INCOMING!

BRIEF OVERVIEW
OF THE NEW FASB-IASB
REVENUE RECOGNITION
STANDARD
Kurt S. Schulzke, JD, CPA, CFE
Associate Professor of Accounting & Business Law
Coles College of Business
October 2014
NEW ASC TOPIC 606
Copyright Kurt S Schulzke 2014
ASC =
Accounting
Standards
Codification
TOPIC 606 – ALLEGED (BUT
UNPROVEN) PRINCIPLE
Copyright Kurt S Schulzke 2014
ASC SUBTOPIC 606-10-25-2
Copyright Kurt S Schulzke 2014
BNA’S TOP TEN
 Industry guidance replaced by legal
opinion & professional judgment
 Topic 606 applies across the board &
requires expanded disclosure
 Transfer of control through satisfaction of
performance obligations is key
 One contract may encompass more than
one performance obligation
 Collectibility is a scope or contract
existence question, not a measurement
question

THINGS TO WORRY ABOUT
 New rules require recognition of estimated variable
consideration if it is “probable” that subsequent
changes in the estimate will not require reversal
 Changes to accounting for long-term contracts
 Accounting for license revenue has changed
 Allocation of transaction price to performance
obligations on the basis of stand-alone selling prices
– no more VSOE of FV
 Effective dates
Copyright Kurt S Schulzke 2014
Good high-level
summary of the
standard but only
points to lurking
contract law questions
BNA’S
HIGH-LEVEL TOPIC
606 FLOWCHART
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IT’S ALL ABOUT CONTRACT LAW
HTTP://BIT.LY/1SVAZFU
Copyright Kurt S Schulzke 2014
Deeper dive on
contract law issues in
Topic 606, plus some
great flowcharts of the
606 revenue
recognition process
ASC Topic 606
SIDE-BY-SIDE
COMPARISON
Copyright Kurt S Schulzke 2014
Purported contract w/
customer
STEP 1
Review purported contract
for legal enforceability
and existence
(ED paras. 13 & 15)
Pass ED
paras. 13 & 15
tests?
Enforceability & existence
A. identify governing law & forum
(para. 13);
B. verify contract formation & validity
(para. 13);
C. verify contract enforceability
(para. 13); and
D. for wholly executory contracts,
verify that at least one party lacks the
enforceable right to unilaterally
terminate without penalty (para. 15)
Para. 14 scope criteria
A. commercial substance/effect on future
cash flows;
B. parties approve and are committed to
perform;
C. identification of parties' rights to goods/
services; and
D. identification of payment terms
Figure 1
ED/2011/6 Revenue Recognition
Stage 1 - Contract Analysis
STEP 2
Verify contract is within
scope (ED para. 14)
Pass ED
para. 14 tests?
Do not recognize
revenue
No
Yes
No
Yes
Go to Measurement &
Recognition Module
(Fig. 2)
Stage 1 –
Contract Analysis
Copyright Kurt S Schulzke 2014
CONTRACT EXISTENCE
& ENFORCEABILITY
Copyright Kurt S Schulzke 2014
CONTRACT SCOPE
CRITERIA
Copyright Kurt S Schulzke 2014
LEISENRING’S LAMENT
Copyright Kurt S Schulzke 2014
In other words, not
only does contract
law differ among
jurisdictions but so
do the extralegal
cultural
understandings of
“contract” as used
in the new
standard.
Henry Rees,
IASB’s project
manager
James
Leisenring,
IASB Member
then
representing
the U.S.
Begin Recognition &
Measurement Module
(a) Identify separate
performance obligations
in the contract
ED paras. 23-30
(b) Determine the
transaction price
ED paras. 50-69
(c) Allocate transaction
price to performance
obligations
ED paras. 70-80
(d) Test for satisfaction
of performance
obligation through
transfer of good or
service to customer by
shifting control
Recognize Revenue
Indicators of customer control
ED paras. 31-48
1. customer’s unconditional obligation to pay for the good
or service;
2. shift of risks and rewards of ownership of goods; or
3. shift in legal title to or physical possession of the goods
Does the customer
control the good or
service?
Yes
No
Figure 2
ED/2011/6 Revenue Recognition
Stage 2 – Recognition & Measurement
Do not recognize
revenue
Customer must
have the present
right to obtain
substantially all of
the cash flows
from the asset by
using, consuming,
selling,
exchanging,
pledging or holding
it.
ED paras. 31-32.
Transaction price =
expected value or
most likely amount
of consideration to
be received. ED
paras. 52-55
Stage 2 –
Recognition &
Measurement
Copyright Kurt S Schulzke 2014
TRANSACTION PRICE – EXPECTED
VALUE OR NOT?
Copyright Kurt S Schulzke 2014
VARIABLE CONSIDERATION
Copyright Kurt S Schulzke 2014
FILLING GAPS WITH PRIOR GUIDANCE
Copyright Kurt S Schulzke 2014
DISCLOSURE – DISAGGREGATION
REQUIRED
Copyright Kurt S Schulzke 2014
DISCLOSURE EXAMPLE – RISK-BASED
DISAGGREGATION (ASC TOPIC 606-10-65-1)
 An entity reports the following segments: consumer products, transportation, and energy, in
accordance with Topic 280 on segment reporting. When the entity prepares its investor
presentations, it disaggregates revenue into primary geographical markets, major product
lines, and timing of revenue recognition (that is, goods transferred at a point in time or
services transferred over time).
 The entity determines that the categories used in the investor presentations can be used to
meet the objective of the disaggregation disclosure requirement in paragraph 606-10-50-5,
which is to disaggregate revenue from contracts with customers into categories that
depict how the nature, amount, timing, and uncertainty of revenue and cash flows are
affected by economic factors. The following table illustrates the disaggregation disclosure
by primary geographical market, major product line, and timing of revenue recognition,
including a reconciliation of how the disaggregated revenue ties in with the consumer
products, transportation, and energy segments in accordance with paragraphs 606-10-50-
6.
Copyright Kurt S Schulzke 2014
DISCLOSURE EXAMPLE – RISK-BASED
DISAGGREGATION (ASC TOPIC 606-10-65-1)
Copyright Kurt S Schulzke 2014
PRESENTER

Kurt S. Schulzke, J.D., CPA, CFE
Associate Professor of
Accounting & Business Law
Coles College of Business
Kennesaw State University
Phone: 770.423.6379
kurt_schulzke@kennesaw.edu

Kurt Schulzke is an Associate Professor of Accounting at Kennesaw
State University and Of Cournsel at Slappey & Sadd, LLC, where he
represents whistleblowers in SEC, IRS and False Claims Act cases.
He delivers seminars on financial reporting, corporate governance,
corporate ethics, and family business in major U.S., European and
Latin American venues. Kurt is an alumnus of the Harvard Program on
Negotiation’s Teaching Negotiation in the Organization and the
Johannes-Kepler Universitaet - Georgia State University Law School
Program on International Commercial Arbitration .
Prior to joining the Coles College faculty in 1990, Kurt worked for four
years as an auditor and tax consultant at Price Waterhouse - Atlanta.
He has been licensed as a CPA since 1987 and as a member of the
Georgia State Bar since 1998. He has served family-owned businesses
as a board member, CFO and general counsel. He holds a J.D. from
Georgia State University’s College of Law, cum laude, as well as B.S.
and M.Acc. degrees from Brigham Young University. He is author of
World Accounting, a multi-volume Lexis-Nexis treatise on global
financial reporting, and has published articles on accounting and
legal topics in the Journal of Forensic Accounting Vanderbilt Journal
of Transnational Law.
Copyright Kurt S Schulzke 2014

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