Published on August 26, 2016
1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series™ Top Issues in the New Revenue Recognition Guidance Manufacturers Should Consider Mark Winiarski, Peter Gold August 25, 2016
2. #cbizmhmwebinar 2 About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest* and advisory services • Over 2,900 professionals nationwide A member of Kreston International A global network of independent accounting firms *MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.
3. #cbizmhmwebinar 3 Before We Get Started… • To view this webinar in full screen mode, click on view options in the upper right hand corner • Click the Support tab for technical assistance • If you have a question during the presentation, please use the Q&A feature at the bottom of your screen
4. #cbizmhmwebinar 4 CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar External participants will receive their CPE certificate via email immediately following the webinar
5. #cbizmhmwebinar 5 Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business.
6. #cbizmhmwebinar 6 Presenters Located in our Kansas City office, Mark is a member of MHM’s Professional Standards Group (PSG). Mark's role includes instructing in our national training program, presenting as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member, Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous industries including manufacturing, distribution, mining, retail sales, services and software. 816.945.5614 • [email protected] • @KCWini MARK WINIARSKI, CPA MHM Shareholder
7. #cbizmhmwebinar 7 Presenters Peter is a Shareholder located in our Boston office. He is a member of the Accounting and Auditing Group and joined CBIZ Tofias in 1992. Peter has extensive experience in the manufacturing, distribution, insurance, investment funds, private equity, and professional services industries. Peter specializes in performing audits and reviews of financial statements, internal control system evaluations, management advisory services and consulting on various management, operational, and financial related matters. 617.761.0739 • [email protected] PETER GOLD, CPA MHM Shareholder
8. #cbizmhmwebinar 8 Agenda Bill and Hold Warranties Topic 606 Overview Long-Term Contracts Variable Consideration
9. #cbizmhmwebinar 9 TOPIC 606 OVERVIEW
10. #cbizmhmwebinar 10 New Five-Step Process • Five steps to apply the core principle: 1 • Identify the contract(s) with a customer 2 • Identify the performance obligations in the contract 3 • Determine the transaction price 4 • Allocate the transaction price to the performance obligations in the contract 5 • Recognize revenue when (or as) the entity satisfied a performance obligation
11. #cbizmhmwebinar 11 Increased Presentation and Disclosure Requirements - Examples The disclosure requirements are significantly in excess of what is currently required under U.S. GAAP. Delineation between contract assets, contract liabilities and receivables Quantitative disclosures showing over-time and point-in-time revenues Qualitative discussion about economic factors impacting revenues and cash flows • Customer types • Geographical locations • Types of contracts
12. #cbizmhmwebinar 12 Preparing for the Standard • Calendar year entity: • Public Business Entity: December 31, 2018 • All other entities: December 31, 2019 • Adoption methods • Retrospective • Retroactive to all years presented • Modified retrospective • Retroactive to the first day of the year of adoption • Disclose revenues under old guidance
13. #cbizmhmwebinar 13 BILL AND HOLD
14. #cbizmhmwebinar 14 Bill and Hold Arrangements • Bill-and-hold arrangements arise when a customer is billed for goods that are ready for delivery, but the entity does not ship the goods to the customer until a later date. • Existing GAAP does not specify when revenue for a bill-and-hold arrangement can be recognized. • SEC staff established seven criteria, including a requirement for a fixed delivery schedule.
15. #cbizmhmwebinar 15 Bill and Hold Arrangements A bill-and-hold arrangement must meet four criteria for control to have transferred and revenue recognized while the goods have not been physically transferred The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement) The product must be identified separately as belonging to the customer The product currently must be ready for physical transfer to the customer The entity cannot have the ability to use the product or to direct it to another customer
16. #cbizmhmwebinar 16 Bill and Hold Arrangements • Substitution of the goods for use in other orders indicates that the goods are not controlled by the customer and therefore revenue should not be recognized until the goods are delivered, or the criterion is satisfied. • An entity that has transferred control of the goods and met the bill-and-hold criteria to recognize revenue needs to consider whether it is providing custodial services in addition to providing the goods. If so, a portion of the transaction price should be allocated to each of the separate performance obligations. • Shipping and handling may be elected to be treated as fulfillment cost, fulfillment costs are accrued when revenue is recognized.
