Revenue Recognition Changes & You - Csh

Our webinarwill begin shortly REVENUE RECOGNITIONCHANGES & YOUPresented by:Michael Cullum, CPAEric J. Schnieber, CPA/CFF, CFE

REVENUE RECOGNITIONCHANGES & YOUPresented by:Michael Cullum, CPAEric J. Schnieber, CPA/CFF, CFE

QUESTIONSHow to ask questions during today’s webinar: Use the “Chat” or “Question” feature on theGoToWebinar panel You can also email Dennis Keller atdjkeller@cshco.com Questions will be addressed at the end ofthe webinar

CPE CREDITCPE Questions Continuing Professional Education Three codes will be provided during thewebinar for those interested in CPE Please record those codes for inclusion on theCPE form If you are interested in CPE, please emailDennis Keller at djkeller@cshco.com

OUR PRESENTERSMichael Cullum, ManagerMichael serves a wide range of commercial clients includingmanufacturing & distribution, construction, and commercialservices organizations. Michael's experience includes leadershipof all aspects of client service for audits, reviews, compilationsand agreed upon procedures.Eric Schnieber, ShareholderEric is responsible for all aspects of audit, review, andcompilation engagements from planning and risk assessmentthrough reporting. For 15 years, Eric's industry concentrationhas been focused on privately-held, middle-market commercialentities, both established and start-up, within the manufacturing,distribution, and service provider niches. As a member of thefirm’s Manufacturing and Distribution Industry Group, Ericstudies emerging issues impacting these clients and providesproactive advice designed to maximize financial benefits.

REVENUE RECOGNITIONCHANGES & YOUPresented by:Michael Cullum, CPAEric J. Schnieber, CPA/CFF, CFE

OUTLINE Brief background of guidance “Old GAAP” vs. “New GAAP” The five step model, with examples Methods of transition New disclosures

BACKGROUND FACTS The joint project on revenue recognition wasundertaken by the FASB and IASB to develop acommon standard Effective date for public companies: annualperiod beginning after December 15, 2017 Effective date for nonpublic companies: annualperiod beginning after December 31, 2018 Most entities will see some level of impact

CHANGES TO GAAP“Old” GAAP“New” GAAP Revenue from contractsvaries by industry Very limited disclosuresother than what is typicallyincluded in the policiesfootnote Individual contracts viewedas one unit Variable considerationtreatment differs byindustry One set of consistentrecognition principles In-depth disclosures aboutspecific contracts Separation of performanceobligations and revenuerecognition in step withcompletion of obligations One single variableconsideration model forrebates, discounts, etc.

DEFINITIONSContract: An agreement between two or more partiesthat creates enforceable rights and obligations May be written, verbal, or implied Must have commercial substancePerformance obligation: A promise within a contract to transfer a goodor service to the customero Capable of being distincto Distinct within the context of the contract

THE FIVE STEP MODEL1) Identify the contract with a customer2) Identify the separate performanceobligations in the contract3) Determine the transaction price4) Allocate the transaction price to theseparate performance obligations5) Recognize revenue as eachperformance obligation is satisfied

1. IDENTIFY THE CONTRACT The below are requirements for a contracto Both parties have approved and arecommitted to performo Rights to goods/services and the paymentterms can be identifiedo Has commercial substanceo Collection of consideration is probable If any of the above are not met, there is norevenue recognition until consideration isreceived ando The performance obligations are satisfied oro The contract is terminated or cancelled

2. IDENTIFY SEPARATE PROFORMANCEOBLIGATIONS WITHIN A CONTRACT A performance obligation is a promise in a contractwith a customer to transfer a good or service To the extent that a contract includes multiple goodsor services, each should be a separate performanceobligation if they are distinct. Criteria for beingdistinct:o Capable of being distinct – the customer canbenefit from the good or service on its owno Distinct within the context of the contract –thepromise to transfer the good or service isseparately identifiable from other promises withinthe contract

2. IDENTIFY SEPARATE PROFORMANCEOBLIGATIONS WITHIN A CONTRACT(cont.) Separately identifiable can be a slippery slope.Further factors to determine if something is separatelyidentifiable and distinct:o The good/service is not an input used to createan end product promised to the customero The good/service does not substantially changeor customize another good/service that ispromised within the contracto The good/service is neither highly dependent on,nor highly interrelated with, another good/servicewithin the contract

EXAMPLES: DISTINCT VS. NOT DISTINCTIs not distinct:Is distinct: As part of building anapartment complex, thecontractor digs out the dirtand lays the foundation While conceivably theowner could benefit from afoundation, it is not distinctbecause it is an input to anend product (theapartment) A software company sellsa software license, aninstallation service, andtech support (each can bebought separately andindependently) The company determinesthat none of the servicesrelies on any of the othersbeing provided by thecompany, and thus each isdistinct from the othersand are accounted forseparately

3. DETERMINE THE TRANSACTION PRICE The transaction price is the amount of consideration towhich a company expects to be entitled in exchange fora transfer of goods or services The transaction price may be fixed, or it may bevariableo Variable transaction price results from items suchas: Discounts Rebates Refunds Credits Penalties Financing

EXAMPLE: IMPLICIT PRICE CONCESSION A hospital provides medical services to anuninsured patient. The hospital determines, afterperforming services, that the fee should be 10,000. Despite this, the hospital does notexpect to collect 10,000 from the uninsuredpatient and actually expects to be paid only 1,000. As such, the total revenue recognizedshould be only 1,000. This is a change from previous GAAP as,generally, the entire transaction price would berecognized as revenue, and any non-paymentwould be written off as bad debts.

