New Rev Rec Standards Impacts

IASB and FASBs New Revenue Recognition Standard:
How Will Changes Impact Investors?

Sandy Peters, CFA
Vincent Papa, CFA
CFA Institute
CFA Institute
Marc Siegel
Patrick Finnegan, CFA
Head, Financial Reporting Policy

Financial Accounting Foundation
Member
IASB
27 June 2014
A CFA Institute Production

www.cfainstitute.org
Slides provided by speaker
Objective
OVERVIEW OF STANDARDS To provide investors with an overview of
the FASBs and IASBs new revenue recognition standards
IMPLICATIONS/CONSIDERATIONS/QUESTIONS FOR INVESTORS

Which will allow them to begin considering the implications of the new
standard on the industries and companies they follow or invest in

Agenda
OBJECTIVE AND BACKGROUND TO NEW STANDARDS
OVERVIEW OF NEW REVENUE RECOGNITION STANDARDS
Transition and Effective Date

Revenue Recognition and Measurement
Special Items
Cost Guidance
Disclosures
QUESTIONS AND ANSWERS

Why Is Revenue Recognition Change Important for

Investors?
PERVASIVENESS AND IMPORTANCE OF REVENUE
WONT CHANGE CASH, BUT RELATIONSHIP BETWEEN CASH AND
REVENUE MAY CHANGE
IMPACTS PERFORMANCE MEASURES AND METRICS
HIGH INFORMATION RISK
NEARLY EVERY INCOME STATEMENT CAPTION COULD CHANGE
(REVENUES, EXPENSES, TAXES, EPS)


Background to New Standard

Revenue Recognition Project

WHY NEW STANDARD NEEDED?
WHY THIS SOLUTION?
US GAAP IFRS
AND
BOTH NEED IMPROVEMENT
SINGLE PRINCIPLES-BASED
REVENUE RECOGNITION STANDARD
Current Challenges Existing requirements in

US GAAP and IFRS have resulted in:
Diverse revenue recognition practices; and

Difficulty for users in understanding and comparing
reported revenues
Emanating From
US GAAP contains numerous transaction and

industry specific requirements;
IFRS contains limited and sometimes inconsistent
guidance that is often supplemented with US GAAP;
and
Both have inadequate disclosure requirements.
More Robust Framework Providing a more

robust framework for addressing issues as they
arise
Increase Comparability Increasing
comparability across industries and markets
Convergence Converging US GAAP and IFRS
revenue guidance
Improve Transparency Improving
transparency about the amounts recognized by
enhancing disclosures for users of financial
statements
Desire for Convergence Policymakers felt

important to converge.

Effective Date and Transition Requirements

Effective Date and Early Application

EFFECTIVE DATE
IFRS
Annual reporting periods beginning on or after 1 January 2017
(Calendar Year Entities = 2017)
US GAAP
Annual reporting periods beginning after 15 December 2016

(Calendar Year Entities = 2017)
Non-public entities = One year deferral
EARLY APPLICATION
IFRS
Allows early application
US GAAP
Does not allow early application

Transition Provisions
Cumulative effect at date of

application
PY1
(2016)
CY
(2017)
CY FOOTNOTES
Contracts restated
Contracts under new standard
Contracts not restated
Cumulative
catch-up
Retrospective
(with optional practical expedients)
Cumulative
catch-up
PY2
(2015)
Existing* and new

contracts under
new standard
Existing and new contracts

presented under legacy
IFRS/US GAAP
*contracts not completed in prior years as determined under legacy revenue guidance

10
Effective Date:
Investor Considerations
EFFECTIVE DATE
US NON-PUBLIC ENTITIES Will not be comparable until 2018 and depending upon
method of transition (retrospective vs. prospective) may or may not be comparable until all
old contracts are off books.
IFRS EARLY ADOPTION For IFRS, filers need to know from management if they intend to
early adopt.
Recognize Comparability Issues
If IFRS companies early adopt this may impact comparability with other IFRS filers, given their effective
date choice, and will impact comparability US GAAP peers group who do not have ability to early adopt.
Depending upon method of transition (retrospective vs. prospective) may or may not be comparable until all
old contracts are off books.
Evaluate Reason For Early Application
Consider why the early adoption option is being select. (i.e. limited impact from adoption; ability to
positively influence results; industry trend; etc.)
Assess method of transition:
Prospective given early adoption?
Sufficient time for retrospective application?

