Revenue – Issues In-Depth - KPMG | US

1 Revenue Issues In-Depth Second edition IFRS and US GAAP. May 2016. Contents Rising to the challenge 1 10 Other Issues 248. Sale with a right of return 248. 1 Key facts 2. Warranties 254. 2 Key impacts 4 Principal versus agent considerations 262. Customer options for additional goods or 3 Putting the new standard into context 6 services 269. Customers' unexercised rights (breakage) 281. 4 Scope 13. Nonrefundable up-front fees 285. In scope 13 Onerous contracts 292. Out of scope 14. Partially in scope 17 11 Presentation 299. Portfolio approach 23 12 Disclosure 305. 5 The model 24 Annual disclosure 305. Step 1: Identify the contract with a customer 24 Interim disclosures 316. Step 2: Identify the performance obligations Disclosures for all other entities in the contract 41 (US GAAP only) 317.

2 Step 3: Determine the transaction price 64 13 Effective date and transition 319. Step 4: Allocate the transaction price to the Effective date 320. performance obligations in the contract 98. Retrospective method 322. Step 5: Recognize Revenue when or as the Cumulative effect method 331. entity satisfies a performance obligation 120. First-time adoption (IFRS only) 334. 6 contract costs 163. 14 Implementation considerations 337. Costs of obtaining a contract 163. Accounting and disclosure 338. Costs of fulfilling a contract 169. Tax 339. Amortization 174. Systems and processes 340. Impairment 178. Internal control 341. 7 contract modifications 181 Determine the adoption date and a Identifying a contract modification 181 transition method 342.

3 Accounting for a contract modification 188 Other considerations 343. 8 Licensing 195 Guidance referenced in this publication 347. Licenses of intellectual property 196 Detailed contents 350. Determining whether a license is distinct 198. Determining the nature of a distinct license 207 Index of examples 354. Timing and pattern of Revenue recognition 222. Contractual restrictions and attributes of Index of observations 357. licenses 226 Acknowledgments 365. Sales- or usage-based royalties 229. Keeping you informed 366. 9 Sales outside ordinary activities 233. General requirements 233. Application under IFRS 235. Application under US GAAP 237. Rising to the challenge When the IASB and FASB published their new Revenue standard in 2014, we predicted that the real work was just beginning.

4 And that has proven to be the case. The past two years have seen companies wrestle with implementation Issues . In response, the Boards have issued their substantive amendments to the new standard and deferred the effective date to 2018. While helping our clients to navigate through this period, we've gained extensive insight and hands-on experience in the United States and globally. And we are delighted to share our experience with you in this second edition of Revenue Issues In-Depth . It's almost twice as long as the first edition, with more examples and discussion of the areas that companies have found most complex, as well as the latest IASB and FASB developments. Many companies have been surprised at the length and complexity of the assessment and implementation phases for the new Revenue standard.

5 If you have not already made a start, it's time to engage to meet the expectations of stakeholders and regulators. Whether you are just making a start or well advanced in your implementation project, use this publication to help you navigate the complexities of this standard. Please speak to your usual KPMG contact if you are facing implementation challenges or would like to discuss any other accounting Issues . Brian K. Allen Prabhakar Kalavacherla (PK). Paul H. Munter Brian O'Donovan Anne Schurbohm KPMG Global and US Revenue Recognition Leadership Teams 2016 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity.

6 All rights reserved. 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Home 2 | Revenue Issues In-Depth | 1 Key facts 1 Key facts The new standard provides a framework that replaces existing Revenue guidance in US GAAP and IFRS. It moves away from the industry- and transaction-specific requirements under US GAAP, which are also used by some IFRS preparers in the absence of specific IFRS guidance. New qualitative and quantitative disclosure requirements aim to enable financial statement users to understand the nature, amount, timing, and uncertainty of Revenue and cash flows arising from contracts with customers. Entities will apply a five-step model to determine when to recognize Revenue , and at what amount.

7 The model specifies that Revenue is recognized when or as an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, Revenue is recognized: over time, in a manner that best reflects the entity's performance; or at a point in time, when control of the goods or services is transferred to the customer. Step 1 Step 2 Step 3 Step 4 Step 5. Determine Allocate Identify Identify the the the Recognize performance contract transaction transaction Revenue obligations price price The new standard provides application guidance on numerous related topics, including warranties and licenses. It also provides guidance on when to capitalize the costs of obtaining a contract and some costs of fulfilling a contract (specifically those that are not addressed in other relevant authoritative guidance for inventory).

8 For some entities, there may be little change in the timing and amount of Revenue recognized. However, arriving at this conclusion will require an understanding of the new model and an analysis of its application to particular transactions. In addition, all entities will be subject to extensive new disclosure requirements. The following table lists the mandatory effective date and early adoption provisions of the new standard for IFRS and US GAAP entities. 2016 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 2016 KPMG IFRG Limited, a UK company, limited by guarantee.

9 All rights reserved. Home Revenue Issues In-Depth | 3. 1 Key facts |. Type of entity Annual periods commencing on or after IFRS entities January 1, 2018 (with early adoption permitted for any annual period). Public business entities December 16, 2017 (with early adoption and certain not-for- permitted for annual periods beginning on or after profit entities applying December 16, 2016, the original effective date). US GAAP1. All other US GAAP December 16, 2018 (with early adoption entities permitted for annual periods beginning on or after December 16, 2016, the original early-adoption date). The impact of the new standard will vary by industry. Those steps of the model that are most likely to affect the current practice of certain industries are summarized below.

10 Industry Step 1 2 3 4 5. Aerospace and defense . Asset managers . Building and construction . contract manufacturers . Health care (US) . Licensors (media, life sciences, franchisors). * . Real estate . Software . Telecommunications (mobile networks, cable).. * In particular, life sciences. 1. Public business entity' is defined in ASU 2013-12, Definition of a Public Business Entity An Addition to the Master Glossary, available at Certain not-for-profit entities' are those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market. All other entities applying US GAAP have the option to defer application of the new guidance for one year for annual reporting purposes.