Handbook: Revenue recognition - KPMG

Revenue recognition

Handbook

US GAAP December 2019 _____ us/frv

Contents

Foreword...................................................................................................... 1 About this publication .................................................................................. 2 1. Executive summary ............................................................................... 4 2. Scope..................................................................................................... 12 3. Step 1: Identify the contract(s) with a customer................................... 52 4. Step 2: Identify the performance obligations in the contract................ 121 5. Step 3: Determine the transaction price ............................................... 214 6. Step 4: Allocate the transaction price to performance obligations ....... 358 7. Step 5: Recognize revenue when (or as) the entity satisfies a

performance obligation.......................................................................... 445 8. Customer options for additional goods or services............................... 553 9. Principal vs. agent ................................................................................. 599 10. Licensing of intellectual property .......................................................... 660 11. Contract modifications .......................................................................... 764 12. Contract costs ....................................................................................... 821 13. Loss contracts ....................................................................................... 879 14. Presentation .......................................................................................... 895 15. Disclosure.............................................................................................. 918 16. Effective date and transition.................................................................. 981 Appendices .................................................................................................. 1065

Index of Q&As ....................................................................................... 1065 Index of examples ................................................................................. 1093 KPMG Financial Reporting View .................................................................. 1105 Acknowledgments ....................................................................................... 1106

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Revenue recognition

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Foreword

A challenging standard

The new revenue standard was issued in 2014, and the 2018 and 2019 application dates once seemed a long way off. Now, as 2019 nears an end, public companies have adopted the new standard and the adoption for private companies is here, right now.

By this stage it is clear that the implementation of Topic 606 is not a simple exercise ? the standard leaves behind legacy US GAAP and introduces a new framework for analyzing transactions. It requires more judgment and estimation, and new disclosures.

KPMG's Accounting Change Survey highlighted that companies expect many areas of their business to be affected. The key areas identified included increased disclosures, accounting policies and procedures, systems and processes, internal controls, customer contracting practices, tax and human resources.

In this publication, we focus on the accounting and disclosure aspects of the new standard. Questions continue to arise and the interpretation of the principles in the standard is evolving. Many companies are seeing the standard as an opportunity to relook at revenue streams, and the processes and controls surrounding revenue accounting.

Our purpose in this updated book is to assist you in gaining an in-depth understanding of the new, five-step, revenue model by answering the questions that we are encountering in practice, providing examples to explain key concepts, and explaining the changes from legacy US GAAP.

Brian Allen and Prabhakar Kalavacherla Department of Professional Practice, KPMG LLP

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Revenue recognition

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About this publication

About this publication

The purpose of this Handbook is to assist you in understanding the new revenue standard, Topic 606, which was issued in May 2014.

Accounting literature

Unless otherwise stated, references to the revenue standard and/or Topic 606 comprise all of the following Accounting Standards Updates issued prior to Topic 606's mandatory adoption date:

-- No. 2014-09, Revenue from Contracts with Customers (Topic 606)

-- No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

-- No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

-- No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting

-- No. 2016-12, Revenue from Contracts with Customers (Topic 606): NarrowScope Improvements and Practical Expedients

-- No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

-- No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments

-- No. 2017-14, Income Statement--Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606): Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 116 and SEC Release No. 33-10403

Organization of the text

Each chapter of this Handbook includes excerpts from the FASB's Accounting Standards Codification? and overviews of the relevant requirements. Our indepth guidance is explained through Q&As that reflect the questions we are encountering in practice. We include examples to explain key concepts, and we explain the changes from legacy US GAAP.

Our commentary is referenced to the Codification and to other literature, where applicable. The following are examples:

-- 606-10-25-16 is paragraph 25-16 of ASC Subtopic 606-10.

-- ASU 2014-09.BC87 is paragraph 87 of the basis for conclusions to Accounting Standards Update No. 2014-09.

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Revenue recognition

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About this publication

-- TRG 01-15.16 is agenda paper no. 16 from the meeting of the IASB and the FASB's Joint Transition Resource Group for Revenue Recognition (TRG) held in January 2015.

-- SAB Topic 11.M is SEC Staff Accounting Bulletin Topic 11.M.

-- 2007 AICPA Conf is the 2007 AICPA National Conference on Current SEC and PCAOB Developments. These references are hyperlinked to the source material on the SEC's website.

-- IFRS 15.C3(a) is paragraph 3(a) of Appendix C of International Financial Reporting Standard (IFRS) 15. References to IFRS are included only in chapter 16.

Pending content

In some cases, the Codification is subject to content that becomes effective after the revenue standard. For example, Accounting Standards Update No. 2016-13, Financial Instruments--Credit Losses (Topic 326), includes consequential amendments to Topic 606.

When an excerpt from the Codification is affected by pending content:

-- the specific sentences that have been superseded are underlined; and -- the amended sentences are included at the end of the excerpt, marked as

pending content.