11
Transition:
Investor Considerations (Comparability)
CUMULATIVE EFFECT
(PROSPECTIVE)
RETROSPECTIVE
Cumulative
Effect 1/1/2017
2015
2016
2017
2015
2016
2017
New
Standard
New
Standard
New
Standard
Previous
Standard
Previous
Standard
New
Standard
Previous Standard
Previous Standard
Adjustments
(Practical Expedients)
2015
2016
2017
New
Standard
New
Standard
New
Standard
Previous Standard
Previous Standard

Revenue
Expenses
Taxes
Net Income
2015
2016
2017
Previous
Standard
Previous
Standard
Previous
Standard
12
Transition:
Investor Considerations (US Registrants)
FIVE-YEAR SELECTED FINANCIAL DATA
RETROSPECTIVE
2013
2014
2015
2016
2017
Previous
Standard
Previous
Standard
New
Standard
New
Standard
New
Standard
2013
2014
2015
2016
2017
Previous
Standard
Previous
Standard
Previous
Standard
Previous
Standard
New
Standard
CUMULATIVE EFFECT
(PROSPECTIVE)
PAY ATTENTION TO TRANSITION RESOURCE GROUP ISSUES

13
How Will Revenue Be Measured and Recognized?

14
Framework to Recognize Revenue

Step #1
Step #2
Step #3
Step #4
Step #5
Identify
Contract(s) with
Customer
Identify
Performance
Obligation
Determine
Transaction Price
Allocate
Recognize
Revenue
Transaction Price
IMPORTANT FOR INVESTORS TO UNDERSTAND BUILDING BLOCKS

FIVE STEPS Determine the amount, timing, and measurement reliability of recognized
revenue.
BUSINESS MODEL STEPS Impact of particular step will depend on business model.
STEPS NOT SEQUENTIAL These steps are jointly considered and do not necessarily occur
in sequential fashion.

15
Overview of Revenue Recognition Principles
WHEN?
(TIMING OF
REVENUE RECOGNITION)
HOW MUCH?
(AMOUNT AND RELIABILITITY
OF REVENUE
RECOGNITION)

TRANSFER OF CONTROL
Recognize revenue when they transfer control of good or service to

customers (i.e. satisfy performance obligation). (Step 5)
Considered to be a more robust criterion than focusing on only the

transfer of risk and reward as required under current guidance.
RISKS AND REWARDS (ONE INDICATOR)
Transfer of risk and reward to customers will be evaluated as one of the
indicators of transfer of control.
MEASUREMENT
Based on amount of consideration to which seller expects to be

entitled to as specified in contract with customer. (Steps 1 and 3)
Not based on fair value at inception of distinct performance

obligations (no day 1 profit possible).
ALLOCATION The transaction price allocated to the performance
obligation (i.e. goods or service) has an effect on the amount of revenue
recognized. (Steps 2 and 4)
16
Explaining Key Building Blocks: The Contract(s) (Step 1)

WHAT ARE THE TYPES OF CONTRACT?
Step #1
Identify
Contract(s) with
Customer
Contract may be written, verbal or implied by customary business

practices
CONTRACT FEATURES
Contract must have commercial substance and be legally
enforceable
Contracts can be combined and modified
WHY STEP MATTERS?
(IMPACTS MEASUREMENT OF REVENUE)
Defines the following:
Expected consideration from customer
Collectability of consideration taken into account (Input to Step 3
Determine Transaction Price)
Performance obligations (goods delivered or services rendered or
licenses granted)

17
Explaining Key Building Blocks: Performance Obligations (Step 2)

WHAT IS A PERFORMANCE OBLIGATION?
Step #2
Identify
Performance
Obligation
Promises within contract to deliver goods or services
Promises implied by customary business practices
WHY STEP MATTERS?

