Financial Reporting Brief Roadmap to Understanding the

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periods within annual reporting periods beginning one year after the annual reporting period in which an entity first applies the. guidance in ASU No 2014 09, This document reorganizes the guidance contained in Topic 606 to follow the five step revenue recognition model along with other. guidance impacted by this standard Additionally it provides references to applicable examples in the implementation guidance. Scope Who Should Apply the Guidance,FASB ASC 606 10 15 2 through 15 4. The revenue recognition standard affects all entities public private and not for profit that either enters into contracts with. customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contrac ts are. within the scope of other standards for example leases and insurance contracts Financial instruments guarantees other than. product or service warranties and nonmonetary exchanges between entities in the same line of business to facilitate sales t o. customers or potential customers are also scoped out. The core principle of Topic 606 is that an entity should recognize revenue to. depict the transfer of goods or services to customers in an amount that. reflects the consideration to which the entity expects to be entitled. in exchange for those goods or services, FASB ASC 606 10 05 3 through 05 4 and 606 10 10 2 through 10 4. The revenue recognition standard explains that To achieve the core princple of Topic 606 an entity should take the following. Step 1 Identify the contract with a customer, Step 2 Identify the performance obligations in the contract. Step 3 Determine the transaction price,Step 4 Allocate the transaction price.
Step 5 Recognize revenue when or as the entity satisfies a. performance obligation, Revenue is recognized when a company satisfies a performance obligation by transferring a promised good or service to a customer. which is when the customer obtains control of that good or service. An entity should consider the terms of the contract and all relevent facts and circumstances when applying the revenue recogn ition. standard An entity should apply the revenue recognition standard including the use of any practical expedients consistently to. contracts with similar characteristics and in similar circumstances. aicpa org FRC, Practical Expedient The revenue recognition standard prescribes accounting for an individual contract with a customer but allows. for application of the guidance to a portfolio of contracts or performance obligations with similar characteristics if the entity. reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ m aterially. from applying this guidance to the individual contracts or performance obligations within that portfolio. Step 1 Identify the contract s with a customer FASB ASC 606 10 25 1 through 25 8. The revenue recognition standard prescribes that an entity should account for a contract with a customer that is within its scope. only when all of the following criteria are met, a The parties to the contract have approved the contract in writing orally or in accordance with other customary. business practices and are committed to perform their respective obligations. b The entity can identify each party s rights regarding the goods or services to be transferred. c The entity can identify the payment terms for the goods or services to be transferred. d The contract has commercial substance that is the risk timing or amount of the entity s future cash flows is expected. to change as a result of the contract, e It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for. the goods or services that will be transferred to the customer collectability threshold In evaluating whether. collectability of an amount of consideration is probable an entity should consider only the customer s ability and. intention to pay that amount of consideration when it is due The amount of consideration to which the entity will be. entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the. customer a price concession,The Contract,FASB ASC 606 10 25 2 through 25 8.
A contract is an agreement between two or more parties that creates enforceable rights and obligations Enforceablity of the rights. and obligations in the contract is a matter of law Contracts can be written oral or implied by an entity s customary business. practices The practices and processes for establishing contracts with customers vary across legal jurisidictions industries and. entities In addition they may vary within an entity for example they may depend on the class of customer or the nature of the. promised goods or services Those practices and processes should be considered in determining whether and when an agreement. with a customer creates enforceable rights and obligations of the entity. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed. contract without compensating the other party parties A contract is wholly unperformed if both of the following criteria are met. a The entity has not yet transferred any promised goods or services to the customer. b The entity has not yet received and is not yet entitled to receive any consideration in exchange for promised goods or. If a contract with a customer meets the criteria to be considered a contract under the revenue recognition standard at contract. inception those criteria should not be reassessed unless there is an indication of a significant change in facts and circumstances If. a contract with a customer does not meet the criteria to be considered a contract under the revenue recognition standard the. contract should continue to be assessed to determine whether the criteria are subsequently met. When a contract with a customer does not meet the criteria to be considered a contract under the revenue recognition standard. and consideration is received from the customer the entity should recognize the consideration received as revenue only when one. or more of the following events have occurred, a The entity has no remaining obligations to transfer goods or services to the customer and all or substantially all of the. consideration promised by the customer has been received by the entity and is nonrefundable. b The contract has been terminated and the consideration received from the customer is nonrefundable. c The entity has transferred control of the goods or services to which the consideration that has been received relates the. entity has stopped transferring goods or services to the customer if applicable and has no obligation under the contract. to transfer additional goods or services and the consideration received from the customer is nonrefundable. Consideration received from the customer should be