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Transcript of Revenue Recognition
Lindsey Demro and Quan Liu Revenue Recognition Intro Current Standard Expected Final Standard Conclusion Step 5: Revenue will be recognized at a point in time or satisfied over time. Differences in Revised Exposure Draft Revised
Draft Only disclose if there is significant financing component Time Value of Money Criteria for mandatory disclosure requirement Disclosures Step 4: Currently being discussed in meetings Differences in Revised Exposure Draft Step 3: Added "Most Likely Amount Approach" Differences in Revised Exposure Draft Step 2: Separation of performance obligations Differences in Revised Exposure Draft Step 1: Contract Modifications Differences in Revised Exposure Draft Recognizing the example over life of contract Core principle and 5 step model remained relatively unchanged Revised Exposure Draft Further guidance to determine if a contract exists Response to Revised Exposure Draft Cell phone example with revised exposure draft applied Answer using Revised Exposure Draft Elements that did change When to separately account for more than one obligation in a contract Amount of revenue to be recognized Guidance $200.00 2-year contract price $600.00 Full-retail price 2-Year service contract is $50 a month Extra $20 a month for 2 GB of data How would the service provider recognize revenue? http://www.chinajiaho.com/Wholesale-mobile-phones-pda-smart-phone_c1098.html First
Draft Only recognize revenue when the obligation is satisfied Recognize Revenue When Performance Obligations are Met Allocate transaction price to performance obligations Allocate Transaction Price to Performance Obligations Qualifications of a contract Identify the Contract Removed inconsistencies of current standard Benefits from First Exposure Draft Nearly 1,000 letters were received Reaction to the First Proposal Transaction price Determine the Transaction Price Identify the Goods and Services Identify Separate Performance Obligations Core Principle: entity would recognize revenue from contracts with customers when it transfers promised goods or services to customer 5 Step Model and principle Answer applying first Exposure Draft Cell phone example with revised exposure draft applied $200.00 2-year contract price $600.00 Full-retail price 2-Year service contract is $50 a month Extra $20 a month for 2 GB of data How would the service provider recognize revenue? http://www.chinajiaho.com/Wholesale-mobile-phones-pda-smart-phone_c1098.html Improved comparability Improved disclosure requirements Enacted the 5 step model to simplify financial statement preparation. Applied with 5 step model Step 1: Identify the contract with the customer Step 2: Identify the performance obligations Step 3: Determine the transaction price Step 4: Allocate the transaction price Step 5: Recognize revenue * ** *** How this compares to
current standard Commercial Substance Approval Terms of Payments Our Example The contract in this example is that the customer agrees to pay the company $50 dollars a month, if they receive the $600 phone for only $200 Separate Entities and Bundles Performance Obligations From Our Example: Transfer of phone to the customer for $200 Provide service each month under terms of contract Amount that is going to be paid to the company for the goods or services Transaction price from our example The phone at sale price The service at 24 Months Total $1880 Should be allocated to all of the separate performance obligations found in Step 2 Allocation based on stand alone price Allocations from our example: Phone (600/2280)*1880=495 Service Plan (1680/2280)*1880=1385 Depends on contract Transfer of ownership to Customer Our Example: Recognize the Revenue from the phone at time of sale Each month recognize payments at end of month The FASB requested the letter to address 18 questions Main concerns Defining the contract Individual industry standards Time Value of Money * ** *** 6 month example from 2-year contract Recognize revenue from phone on date of transfer of ownership to customer Find the monthly allocation of 2-year service contract $1385/24 months = $57.71 Guidance for circumstances that arise from a range of contract modifications How does this relate to our example: Customer additional minutes to plan in middle of month. Can only be separate if distinct Service provider has to agree to modification Clarified what makes an obligation distinct How this relates to our example: Minutes, text messaging and data are interrelated Phone is distinct Used for variable consideration How does this relate to our example: Increased rate for overage on minutes, text messaging or data Example for Most Likely Amount Approach compared to previous Other methods for allocation Possible residual How would this be related to our example Currently we would allocate the transaction price proportionally to the standalone selling price 2 criteria for over time clarified over time criteria How does this relate to our example Point of sale – when phone is purchased Over time – monthly service contract payments Both qualitative and quantitative information Should clarify information for investors Contract modifications Progress to complete separate performance obligation Collectability Contract Costs When it is realized Revenue Recognition Principle When it is realizable When it is earned IFRS is a principle based recognition Current differences between U.S. GAAP ad IFRS IFRS lacks guidance Why the new standard is needed Answer applying Current Standard One basic standard U.S. GAAP is a rule based recognition Percentage-of-completion for Long-term contracts Completed-contract method for long-term contracts Installment-sales method Cost-recovery method GAAP has numerous inconsistent standards *[(50+20)x24months]=1680 $200.00 2-year contract price Cell phone example with current
standard applied $200.00 2-year contract price $600.00 Full-retail price 2-Year service contract is $50 a month Extra $20 a month for 2 GB of data How would the service provider recognize revenue? http://www.chinajiaho.com/Wholesale-mobile-phones-pda-smart-phone_c1098.html Transition Issues for Re-deliberation Scope of standard Issues for Re-deliberation Constraints on recognizing revenue Issues for Re-deliberation Allocation of transaction price Issues for Re-deliberation Example More explicit guidelines Final Draft Expectations Residual Approach Basis for Performance Obligations Collectability Minimum Threshold Impairment Loss Linkage with Financial Instruments Variable Consideration Sales-based Royalties Different Approaches Sales on Nonfinancial Assets Licensing Contract cost Definition of a Customer Interaction with Other Projects Transfer of Nonfinancial Assets Disclosures Costs to Prepare Usefulness of Disclosures Interim Reporting Public & Nonpublic Needs Retrospective Application Alternatives to Retrospective Application Appropriate effective date Remaining issues Cost-Benefit Allocation of transaction price Time Value of Money Contract issues Free blue tooth speaker giveaway with purchase of smart phone Clause included in contract Does service provide include this as a separate performance obligation? Revenue Recognition with contract 2008 2010 2011 -
2012 2012 -
2013 Comparison Current Standard Revised Exposure Draft