(EFFECTS REVENUE AMOUNT)
Determines the unit of account to which consideration will be allocated when
measuring revenue (Step #4)
WHEN DOES IT MATTER MOST?
Critical judgment in multiple element contracts (e.g. software vendor in
contract with installation, training, customer service and product upgrade)
FEATURES OF DISTINCT PERFORMANCE OBLIGATIONS

Customer can benefit from good or service on its own or with other readily
available resources
Distinct in context of contract (not integrated with delivery of other goods)
18
Explaining Key Building Blocks:

Determining Transaction Price (Step 3)
WHY STEP MATTERS?
(KEY INPUT FOR REVENUE MEASUREMENT)
Transaction price is based on consideration that entity expects to be entitled to while taking
account of:
Step #3
Fixed consideration
Variable consideration
Determine
Transaction Price
Significant financing components (time value)
Non-cash consideration
Consideration payable to customer
(Dependent on Step 1 to assess entitled consideration)
VARIABLE CONSIDERATION MEASUREMENT AND RECOGNITION

Measurement Methods: Variable consideration is measured at either its expected value or

most likely amount
Measurement Inputs: Measurement takes into account historical, current, and forecast
information that is reasonably available to the entity
Constraint to Recognizing Variable Consideration: Only recognized if it is probable that there

will be no subsequent significant reversal in cumulative revenue
19
Variable Consideration (Step 3) Example

ASSET MANAGEMENT FIRM
An asset manager enters into a one-year contract with an investor to provide
investment management services.
The asset manager will be paid a performance-based incentive fee of 10% of the
funds return in excess of the return of an observable index at the end of the
year.
The incentive fee represents variable consideration.
The incentive fee does not pass the constraint of being probable until the end of
the year because:
the fee is highly susceptible to factors outside the managers influence (i.e., volatility
in the market), and
has a large number and high variability of possible consideration amounts.

20
Explaining Key Building Blocks: Transaction Price Allocation (Step 4)
Step #4
WHY STEP MATTERS?

(KEY INPUT FOR REVENUE MEASUREMENT IN
MULTIPLE-ELEMENT CONTRACTS)
Transaction
Price Allocation
Transaction price allocation occurs if more than one distinct performance obligation
in contract with customer
Dependent on Steps 1, 2, and 3:
Distinct performance obligations are identified in Step 2
Transaction price is determined through Steps 1 and 3
TRANSACTION PRICE ALLOCATION

Based on relative standalone selling price of distinct performance obligations
Estimated selling prices for the distinct performance obligation are applied if
there is no observable data
Residual estimation methods when standalone selling prices are highly variable
or uncertain
21
Transaction Price Allocation (Step 4) Example

VIDEO GAME COMPANY
A video game company sells a boxed video game for $24.

The boxed game can be played on a console, but also can be played online for a period of 12
months.
The game and online gaming function are distinct performance obligations.
Estimate the standalone selling price using a suitable method:

Game:
Online Function:
Allocate $24 to each as follows:
Game:
Online Function:

$20
$10
$30
($20/($20+$10)) X $24 = $16
($10/($20+$10)) X $24 = $ 8
Total Transaction Price $24
22
Investors Considerations:
Where Significant Impact Expected (Steps 1 and 3)
WHERE IT WILL LIKELY MATTER MOST
Step #1
Identify
Contract
Step #3
Determine
Transaction
Price
Business Models:
Where cash collection occurs well after delivery of goods and services
With significant revenue adjustments or implied price concessions (i.e. discounts, rebates, refunds) that
occur at future dates
With performance based revenue (e.g. franchisors)
POTENTIALLY SIGNIFICANT IMPACT ON REPORTED REVENUE AMOUNTS
Collectability Risk Measurement:
To be based on transaction price (i.e. entitled consideration) rather than contract price as could be
occurring under current practice
May result in increased revenue amounts.
Need to be clear whether entitled consideration only presents price concession or whether it includes
revenue credit risk
Variable Consideration
Need to monitor how effective management will be at predicting variable consideration

Need to monitor cash conversion of variable consideration
Potential improvement in comparability as new standard addresses following areas where there is
inadequate or no current guidance:
Contract modification
Time value of money where there are significant financing components
Variable consideration timing and measurement

