FINANCIAL REPORTING
ANALYSIS OF THE UPDATED EXPOSURE DRAFT ON REVENUE AS IT RELATES TO THE TECHNOLOGY INDUSTRY
FINANCIAL REPORTING
BY SUZIE DORAN, CPA | PARTNER ASSURANCE & ADVISORY
sdoran@singerlewak.com | 310.477.3924
E X EC U T I V E SU M M A R Y The FASB and IASB released and updated exposure draft in November 2011, which requires a five step approach with a goal to converge the revenue guidance for IFRS and US GAAP. The result is a new revenue recogni-
A new revenue recognition model that could significantly change the way entities recognize revenue by removing inconsistencies and improving comparability of revenue recognition tion model that could significantly change the way entities recognize revenue by removing inconsistencies and improving comparability of revenue recognition. It employs an asset and 3 | SingerLewak
liability approach. The following is a summary of how this proposed standard may impact the technology industry from current US GAAP guidance. SU M M A R Y O F AC C OU N T ING: This draft proposes the following changes: Elimination of software specific guidance - Recognition will be based on distinct performance obligations met at a point in time with the ability to estimate a standalone selling price. This eliminates the need for VSOE and can result in earlier revenue recognition. Intellectual Property Licenses Revenue will be recognized when the customer gets control of the license rights. This removes current use of judgment in determining if substance of agreement should be recognized upfront or ratably over the term of agreement and can result in earlier revenue recognition.
Variable Consideration - The transaction price is based on the estimated consideration, including uncertain or variable amounts using either a probability or cash flow analysis. As current guidance requires a fixed and determinable price before recognition, this may result in earlier recognition. Multiple Element Arrangements - Bundles of services and goods can be recognized as either a single or multiple performance obligations. This will result in more judgment in determining the number of performance obligations in a bundle of services and goods. Allocation of Transaction Price - This price can be allocated based on the relative standalone selling price, which can be estimated. The residual method can be used and certain elements such as discounts or change orders can be allocated to only one specific performance obliga-