New GAAP Revenue Recognition Rules
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2019 financial statements are subject to the most significant changes to accounting for revenue recognition in history. The new standards fundamentally alter the approach to recognizing revenue under U.S. generally accepted accounting principles (“GAAP”). Both accountants and readers of financial statements need to understand the new standards and how they vary from the old approach in order to make sense of financial reporting in the new era.
• An overview of the new five-step approach to revenue recognition
• Distinguishing contracts with customers from other arrangements
• Identifying performance obligations
• Methods of allocating the purchase price to performance obligations
• Determining the appropriate time to recognize revenue
Partial Contracts 00:05:46
New 5 Step Approach 00:08:08
Step 1 -Identify a Contract with a Customer 00:10:42
Contract Existence 00:11:03
No Contract Existence 00:14:55
Commercial Substance 00:19:41
Revenue Before Contract 00:25:09
Revenue Before Contract (cont.) 00:26:10
Collectibilty is a Criteria 00:27:22
Is This a Contact with a Customer? 00:30:14
Portfolio Approach 00:31:14
Combining Contracts 00:33:32
Contract Modification - Separate Contract 00:37:39
Contract Modification - Not a Separate Contract 00:39:02
Case A 00:40:09
Case B 00:40:10
Step 2 Identify Performance Obligations 00:42:14
Performance Obligations 00:42:35
Multiple Performance Obligations 00:43:47
Implicit Promises 00:44:29
What does “Distinct” mean? 00:48:02
If Not Distinct? 00:51:12
Example 1 00:53:28
Example 2 00:57:11
Step 3 - Determine the Transaction Price 01:
Transaction Price Definition 01:02:56
Options and Change Orders 01:05:06
Must Consider 01:06:04
Variable Consideration 01:08:55
Promised Consideration is Variable If 01:10:59 01:
2 Methods for Determining Variable Consideration 01:11:39
No Significant Financing Component If 01:13:53
Noncash Consideration 01:15:12
Consideration Payable to a Customer 01:15:31
Step 4 - Allocate Transaction Price to Performance Obligations 01:16:08
Standalone Selling Price is Key 01:16:18
Non Pro Rata Allocation of Variable Consideration 01:20:55
Changes in Transaction Price 01:22:29
Step 5 Recognize Revenue as Performance Obligations are Satisfied 01:24:40
Satisfying Performance Obligations 01:25:14
Indicators of Control at a Point in Time 01:27:04
Performance Obligations Satifisfied Over Time 01:29:31
Measure Progress Toward Satisfaction - Output Method 01:31:03
Measure Progress Toward Satisfaction - Input Method 01:31:26
Reasonable Measures of Progress 01:36:14
New Disclosures 01:36:36
Transit Options 01:37:33
Presentation Closing 01:40:05
- Contracts 00:08:46
- Deferred Revenue 00:26:28
- Distinct 00:48:02
- Entities 00:22:12
- Input Method 01:31:26
- Liability 00:26:23
- Like-Kind Exchange 00:21:21
- Output Method 01:31:06
- Revenue 00:05:09, 00:09:56, 00:25:11
- Revenue Recognition 01:24:47
- Sale and Leaseback 00:22:13
- Transaction 00:09:36
- Transaction Price 01:02:56
- Unrelated Business Taxable Income (UBTI) 00:05:12
- Variable Consideration 01:08:55
Contract: A written or spoken agreement, especially one concerning employment, sales, or tenancy, that is intended to be enforceable by law.
Deferred Revenue: Deferred revenue is a liability related to a revenue-producing activity for which revenue has not yet been recognized. Generally, an entity records deferred revenue when it receives consideration from a customer before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.
Distinct: To be distinct, a good or service must meet two criteria: It must be capable of being distinct, and. It must be separately identifiable or “distinct within the context of the contract”
Liability: In financial accounting, a liability is defined as the future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.
Like-Kind Exchange: A like-kind exchange under United States tax law, also known as a 1031 exchange, is a transaction or series of transactions that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset.
Output Method: The output method measures the results achieved and value transferred to a customer.
Revenue: In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees.
Revenue Recognition: Revenue recognition is an accounting principle that outlines the specific conditions under which revenue. In accounting, the terms "sales" and "revenue" can be, and often are, used interchangeably, to mean the same thing. Revenue does not necessarily mean cash received.
Sale and Leaseback: A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an asset, typically real estate, and then leases it back from the buyer. In this way, the transaction functions as a loan, with payments taking the form of rent.
Transaction: In QuickBooks, a transaction type identifies what kind of transaction occurred, such as a customer transaction, bill payment or a bank transfer. When you submit a transaction, you type in a transaction code to represent it.
Transaction Price: The price of a good or service expressed relative to the same quantity of another good or service. Transaction prices help distinguish price changes due to inflation from real price changes.
Unrelated Business Taxable Income (UBTI): The Internal Revenue Service (IRS) defines the income generated from unrelated business activities as income from a trade or business regularly carried on, that is not substantially related to the purpose that is the basis of the organization's exemption from tax.
Variable Consideration: Variable consideration is defined broadly and can take many forms, such as price concessions, rebates or refunds. Consideration is also considered variable if the amount an entity will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.
Chuck Borek is a practicing attorney and founder of the Borek Group, LLC. Chuck is also a CPA, and his background includes five years as a partner in a public accounting firm. He received his law degree and MBA summa cum laude from the University of Baltimore in 1993, where he was editor-in-chief of the Law Review. He has been teaching professionally since 1989, including four years as an Associate Professor of Accounting and two years as a Visiting Assistant Professor of Law. He ha... View Full Profile
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