23
Where Significant Impact Expected (Steps 2 and 4)

Step #2
Identify
Performance
Obligation
Step #4
Transaction
Price
Allocation
Multiple-element contracts businesses with distinct deliverables spread across multiple time
periods
Intellectual property intensive business models that typically bundle products, services, licenses
in customer contracts (software, bio-tech, pharma-life sciences)
Telecommunications industry where revenue is currently not recognized on delivery of handset
POTENTIALLY SIGNIFICANT IMPACT ON REPORTED REVENUE AMOUNTS
Unit Of Account For Allocating Transaction Price May Change: There may be a change from
current practice in goods, services, or licenses that are deemed to be distinct (Additional
criterion all deliverables need to be distinct in context of contract (e.g. consider whether they
are integrated with the other goods or services within the contract?)
Use Of Estimated Selling Prices May Affect Amount, Timing And Measurement Reliability Of Revenue:
There will be no requirements for vendor specific objective evidence (VSOE) before allocating transaction price
to future period deliverables (e.g. software product upgrades)
Economic Representation: Does revenue reflect the economic worth (e.g. fair value) of the underlying
customer contract deliverables (goods, services, licenses) or is there an effective cross-subsidization of
product revenue in the pattern of reported revenue?
Potential Improvement In Comparability: Provides currently inadequate guidance on treatment of sales
incentives and customary business practice performance obligations (i.e. constructive performance
obligations)

24
Explaining Key Building Blocks:

Satisfy Performance Obligation (Step 5)
Step #5
Satisfy
Performance
Obligation
(Recognize
Revenue)
WHY STEP MATTERS?

(KEY INPUT FOR WHEN TO RECOGNIZE REVENUE)
Revenue amount depends on Steps 1, 2, 3, and 4.
When to recognize depends on Step 5.
Performance obligations are satisfied and revenue is recognized
when transfer of control of good or service to customer occurs.
Transfer of control means customers have the ability to direct
use of good or service received to derive economic benefits.
TWO POSSIBLE APPROACHES:
INFLUENCE AMOUNT AND TIMING OF REVENUE RECOGNITION
Performance obligation satisfied over time. (Company can select
either inputs or outputs based method of recognizing revenue
over time.)
Performance obligation satisfied at a point in time.

25
Recognize Revenue: Over Time (Step 5)

Key consideration = Customer controls asset being created as the reporting entity
performs over time.
1
CUSTOMER RECEIVES AND CONSUMES BENEFIT

AT THE SAME TIME
CRITERION IS RELEVANT FOR SERVICES (E.G.
PAYROLL MANAGEMENT, CLEANING SERVICES)
Criterion helps determine if deliverable is a

service.
If consumption of benefit is not immediate
consider whether re-performance will be
required if contract terminated
PERFORMANCE CREATES OR ENHANCES
ASSETS THAT CUSTOMER CONTROLS
WORK IN PROGRESS ASSETS CREATED
Development of an IT system
on customer premise

PERFORMANCE DOES NOT CREATE ASSET WITH

ALTERNATIVE USE
+
ENFORCEABLE RIGHT TO RECEIVE PAYMENT
THAT INCLUDES PROFIT MARGIN
INDICATORS OF ASSETS CREATED WITH NO ALTERNATIVE USE

FOR ENTITY:
Good or service customised for customer, significant
rework before selling to another customer
Contractual restrictions that limit sale to another customer
of good or service being created
Right to receive payments for work completed to date is an
indicator of control.
26
Recognize Revenue: Point In Time ( Step 5)
If not over time,

performance obligation is
satisfied at a point in
time.

Revenue recognized when transfer of

control of goods and services to
customer occurs.
Indicators of Control:
Physical possession
Customer acceptance
Legal ownership
Present right to payments
Risks and rewards of ownership
27
Recognize Revenue (Step 5) Example

RESIDENTIAL UNITS CONSTRUCTION
OVERTIME
POINT IN TIME
Real estate developer enters into contract with customer

to develop 40 residential units over the next three years
Units are all custom built
Customer pays non-refundable deposit and makes
progress payments
Contract has terms that preclude the real estate
developer from being able to direct unit to another
customer
If customer defaults on contract before completion of
units (e.g. after 20 units are built), real estate developer
is entitled to revenue for the number of units completed
(right to payment for performance)
Real estate developer enters into contract with customer

to develop 40 residential units over the next three years
Units are all custom built
Customer pays non-refundable deposit, only refundable
to customer if real estate developer fails to complete the
construction of the units
Customer will pay the rest of the contract price on
completion of construction
If customer defaults on contract before completion of
units, real estate developer is only entitled to retain
customer deposit (no right to payment for performance)
REVENUE RECOGNIZED AS CONSTRUCTION OF EACH