EXAMPLE: DISCOUNTSFOR CUSTOMER The new guidance calls for new treatment for discounts forsets of goods or serviceso A sandwich shop offers a loyalty card that entitles thebuyer to one free sandwich after the purchase of fivesandwiches. Assume the sandwiches cost 10 eachon averageo Guidance suggests that the transaction price isvariable, and thus the discounted (free) sandwich mustbe accounted for during the revenue recognition of theprevious five sandwiches.o Revenue recognized for each of the five sandwichesand the sixth (free) sandwich should be 8.33o ( 10 * 5 sandwiches 0 * 1 sandwich)/6 sandwiches

TRANSACTION PRICE & THE IMPACT OFRIGHTS TO RETURN OR WARRENTIES The new guidance requires theconsideration of returns and warrantieswhen calculating the transaction price The guidance suggests that expectedvalue method is used to calculate thetotal expected returned value, and thenon-recognition of the revenueassociated with those products/the saleof those products

EXAMPLE: RIGHTS TO RETURN If a widget maker sells 100 widgets at 20 perwidget to 100 different customers, there areessentially 100 separate contracts, with 100 rightsto return. Traditionally, total revenue recognizedwould be 2,000. If the company expects 5% ofall widgets to be returned, there is now anobligation to recognize that within the revenuerecognition transaction The company would only recognize revenue of 1,900 (95 widgets * 20). The differencebetween the sale price and the revenuerecognized would be an expected refund liability(credit), a right to recover returned products(debit), and an adjustment to the costs of sale(debit)

EXAMPLES: FINANCING COMPONENTSAdjustment totransaction price:No adjustment totransaction price: A home goods store sellsa 300 lawnmower for 330, with payment notdue until 24 months later As the real sale price ofthe lawnmower is 300,the store recognizesrevenue of 300 at time ofsale The additional 30 isrecognized as accretion ofinterest into the receivableuntil cash is received A contractor is building aschool, and the contractincludes withheldretainage for each billingof 10% of the billedamount Although the contract maylast multiple years, thecompany determines thatthe retainage is not afunction of a financingcomponent, but rather amethod of ensuringcustomer satisfaction

4. ALLOCATING THE TRANSACTION PRICETO THE PERFORMANCE OBLIGATIONS The goal is to attribute an amount to each of theperformance obligations within a contract in stepwith the amount of consideration to which thecompany will be entitled for delivering thatparticular good or serviceo First: determine the standalone selling pricefor each performance obligationo Second: allocate the transaction price basedon relative standalone selling price

STANDALONE SELLING PRICE VS.THE REAL WORLD In some (most) cases, a standalone selling pricemay be difficult to determine. In such cases:o Evaluate the market and estimate the pricethat a customer would be willing to pay(adjusted market assessment approach)o Forecast estimated costs and an appropriatemargin (expected cost plus margin approach)o As a last resort, subtracting other standaloneprices from the transaction prices (residualapproach)

5. RECOGNIZE REVENUE AS EACH PERFORMANCEOBLIGATION IS SATISFIED Two main methods of recognizing revenueas it relates to transferring control to thecustomer:o Note: the assumption is that alltransactions are at a point in timeo At a point in time Example: the shipping of a widgeto Over the course of a period of time Example: a service contract forhousekeeping services at an officesuite

CONTRACT MODIFICATION FLOWCHARTNoIs the contractmodification approved?YesDo not account forcontract modificationuntil approved.Does it add distinctgoods or services thatare pricedcommensurate withtheir standalone sellingprices?YesNoAccount for as aseparate contract.YesAccount for as atermination of existingcontract and creation ofa new contract.NoAccount for as part ofthe original contractAre the remaining goodsor services distinct fromthose alreadytransferred?

EXAMPLES: CONTRACTMODIFICATIONSIs not a contract modification:Is a contract modification: 120 products promised at 100each.60 products into the delivery, thecontract is modified to include anadditional 20 products at 95 each(the sales price at the time ofsecond deal)Two separate contracts, andrevenue recognized as such( 100/each for the first 120, 95for the last 20) Same situation as left, but defectsexist in the originally transferred60As such, a 30 credit is appliedper item on the additional 20products, resulting in a price forthe second order of 65As 65 each does not reflect thestandalone sales price, and it hasbeen impacted by the previouscontract, this is not a separatecontractRevenue recognized on theadditional 60 products fromoriginal contract the 20 from themodification should be recognizedin line with the blended rate( 100 * 60 products remaining 65 x 20 products)/80 products 91.25 per remaining product tobe delivered

METHODS OF TRANSITIONRetrospective ApproachModified Retrospective The company will applythe standard to eachperiod presented withinthe financial statements,as if it had been in effectsince the inception of allcontracts presented in thefinancials The company will applythe new guidance only tothe current period (as ofthe application date), withno restatement ofcomparative periodspresented.Additional disclosure ofthe quantitative effect andan explanation of thesignificant changesbetween the reportedresults under the newGAAP versus old GAAP.