recognized as a liability until one of the events above occurs or until the. contract meets the criteria to be considered a contract with a customer under the revenue recognition standard are subsequently. met Depending on the facts and circumstances relating to the contract the liability recognized represents the entity s obligatio n to. either transfer goods or services in the future or refund the consideration received In either case the liability should be measured. at the amount of consideration received from the customer. Collectability Threshold, FASB ASC 606 10 25 1 e and 606 10 55 3 a through 55 3 c. One of the required criteria in FASB ASC 606 10 25 1 is that it be probable that the entity will collect substantially all of the. consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer to be. considered a contract with a customer, FASB ASC 606 10 25 3 explains that in evaluating the criterion in FASB ASC 606 10 25 1 e an entity should assess the collectibility. of the consideration promised in a contract for the goods or services that will be transferred to the customer rather than assessing. the collectibility of the consideration promised in a contract for all of the promised goods or services see 606 10 55 3 a through. Difference with IFRS Collectability Threshold, The collectability threshold is probable under both GAAP and IFRS 15 because that is similar to current guidance under each of the. frameworks It should be noted that in GAAP probable is defined as likely to occur while it is defined in some IFRSs as more likely. than not This is one of the differences between the standards. Probable as defined under GAAP is a slightly higher threshold as compared to IFRS this may mean there will be differences between. what is considered a contract with a customer under the two revenue recognition standards. For additional information see example 1 Collectability of the Consideration in FASB ASC 606 10 55 95 through 55 98. Combination of Contracts,FASB ASC 606 10 25 9, Two or more contracts entered into at or near the same time with the same customer or related parties of the customer should.
be combined and accounted for as a single contract if one or more of the following criteria are met. The contracts are negotiated as a package with a single commercial objective. The amount of consideration to be paid in one contract depends on the other price or performance of the other. The goods and services promised in the contracts or some goods or services promised in the contracts are a single. performance obligation in accordance with the standard. Contract Modifications,FASB ASC 606 10 25 10 through 25 13. A contract modification is a change in the scope or price of a contract or both that is approved by the parties to the contract. sometimes called a change order a variation or an amendment A contract modification exists when the parties to a contract. approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. A contract modification could be approved in writing orally or implied by customary business practice If the parties to a contract. have not approved a contract modification an entity should continue to apply the guidance in the Standard to the existing contract. until the contract modification is approved,aicpa org FRC. A contract modification may exist even though the parties to the contract have a dispute about the scope or price or both of the. modifications or the parties have approved a change in the scope of the contract but have not yet determined the corresponding. change in price In determining whether the rights are obligations that are created or changed by a modification are enforceable. an entity should consider all relevent facts and circumstances including the terms of the contract and other evidence. If the parties to a contract have approved a change in the scope of the contract but have not yet determined the correspondin g. changes in price an entity should estimate the change to the transaction price arising from the modification in accordance with the. guidance on estimating variable consideration and constraining estimates of variable consideration. An entity should account for a contract modification as a separate contract if both of the following conditions are present. a The scope of the contract increases because the addition of promised goods or services that are distinct. b The price of the contracts increases by an amount of consideration that reflects the entity s standalone selling prices of. the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of. the particular contract For example an entity may adjust the standalone selling price of an additional good or service for. a discount that the customer receives because it is not necessary for the entity to incur the selling related costs that it. would incur when selling a similar good or service to a new customer. If a contract modification is not accounted for as a separate contract if both of the conditions above are not met an entity should. account for the promised goods or services not yet transferred at the date of the contract modification that is the remaini ng. promised goods or services in whichever of the following ways is applicable. a Account for the contract modification as if it were a termination of the existing contract and the creation of a new contract. if the remaining goods and services are distinct from the goods or services transferred on or before the date of the contract. modification The amount of consideration to be allocated to the remaining performance obligations or to the remaining. distinct goods or services in a single performance obligation is the sum of. 1 The consideration promised by the customer including amounts already received from the customer that was. included in the estimate of the transaction price and that had not been recognized as revenue and. 2 The consideration promised as part of the contract modification. b Account for the contract modification as if it were a part of the existing contract if the remaining goods or services are not. distinct and therefore form part of a single performance obligation that is partially satisfied at the date of the contract. modification The effect that the contract modification has on the transaction price and on the entity s measure of. progress toward complete satisfaction of the performanc. Financial Reporting Brief Roadmap to Understanding the New Revenue Recognition Standards In May 2014 FASB issued Accounting Standards Update ASU 2014 09 Revenue from Contracts with Customers Topic 606 and the International Accounting Standards Board IASB issued International Financial Reporting Standards IFRS 15 Revenue from

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