UNIT IS COMPLETED

REVENUE ONLY RECOGNIZED ON COMPLETION OF

CONSTRUCTION OF ALL 40 UNITS
28
Where Significant Impact Expected (Step 5)

Step #5
Satisfy
Performance
Obligation
INVESTOR QUESTIONS TO JUDGE WHETHER REVENUE IS RECOGNIZED OVER

PARTICULAR BUSINESS MODELS
(Recognize
Revenue)
Long term construction contracts (e.g. Real estate, equipment manufacturer, engineering cos)
Multi-period service contracts
Does the reporting companies contract with sales entail the delivery of a pure service over multiple
periods (e.g. Consultancy, legal services)?
Does the reporting company enter long term contracts that involve the creation of bespoke goods or
services for its customers?
Does business model feature the creation of work in progress assets that are controlled by its
customer (e.g. Some types of government contracts)?
CONSIDERATIONSPERFORMANCE OBLIGATION SATISFIED OVER TIME
Will the companies that previously applied the percentage of completion method continue to do so?
What will be the impact of the selected methods (input- versus output-based methods) on the timing of revenue
recognition?
CONSIDERATIONSPERFORMANCE OBLIGATION SATISFIED AT POINT IN TIME
What will be timing effects on revenue due to recognition based on transfer of control of goods and services to customer,
as opposed to mainly transfer of risks and rewards?

29
Revenue Special Items

30
Implementation Guidance
REVENUE ADJUSTMENTS
Warranties (Quality assurance and service warranties)

Refunds, rebates
Right of returns
Breakages Customer unexercised rights e.g. (customer missed flights)
SPECIAL ITEMS
Licenses Critical for many intellectual property intensive business

Customer options for additional goods or services
Principal versus agent
Bill-and-hold arrangements
Repurchase agreements
Non-refundable upfront fees
Customer acceptance
INVESTOR CONSIDERATIONS
Where will these special items be disclosed or presented?

Will the treatment of these items change significantly from current guidance?

31
Cost Recognition

32
New Cost Recognition Guidance

COSTS OF
OBTAINING
A CONTRACT
COSTS OF
FULFILLING
A CONTRACT
Recognized as an asset if they are:
Recognized as an asset if they:
relate directly to a contract;

generation or enhance resources of
the entity that will be used to satisfy
performance obligations in the future;
and
are expected to be recovered.
incremental; and
expected to be recovered.
Practical Expedient:
May recognize as an expense when
occurred if the amortization period is one
year or less.
Example:
Selling Commissions

Example:
Pre-Contract or Setup Costs
33
Amortization and Impairment of Deferred Costs

AMORTIZATION
AMORTIZE ON A SYSTEMATIC BASIS Consistent with the pattern of transfer of the goods or services to
which the asset relates. In some instances amortization may be extend beyond original contract period to
specifically anticipated (i.e. future) contract.
IMPAIRMENT
EVALUATE AND RECOGNIZE FOR IMPAIRMENT
Recognize an impairment loss to the extent that the carrying amount of an asset recognized exceeds:
Consideration: The remaining consideration that the entity expects to receive in exchange for the goods and
services to which the asset relates.
Costs: The costs directly related to providing the goods and services which have not been recognized as an
expense.
REVERSAL OF IMPAIRMENTS
IASB Permits reversal of an impairment and an increase in the carrying amount of the asset, limited to the
carrying amount that would have been determined (net of amortization and depreciation).
FASB Does not permit reversal of impairments.