The transition dates for pending content are shown based on their general applicability to public entities (P) and non-public entities (N). See the relevant Topic to determine the specific transition requirements and whether a public entity may qualify to adopt the pending content at the non-public entity date.

December 2019 edition

This version of our Handbook includes new and updated interpretations based on our experiences with companies implementing Topic 606, as well as discussions with the FASB and SEC staff.

New Questions and Examples are identified throughout the Handbook with ** and items that have been significantly updated or revised are identified with #.

Abbreviations

The following is a list of the less common abbreviations used in this Handbook:

IP

Intellectual property

MSA

Master services agreement

PCS

Post-contract support

SaaS

Software-as-a-service

TRG

The IASB and the FASB's Joint Transition Resource Group for

Revenue Recognition

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

1.

Revenue recognition

4

1. Executive summary

Executive summary

Public entities1

Other entities

Effective date:

-- First annual reporting period beginning after December 15, 2017.

-- Interim reporting periods within that annual period.

-- First annual reporting period beginning after December 15, 2018.

-- Interim reporting periods within annual reporting periods beginning after December 15, 2019.

Early adoption:

Permitted for:

-- Annual reporting periods beginning after December 15, 2016.

-- Interim reporting periods within that annual period.

Permitted for:

-- Annual reporting periods beginning after December 15, 2016.

-- Interim reporting periods:

-- within the annual reporting period of adoption; or

-- within the annual reporting period subsequent to the annual reporting period of adoption.

Note:

1. This includes (1) public business entities, (2) not-for-profit entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and (3) employee benefit plans that file or furnish financial statements with or to the SEC.

For a calendar year-end public entity that adopts Topic 606 in accordance with the mandatory effective date, the following are the relevant dates. Transition is discussed in chapter 16.

Beginning of earliest period presented

January 1, 2016

January 1, 2017

Effective date (date of initial application)

January 1, 2018

December 31, 2018

Comparative period

Comparative period

Current period (Year of adoption)

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Revenue recognition

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1. Executive summary

Scope

The guidance applies Topic 606 applies to contracts to deliver goods or

to all contracts with services to a customer. A `customer' is a party that

customers unless the has contracted with an entity to obtain goods or

customer contract is services that are an output of the entity's ordinary

specifically within

activities in exchange for consideration.

the scope of other guidance ? e.g. Topic 944 (insurance),

Topic 606 is applied to part of a contract when only some elements are in the scope of other guidance.

Topic 460 (guarantees). Read more: chapter 2

Step 1: Identify the contract

Contracts can be

A contract with a customer is accounted for under

written, oral or implied the revenue model when the contract is legally

by an entity's

enforceable and all of the following criteria are met:

customary business practices, but must be enforceable by law.

-- the contract has commercial substance; -- rights to goods or services can be identified; -- payment terms can be identified;

This may require legal -- the consideration the entity expects to be

analysis on a

entitled to is probable of collection; and

jurisdictional level to -- the contract is approved and the parties are

determine when a

committed to their obligations.

contract exists and the terms of that contract's enforceability.

If the criteria are not met, any consideration received from the customer is generally recognized as a deposit (liability).

Read more: chapter 3

Step 2: Identify the performance obligations

Performance

Performance obligations are the unit of account

obligations do not

under Topic 606 and generally represent the

have to be legally

distinct goods or services that are promised to

enforceable; they exist the customer.

if the customer has a

reasonable expectation Promises to the customer are separated into

that the good or

performance obligations, and are accounted for

service will be

separately if they are both (1) capable of being

provided.

distinct and (2) distinct in the context of the

contract.

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Revenue recognition

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1. Executive summary

A promise can be implied by customary business practices, policies or statements.

If the distinct goods or services are substantially the same and have the same pattern of transfer to the customer over time, they are combined into a single performance obligation (a `series').

Read more: chapter 4

Step 3: Determine the transaction price

Estimating variable consideration will represent a significant departure from legacy US GAAP for many entities.

When determining the transaction price, an entity uses the legally enforceable contract term. It does not take into consideration the possibility of a contract being cancelled, renewed or modified.

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer, excluding amounts collected on behalf of third parties ? e.g. some sales taxes. This consideration can include fixed and variable amounts, and is determined at contract inception and updated each reporting period for any changes in circumstances.

The transaction price determination also considers:

-- Variable consideration, which is estimated at

contract inception and is updated at each reporting date for any changes in circumstances. The amount of estimated variable consideration included in the transaction price is the amount for which it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty is resolved.

-- Noncash consideration received from a

customer, which is measured at fair value at contract inception.

-- Consideration payable to a customer, which

represents a reduction of the transaction price unless it is a payment for distinct goods or services the entity receives from the customer.

-- Significant financing component, which may

exist in a contract when payment is received significantly before or after the transfer of goods or services. This could result in an adjustment to the transaction price to impute interest income/expense.

Read more: chapter 5

? 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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