17. #cbizmhmwebinar 17 Bill and Hold Arrangements - Example Toy Manufacturer enters into a contract during 20X7 to supply 100,000 Superman action figures to Target. The contract contains specific instructions from Target about where the action figures should be delivered. Toy Manufacturer must deliver the action figures in 20X8 at a date to be specified by Target. Target expects to have sufficient shelf space at the time of delivery. As of December 31, 20X6, Toy Manufacturer has inventory of 120,000 action figures, including the 100,000 relating to the contract with Target. The 100,000 action figures are stored with the other 20,000 action figures, however, Toy Manufacturer will not deplete its inventory below 100,000 units. When should Toy Manufacturer recognize revenue for the 100,000 action figures to be delivered to Target?
18. #cbizmhmwebinar 18 Bill and Hold Arrangements Toy Manufacturer should not recognize revenue until the bill-and-hold criteria are met or if Toy Manufacturer no longer has physical possession and all of the other criteria related to the transfer of control have been met. Although the reason for entering into a bill-and hold transaction is substantive (lack of shelf space), the other criteria are not met as the action figures produced for Target are not separated from other products.
19. #cbizmhmwebinar 19 LONG-TERM CONTRACTS
20. #cbizmhmwebinar 20 Long-Term Contracts - Considerations Defining the contract, such as when to combine contracts, and when and how to account for change orders and other modifications Defining the contract price, including variable consideration, customer-furnished materials, claims, and financings Recognition methods, determining when control transfers. If over-time recognition is appropriate establish an input/output method to measure performance Accounting for contract costs, such as pre-contract costs and costs to fulfill a contract Accounting for loss-making contracts
21. #cbizmhmwebinar 21 Long-Term Contracts - Financing • An entity shall consider all relevant facts and circumstances in assessing whether a contract contains a financing component and whether that financing component is significant to the contract, including both of the following: • The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services • The combined effect of both of the following: • The expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services • The prevailing interest rates in the relevant market
22. #cbizmhmwebinar 22 Long-Term Contracts - Financing A contract with a customer would not have a significant financing component if any of the following factors exist The customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer. A substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity (for example, if the consideration is a sales based royalty). The difference between the promised consideration and the cash selling price of the good or service…arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.
23. #cbizmhmwebinar 23 Long-Term Contracts - Costs • Capitalize or don’t capitalize costs? • Costs to obtain a contract • Pre-contract costs • Costs to fulfill a contract • Learning curves • For example, custom manufacturers often incur costs relating to the design and testing of products and manufacturing techniques when preparing to provide service under a new contract. Set-up costs may include labor, overhead, or other specific costs. Some of these costs might meet the definition of assets under other standards, such as property, plant, and equipment.
24. #cbizmhmwebinar 24 Long-Term Contracts Costs to fulfill a contract are costs directly related to a contract but are not a performance obligation, design, set-up, tooling etc. Can be capitalized and amortized if certain conditions are met. Pre-contract costs include costs incurred in anticipation of a contract. Can be capitalized and amortized if certain conditions are met. Costs to obtain a contract are costs incurred as a result of signing a contract. Direct commissions, legal fees contingent upon signing a specific contract. Costs are capitalized and amortized.
25. #cbizmhmwebinar 25 Long-Term Contracts – Capitalizing Costs • Inventory • Internal-use software • Property, plant and equipment • Software to be sold • Costs to fulfill a contract • Cost relates directly to a contract/anticipated contract • Cost generates or enhances resources to satisfy future performance obligations • Costs are expected to be recovered FASB has proposed eliminating the guidance on capitalizing pre- production costs for long-term supply contracts in ASC 340-10
26. #cbizmhmwebinar 26 Long-Term Contracts – Costs To Be Expensed • General n administrative costs • Unless explicitly chargeable to the customer • Costs of wasted materials, labor or other resources not reflected in the price of the contract • Costs that relate to satisfied performance obligations • Costs that cannot be distinguished between unsatisfied and satisfied performance obligations Production contracts may have a “learning curve” where costs are higher for the first units produced. Costs related to learning curves must be carefully analyzed to determine if they should be capitalized or expensed as incurred.
