Accounting. Overview of the New Revenue Recognition Standard. Fort Worth Chapter TSCPA Free CPE Day

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1 Accounting Update Overview of the New Revenue Recognition Standard 1 Fort Worth Chapter TSCPA Free CPE Day

2 ASC Topic 606, Revenue from Contracts with Customers Issued in May 2014 Supersedes ASC Topic 605 and most industry revenue recognition guidance Introduces a new 5-step approach to recognize revenue Applies to all contracts with customers except those that are within the scope of other ASC topics Effective for fiscal periods beginning after December 15, 2016 for public entities and December 15, 2017 for non-public entities* Early adoption prior to December 15, 2016 is not permitted *A 1-year deferral for all entities is to be proposed/issued by the FASB in Fort Worth Chapter TSCPA Free CPE Day

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4 6 Decoupling of contract revenue and contract cost recognition cost recognition Smooth margins only possible if cost-to-cost method is appropriate measure of progress Contract costs not eligible for capitalization are expensed as incurred Elimination of specific requirements for full profit recognition May result in acceleration of revenue (or gains) Potential changes to incentive fee recognition KPMG U P, a Delawarelimitedliability partnership andthe U.S. memberfinn of the KPMG nel'm>rkofindependent memberfirma alliilaled 7 7 Fort Worth Chapter TSCPA Free CPE Day

5 8 Revenue Recognition Standard: Transition and Reporting New required disclosures (both qualitative and quantitative) Three transition methods: 1. Full retrospective approach 2. Retrospective using one or more practical expedients 2 practical expedients allow for the exclusion of certain transaction types from application of the full retrospective approach (i.e. transactions entered into and completed within the same reporting period) 1 practical expedient provides certain disclosure relief 3. Cumulative effect at the date of adoption 9 9 Fort Worth Chapter TSCPA Free CPE Day

6 10 Revenue Recognition (SAB Topic 13): Before and After Current Criteria Persuasive evidence of an agreement Seller has delivered/performed Sales price is fixed or determinable Collectibility is reasonably assured Bridge to ASC Topic 606 Contract = An agreement that creates enforceable rights and obligations (may be written, oral, or implied by customary business practice with a customer). Revenue is recognized when performance obligations are satisfied. For performance obligations satisfied at a point in time, revenue is recognized when the customer obtains control of the asset. For performance obligations satisfied over time, revenue is recognized using a measure of progress toward completion. Revenue constraint lower threshold than fixed criteria. Collectibility threshold evaluated to determine if a contract exists Fort Worth Chapter TSCPA Free CPE Day

7 Summary of Potential Changes to Current Practice (1) Multiple Element Arrangements Estimated Selling Price Variable Consideration Time Value of Money Timing of Revenue Recognition Licenses Contract Costs Revenue that may be allocated to the delivered item would no longer be limited to the amount that is not contingent upon delivery of the undelivered item If the stand alone selling price of a good or service is highly variable or uncertain, the residual approach would be permitted The transaction price allocated to performance obligations would include an estimate of variable consideration; however, that variable consideration would be subject to the constraint The transaction price would be adjusted to reflect the time value of money if the contract has a financing component that is significant to the contract, including accretion on advance payments Each performance obligation would be evaluated to determine whether it is satisfied (a) over time or (b) at a point in time Guidance will be provided to determine if a license that is distinct represents a promise to transfer intellectual property at a point in time or represents a promise to provide the customer access to the entity s intellectual property over time Certain fulfillment costs and contract acquisition costs would be required to be capitalized Summary of Potential Changes to Current Practice (2) Construction- Type Contracts Construction- Type Contract Costs Telecom / Cable Separation Criteria for Elements in Software Arrangements Sales of Real Estate Disclosures Contract revenue and contract cost recognition could be decoupled from one another; smooth margins would only be possible if cost-to-cost method is an appropriate measure of progress towards satisfaction of the performance obligation Contract costs not eligible for capitalization (e.g., as inventory or direct fulfillment costs) would be expensed as incurred, potentially including learning curve costs Current practice of recognizing revenue only to the extent of the cash received (based on the contingent revenue cap approach) will be replaced by a requirement to estimate a stand-alone selling price for free or discounted goods or services (e.g., wireless handset or free premium channel services for a limited time) Vendor-specific objective evidence of fair value of the undelivered items not required to separately account for elements in a software arrangement The forthcoming standard will eliminate the specific requirements for profit recognition on sales of real estate under current U.S. GAAP, which may result in acceleration of revenue (or gains). Preparers would be required to disclose more information on contracts with customers (e.g., disaggregation of revenue, performance obligations remaining at end of reporting period, explanation of significant changes in contract assets, contract liabilities, and contract costs) Fort Worth Chapter TSCPA Free CPE Day

8 Revenue Recognition Transition Resource Group (TRG) Purpose: To solicit, analyze, and discuss stakeholder issues arising from implementation of the new revenue recognition guidance To inform the FASB and the IASB about such implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues To provide a forum for stakeholders to learn about the new revenue recognition guidance from others involved with implementation TRG periodically meets to discuss stakeholder submissions Two meetings in 2014 and four scheduled for 2015 Public can attend meetings in person or view them live via video webcasts on the FASB s and IASB s websites Other industry groups (including the AICPA) have created task forces to evaluate implementation of the new standard Fort Worth Chapter TSCPA Free CPE Day

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12 Thank you Presentation by Thomas Hansen 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. Fort Worth Chapter TSCPA Free CPE Day