34
Costs: Analyst and Investor Considerations
DISCLOSURES (TRANSPARENCY)
REQUIRED DISCLOSURES
Judgments in determining costs to be deferred
and amortization period (qualitative)
Ending balance and amount of amortization and
impairment (quantitative)
(i.e., see items noted to the right)
NOT REQUIRED
Rollforward of account balances
Reconciliation to amounts disclosed in notes to
those presented on balance sheet or income
statement not required
Amortization periods
Expected run-off period for deferred costs
Deferred Costs at Beginning of Year

Costs Deferred:
Cost to Acquire
Cost to Fulfill
Amortization
Impairment
Acquisitions/(Dispositions)
Foreign Currency
Deferred Costs at End of Year
X,XXX
X,XXX
X,XXX
(X,XXX)
(X,XXX)
X,XXX
X,XXX
X,XXX
IMPACT ON METRICS
Analysts and investors must assess the impact on metrics (expense ratios, EBITDA, asset ratios) of the one-time
change and the ongoing impacts.
Will metrics like EBITDA be adjusted given amortization of expenses?

35
Disclosures

36
Why Revenue Disclosures Improvements

Required by Investors
REVIEW OF EXISTING DISCLOSURES OF DOW 30 COMPANIES
CONCENTRATED IN POLICY NOTES
Generally revenue disclosures were concentrated in the policy note.
In most instances highly generic (non entity specific) in description.
Difficult to ascertain where some of the refunds, rebates, incentives presented.
QUALITATIVE NOT QUANTITATIVE

Qualitative not quantitative in nature despite being single biggest determinate of firm success in a given
period. Only 7 of 30 provided any quantitative information.
In the 15 of 30 companies where revenue was considered as a critical accounting policy, there was no
quantitative information provided to facilitate better understanding of the impact of these critical estimates.
NEED FOR IMPROVEMENTS DUE TO:

SIZE OF BALANCES, SIGNIFICANCE OF JUDGEMENTS, INFORMATION RISK
IMPORTANCE OF NUMBERS TO INVESTORS
NEED TO UNDERSTAND RELATIONSHIP TO CASH (CASH CONVERSION)

37
Updated Disclosure Requirements

DISCLOSURE OBJECTIVE: To enable users of financial statements to understand the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers
User needs
Disclosure
Workshops
Preparer
concerns
Clarifications and refinements to disclosure

requirements
Disaggregation of revenue
Information about contract balances
Transaction price allocated to remaining
performance obligations
Interim requirements

38
Review of Terms
Are performance obligations liabilities?
Performance
Promise to Perform
Obligation
Satisfied
Performance
Obligation
Revenue*
* There may be circumstances where revenue is not yet recognized at
satisfaction of performance, but this is generally true.
Liability on
Performance
Obligation

[Unless
proceeded by
cash]
Balance Sheet
39
Review of Terms
When are performance obligations reflected in financials?
Contract
Prior To
Satisfying
Performance
Obligation
Satisfy
Performance
Obligation
Prior To
Receiving
Cash
Trade
Satisfy
Performance
Obligation
Prior To
Receiving
Cash and
Conditioned on Other
Than Passage of Time
Contract
Cash Received

Liability
Receivable
Asset
40
Review of Terms
All
Performance
Obligations
Contract
Liabilities

Disclosure =
Performance
Obligations To
Be Satisfied in
One Year or
More
Backlogs:
Backlogs are a subset of
performance obligations.
Performance obligations are not
backlogs per se.
Disclosures:
Disclosures will not include
quantitative information regarding
all performance obligations and will
not identify which performance
obligations are already contract
liabilities.
This will limit analytical usefulness.
41
Disclosures:
Overview of Proposed Disclosures
Objective:
To enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue
and cash flows arising from contracts with customers.
To achieve that objective, an entity shall disclose information about:
Contracts with Customers
Disaggregation of Revenue
Contract Balances
Performance Obligations
Judgements or
Changes in Judgements Made
Determination of Timing of Satisfaction of

Performance Obligations
Determining Transaction Prices and
Amounts Allocated to Performance Obligations
Assets Recognized from Cost to

Obtain or Fulfil Contracts with Customers
INTERIM DISCLOSURES: IFRS US GAAP

42
Disclosures:
Nature of Proposed Disclosures
DISAGGREGATION OF REVENUE
BY NATURE, AMOUNT, TIMING, AND UNCERTAINTY Revenue will be disaggregated into

categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows
are affected by economic categories: Quantitative
Example categories include in the implementation guidance include:
Type of good or service

Geography
Market or type of customer
Type of contract
Contract duration
Timing of transfer of goods or service
Sales channel
DISAGGREGATION DISCLOSED IN NOTES NOT ON FACE Disaggregation will not appear on

face of statement of comprehensive income (income statement), but in notes to financial
statements.
DISAGGREGATION BY PERFORMANCE OBLIGATION Disaggregation will not necessarily
correspond to performance obligation determination or performance obligation disclosures.