27. #cbizmhmwebinar 27 WARRANTIES
28. #cbizmhmwebinar 28 Accounting for Warranties Topic 605 (existing US GAAP) Included warranty is accounted for under guidance for guarantees Separately priced warranty is accounted for as a service Topic 606 Assurance-type warranty accounted for under guidance from guarantees Service-type warranty accounted for as a performance obligation
29. #cbizmhmwebinar 29 Service Type Warranty • When is a warranty a separate performance obligation? • Customer has the option to purchase separately, or • Warranty provides a service beyond assurance that the product complies with agreed-upon specifications, weight factors such as • Is the warranty required by law? • What is the length of warranty coverage? • What types of tasks are promised? Don’t forget about non-contractual “customer retention/service” activities that might result in implied warranties
30. #cbizmhmwebinar 30 Service Type Warranty - Example An entity manufactures fork-lifts used in warehouses It sells the fork-lift for $10,000 and includes a 1 year warranty on parts and labor as required by law •Typically incur $500 in warranty costs in year 1 In the past customers have come back after 1 year and requested to buy an additional 5 years of warranty for on average $5,000 A new customer contracts to buy a fork- lift and 5 additional years of warranty •Fork-life is priced at $10,000 •Warranty is priced at $4,000
31. #cbizmhmwebinar 31 Service Type Warranty - Example • How many performance obligations exist? • Does an assurance-type warranty exist? • Does a service-type warranty exist? • Has the customer financed the service-type warranty? • How much consideration should be allocated to the fork-lift and to the service-type warranty? Standalone Selling Price Relative Price Allocated Revenue Fork-Lift 10,000$ 67% 9,333$ Warranty 5,000 33% 4,667 Total 15,000$ 100% 14,000$
32. #cbizmhmwebinar 32 Service Type Warranty - Example • When should revenue be recognized? • Year 1 Journal Entry Debit Account receivable 14,000$ Revenue (9,333) Contract liability (4,667) To record sale of fork-lift and service-type warranty Warranty expense 500 Accrued warranty (500) To record liability for assurance-type warranty guaranty
33. #cbizmhmwebinar 33 VARIABLE CONSIDERATION
34. #cbizmhmwebinar 34 Variable Consideration • Variable consideration is estimated using either: • Most likely amount • Expected value • Forms of variable consideration common for manufacturers: • Coupons • Rebates • Volume discounts • Price protection • Rights of return • Price concessions Constraint: variable consideration is only recognized to the extent it is not probable that a significant reversal will occur
35. #cbizmhmwebinar 35 Contract Approach vs Portfolio Approach • Topic 606 is a contract based model • However, as a practical expedient, the guidance may be applied to a portfolio of contracts or performance obligations with similar characteristics • Reasonably expect that the accounting for the portfolio would not differ materially from a contract based application • Example: How might it compute the transaction price? The agreed upon price is $10,000, based on past history it expects that it will offer a price concession when it collects the final payment. A manufacturer sells a piece of equipment in China.
36. #cbizmhmwebinar 36 Contract Approach vs Portfolio Approach • Portfolio based approach, assume all outstanding sales to China total $1,000,000 • The past three years the price concession on sales to China have averaged 10%, 11% and 9% • No significant changes that would impact the amount of price concessions • Compute the transaction price as $900,000 ($1,000,000 * 90%) Amount Expected to be Received Probability 10,000$ 10% 1,000$ 9,500 30% 2,850 9,000 35% 3,150 8,500 20% 1,700 7,000 5% 350 Tranasction Price: 9,050$ Probability that the entity will receive at least $9,000 is 75% $10,000 – 10% $9,500 – 30% $9,000 – 35% • Contract based approach
37. #cbizmhmwebinar 37 Rights of Return - Example A manufacturer of medical testing equipment sells a good worth $1,000 and estimates that 5% is expected to be returned. The cost of good was $800 There is no significant restocking cost How should the manufacturer account for the right of return?
38. #cbizmhmwebinar 38 Distributor/Retailer • Accounting for Returns – Journal entry Account Debit Cash $1,000 Right of return asset 40 Cost of sales 760 Revenue (950) Inventory (800) Refund liability (50)
39. #cbizmhmwebinar 39 ? QUESTIONS
40. #cbizmhmwebinar 40 If You Enjoyed This Webinar… Upcoming Courses: • 9/13 & 10/18: Third Quarter Accounting and Financial Reporting Issues Update • 9/15: Win the Not-for-Profit Talent War - Recruitment, Retention, Rewards and Regulation • 9/20 & 9/22: Preventing Fraud in the Workplace • 10/27 & 11/2: Eye on Washington – Quarterly Business Tax Update Recent Publications: • Understanding the Leasing Standard: Part 3: Lessor Accounting • SEC Aims to Simplify its Disclosure Requirements • 7 Ways to Strengthen Your Cybersecurity: Secure the Small Things
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42. #cbizmhmwebinar 42 THANK YOU CBIZ & Mayer Hoffman McCann P.C. [email protected]