

A. Definitions of Principal and Agent

B. Principal and Agent Indications

1. Indicators of Principal

2. Indicators of Agent

Review Questions - Group 4

V. Licensing

A. Scope of the Licensing Guidance

B. Determining Whether a License Is Distinct

C. Identifying the Nature of a Distinct License

1. Symbolic Intellectual Property (Right to Access)

2. Functional Intellectual Property (Right to Use)

D. Determining Whether Contractual Provisions Represent Attributes of a License or Additional Rights

E. Accounting for Sales- or Usage-Based Royalties

VI. Customer Options for Additional Goods or Services

VII. Nonrefundable Upfront Fees

VIII. Repurchase Agreements

A. Forward or Call Option

B. A Put Option

C. Consignment Arrangements

D. Bill-and-Hold Arrangements

Part IV -  Presentation and Disclosure

I. Presentation

A. Statement of Financial Position

B. Contract Asset vs. Receivable

II. Disclosure

A. General Rules

B. Disclosure for Public Entities

1. Contract with Customers

2. Significant Judgments

3. Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer

4. Practical Expedients

C. Disclosure for Nonpublic Entities

1. Contracts with Customers

2. Significant Judgments

3. Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer

Part V -  Implications to Internal Controls

I. Responsibilities of SEC Registrants

A. The Role of Internal Control over Financial Reporting

B. Regulatory Compliance

1. SOX Section 404

2. SOX Section 302

3. Considerations

Review Questions - Group 5

II. Design and Implementation of Controls

A. Control Environment

B. Risk Assessment

C. Control Activities

1. Revenue Recognition Process

2. Estimation Process

D. Information and Communication

E. Monitoring

Review Questions - Group 6

Glossary

Table of Examples

Applicability

Example 1: Identifying the Customer – Collaborative Arrangement

Transition Guidance

Example 2: Apply the Modified Retrospective Method

Significant Impacts

Example 3: Sales of Real Estate

Step 1: Identify the Contract with a Customer

Example 4: Assessing the Existence of a Contract - No Written Sales Agreement

Example 5: Collectibility of the Consideration

Example 6: Consideration Is Not the Stated Price - Implicit Price Concession

Example 7: Reassessing the Criteria for Identifying a Contract

Example 8: Contract Modifications - Unpriced Change Order

Example 9: Modification of a Contract for Goods

Example 10: Modification of a Services Contract

Example 11: Modification Resulting in a Cumulative Catch-Up Adjustment to Revenue

Step 2: Identify the Performance Obligations in the Contract

Example 12 A: Determining Whether Goods or Services Are Distinct

Example 12 B: Goods and Services Are Not Distinct

Step 3: Determine the Transaction Price

Example 13: Variable Consideration - Price Concessions

Example 14: Estimating Variable Consideration - Performance Bonus with Multiple Outcomes

Example 15: Constraining Estimates of Variable Consideration

Example 16: Significant Financing Component

Example 17: Entitlement to Noncash Consideration

Example 18: Consideration Payable to a Customer

Step 4: Allocate the Transaction Price to the Performance Obligations

Example 19: Estimating Standalone Selling Price - Residual Approach

Example 20: Allocating a Discount

Example 21: Allocating Variable Consideration

Example 22: Allocating Transaction Price - Change in Transaction Price

Step 5: Recognize Revenue

Example 23: Customer Simultaneously Receives and Consumes the Benefits

Example 24: Customer Controls the Work in Progress

Example 25: Assessing Alternative Use

Example 26: Assessing Whether a Performance Obligation Is Satisfied at a Point in Time or Over Time

Example 27: Selecting the Measures of Progress

Example 28: Customer Has Physical Possession with No Control of an Asset

Contract Costs

Example 29: Incremental Costs of Obtaining a Contract

Example 30: Costs to Fulfill a Contract

Sale with a Right of Return

Example 31: Right of Return

Accounting for Warranties

Example 32: Warranties

Principal versus Agent Considerations

Example 33: Determining Whether an Entity is the Principal or an Agent

Licensing

Example 34: Determining Whether Goods or Services Are Distinct

Example 35: Right to Access Intellectual Property

Example 36: Right to Use Intellectual Property

Example 37: Determining Whether Contractual Provisions Represent Attributes of a License or Additional Rights

Example 38: Sales-Based Royalty

Table of Illustrations

Illustration 1 When Contract Criteria is Not Met

Illustration 2: Accounting for Contract Modification

Illustration 3: Determining Standalone Selling Price

Illustration 4: Satisfaction of Performance Obligations

Illustration 5: Accounting for Incremental Costs

Illustration 6: Accounting for Contract Fulfill Costs

Illustration 7: Determination of Types of Warranties

Illustration 8: Determination of Right to Access or Right to Use