43
Disclosures:
CONTRACT BALANCES
DISCLOSE ALL OF THE FOLLOWING:
Opening and closing balances of receivables, contract assets, and contract liabilities
Revenue recognized Quantitative
and included in contract liabilities at beginning of period
from performance obligations satisfied in prior periods
TIMING OF SATISFACTION OF PERFORMANCE OBLIGATIONS:
Explain how the timing of satisfaction of performance obligations relates to the typical timing of payment and the
effect that those factors have on the contract asset and contract liability balances (qualitatively)
CHANGES IN CONTRACT ASSET AND CONTRACT LIABILITY BALANCES: Explain
significant Examples of changes in the entitys balances of contract assets and liabilities include:
Changes due to business combinations Quantitative
Cumulative catch-up adjustments to revenue that affect corresponding asset/liability Quantitative
Impairment of a contract assets Quantitative
A change in the time frame for a right to consideration to become unconditional
(i.e. reclassifying a contract asset to a receivable)

A change in the time frame for a performance obligation to be satisfied
(i.e. recognizing revenue arising from a contract liability)

44
Disclosures:
PERFORMANCE OBLIGATIONS
DESCRIPTION OF PERFORMANCE OBLIGATIONS:
When entity typically satisfies performance obligations.
For example, upon shipment, upon delivery, as
services are rendered or upon completion of service
Including bill-and-hold arrangements
Significant payment terms
For example, when payment is typically due, whether
the contract has a significant financing component, is
variable, and is typically constrained
Nature of goods and services promised to transfer
Highlighting any performance obligations to arrange for
another party to transfer goods
Obligations for returns, refunds, and other similar
obligations
Types of warranties and related obligations

TRANSACTION PRICE ALLOCATED TO REMAINING

PERFORMANCE OBLIGATIONS:
An entity shall disclose the following information:
Aggregate amount of the transaction price
allocated to the unsatisfied obligations Quantitative
An explanation of when the entity
expects to recognise as revenue the
amount disclosed Quantitative
An entity need not disclose above information if either

following conditions is met (practical expedients is taken):
Performance obligation is part of a contract that has an
original expected duration of one year or less
Entity recognises revenue from the satisfaction of the
performance obligation in amount equal to the amount
which can be invoiced
45
Disclosures:
JUDGEMENTS OR CHANGES IN JUDGEMENTS
DETERMINATION OF
TIMING OF SATISFACTION OF
DETERMINING TRANSACTION PRICE AND

AMOUNT ALLOCATION TO
POINT-IN-TIME DISCLOSURES
Disclose significant judgements
made in evaluating when customer
obtains control of goods or services.
OVER TIME DISCLOSURES
Methods used to recognize revenue
and an explanation of why such
methods faithfully depict the transfer
of goods or services
Disclose information about the methods, inputs

and assumptions used to:
Determine the transaction price
Assess constraints on variable consideration
Allocate the transaction price and estimate
stand-alone selling prices and allocate
discounts and variables to specific parts of
contract
Measure obligation for returns, refunds,
warranties, and similar obligations

46
Disclosures:
Analyst and Investor Considerations
WHERE WILL DISCLOSURES BE LOCATED?
SEPARATE REVENUE NOTE?

JUDGEMENTS AND CHANGES IN JUDGEMENTS POLICY NOTE?
DISAGGREGATION SEGMENT NOTE?
CONTRACT BALANCES AND PERFORMANCE OBLIGATIONS
NEW NOTE? EMBEDDED WITHIN OTHER NOTES?
OVERALL OBSERVATIONS/CONSIDERATIONS
QUALITATIVE VS. QUANTITATIVE
RECONCILING TO FINANCIAL STATEMENTS AND CONTEXTUALIZING
RELATIONSHIP BETWEEN REVENUE AND CASH
DECISION-USEFULNESS
INTERIM DISCLOSURES UNDER IFRS

