Moss Adams Insights - Winter 2012

What’s Changed from the 2010 Exposure Draft?

Quite a bit. Let’s look at some of the more significant changes.

Bundles of Goods or Services

The proposal clarifies that to identify separate performance obligations, an entity must consider the attributes of an individual good or service and must consider how that good or service is bundled with other goods or services in a particular contract. An entity would account for a bundle of goods and services as one performance obligation if the goods and services are highly interrelated and transferring them to the customer requires significant integration and if the bundle of goods or services is significantly modified or customized to fulfill the contract.

Performance Obligations Satisfied over Time

The proposal adds guidance on how to determine when a good or service is transferred at a point in time or continuously over time. A performance obligation is satisfied continuously if at contract inception either of the following conditions are met:

•;The entity’s performance creates or enhances an asset that the customer controls as the asset is being created or enhanced.

•;The entity’s performance does not create an asset with alternative use to the entity and at least one of the following criteria are met:

< The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs it.

< Another entity would not need to substantially reperform the work the entity has completed to date if that other entity were to fulfill the remaining obligation to the customer.

< The entity has a right to payment for performance completed to date, and it expects to fulfill the contract as promised.

For each separate performance obligation, an entity would recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation.

If none of the conditions noted above is met, revenue is recognized based on the guidance for transferring the good or service at a point in time.

Product Warranties

Some warranties provide a customer with assurance that the related product complies with agreed-upon specifications. Other warranties provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications. The boards simplified the guidance so that a separate performance obligation would be created if the customer can purchase the warranty separately or if the warranty provides the customer with a service in addition to the assurance that the product complies with the agreed-upon specifications. Assurance-type warranties would be accounted for under a cost accrual method, which is consistent with current practice.

Collectibility

Collectibility refers to a customer’s credit risk— that is, the risk that an entity will be unable to collect from the customer the amount of consideration to which the entity is entitled based on the contract. The 2010 exposure draft required the initial measurement of revenue to include an adjustment for collectibility. The revised proposal would require the provision for uncollectible accounts to be presented as a separate line item adjacent to revenue. Changes in subsequent measurements of the provision for uncollectible accounts would also be presented in a line item adjacent to revenue.

The proposed accounting is consistent with current practice. However, the change in presentation and classification would lower gross margins for many entities.

Variable Consideration

The consideration in a contract can vary because of discounts, rebates, refunds, credits, incentives, price concessions, and other similar items. The 2010 exposure draft required variable consideration to be estimated, allocated, and recognized based solely on a probability-weighted method that didn’t align well in situations where the variable consideration was all or nothing.