47
Summing It Up
EFFECTIVE DATE AND TRANSITION
Be aware of the effective date of the entities you follow and identify the transition
method they intend to use.
Evaluate reasons for early or prospective adoption.
Remember that comparability within and between companies maybe altered.
When there is a change, it will likely impact a significant number of financial statement
line items.
Analyze the change (whether cumulative effect or retrospective adoption) to provide
insights into the nature of the revenue and the issues company face with recognizing
and measuring revenue.
The change may be the most informative/insightful piece of information as it will allow
users to understand not only the new standard but the nature of the revenue
transactions.
Financial ratios and metrics will change.

48
Summing It Up (2)
RECOGNIZING AND MEASURING REVENUE
The application of the five steps may not be transparent to those external to the organization.
Understanding whether there are:
multiple performance obligations,

the need to allocate transaction price,
the existence of variable consideration, and
performance obligations which are longer in duration;
should lead analysts and investors to ask more questions.
There is greater information risk with these subjective estimates and disclosures will likely be
highly qualitative.
It is important to understand how collectability is being assessed under the new standard.
Consider the special items and their potential impact.
While not industry focused, it is important to follow what is being said about the new standard by
industry to understand implication.

49
Summing It Up (3)
COSTS
Less obvious, but potentially significant impact.
Relationship between cash and expense may be challenging to assess.
DISCLOSURES
While there may be greater quantitative information on the disaggregation of
revenue, likely to be highly qualitative disclosures on judgements and estimates
made in measuring and recognizing revenue.
May be hard to contextualize the numbers given no requirement, other than for
revenue disaggregation, to reconcile to amounts presented in financial statements.

50

New Rev Rec Standards Impacts

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New Rev Rec Standards Impacts

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IASB and FASBs New Revenue Recognition Standard:

How Will Changes Impact Investors?

Vincent Papa, CFA

Patrick Finnegan, CFA

Head, Financial Reporting Policy

A CFA Institute Production

IMPLICATIONS/CONSIDERATIONS/QUESTIONS FOR INVESTORS

A CFA Institute Production

Transition and Effective Date

QUESTIONS AND ANSWERS

A CFA Institute Production

Why Is Revenue Recognition Change Important for

A CFA Institute Production

A CFA Institute Production

Background to New Standard

A CFA Institute Production

Revenue Recognition Project

WHY THIS SOLUTION?

Current Challenges Existing requirements in

Diverse revenue recognition practices; and

US GAAP contains numerous transaction and

More Robust Framework Providing a more

Desire for Convergence Policymakers felt

A CFA Institute Production

Effective Date and Transition Requirements

A CFA Institute Production

Effective Date and Early Application

Annual reporting periods beginning after 15 December 2016

A CFA Institute Production

Cumulative effect at date of

Contracts not restated

Existing* and new

Existing and new contracts

A CFA Institute Production

A CFA Institute Production

A CFA Institute Production

PAY ATTENTION TO TRANSITION RESOURCE GROUP ISSUES

A CFA Institute Production

How Will Revenue Be Measured and Recognized?

A CFA Institute Production

Framework to Recognize Revenue

IMPORTANT FOR INVESTORS TO UNDERSTAND BUILDING BLOCKS

A CFA Institute Production

Overview of Revenue Recognition Principles

A CFA Institute Production

Recognize revenue when they transfer control of good or service to

Considered to be a more robust criterion than focusing on only the

Based on amount of consideration to which seller expects to be

Not based on fair value at inception of distinct performance

Explaining Key Building Blocks: The Contract(s) (Step 1)

Contract may be written, verbal or implied by customary business

A CFA Institute Production

Explaining Key Building Blocks: Performance Obligations (Step 2)

Promises within contract to deliver goods or services

Promises implied by customary business practices

WHY STEP MATTERS?

A CFA Institute Production

Distinct in context of contract (not integrated with delivery of other goods)

Explaining Key Building Blocks:

Significant financing components (time value)

Consideration payable to customer

(Dependent on Step 1 to assess entitled consideration)

VARIABLE CONSIDERATION MEASUREMENT AND RECOGNITION