CFO Financial Forum Presentation New Rev Rec 102209 B&W

CFO Financial Forum Webcast
Implementing EITF 08-1 and EITF 09-3 0809-
KPMG LLP
Mark Bielstein Tamara Mathis David Elsbree Meredith Canady Cecil Mak Department of Professional Practice October 22, 2009
1
Administrative
CPE regulations require online participants take part in online questions You must respond to a minimum of three questions in order to be eligible for CPE credit Polling questions will appear on your media player on top of the slides. Send Questions via Ask a Question Button. Be sure to hit the X after you have submitted your question to close the dialog box. Help Desk: 1-866-956-4770 or outside the U.S. at +1-601-957-5017
Agenda
Introduction Issue 08-1, Revenue Arrangements with Multiple Deliverables 08Deliverables First Steps to Implementation Estimating a Standalone Selling Price Transition & Disclosures Issue 09-3, Certain Revenue Arrangements That Include 09Software Elements Elements Other Considerations Questions and Answers
2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
References
EITF FASB ASC ASU SOP IASB CPE VSOE TPE PCS Emerging Issues Task Force Financial Accounting Standards Board Accounting Standards Codification Accounting Standards Update AICPA Statement of Position International Accounting Standards Board Continuing Professional Education Vendor Specific Objective Evidence Third Party Evidence Post-Contract Customer Support Post-
References, Continued
Original Pronouncements
EITF 00-21 SOP 97-2 SOP 81-1
FASB Accounting Standards Codification
EITF 03-5
Subtopic 605-25, Revenue Recognition Multiple-Element Arrangements Subtopic 985-605, Software Revenue Recognition Accounting for Performance of Subtopic 605-35, Revenue Recognition Construction-Type and Certain - Construction-Type and ProductionProduction-Type Contracts Type Contracts Applicability of SOP 97-2 to Non- Subtopic 985-605, Software Revenue Software Deliverables in an Recognition (ASC paragraph 985-605Arrangement Containing More- 15-3(c)) Than-Incidental Software Accounting Changes and Error Corrections Topic 250, Accounting Changes and Error Corrections
Revenue Arrangements with Multiple Deliverables Software Revenue Recognition
FAS 154
References, Continued
Consensus / Accounting Standards Update

EITF 08-1 EITF 09-3
FASB Accounting Standards Codification

Subtopic 605-25, Revenue Recognition Multiple-Element Arrangements Subtopic 985-605, Software Revenue Recognition
ASU 200913 ASU 200914
EITF 08-1, Revenue Arrangements with Multiple Deliverables

EITF 08-1 will amend EITF 00-21 EITF 00-21 required objective and reliable evidence of fair value (VSOE or TPE) to separate deliverables EITF 08-1 requires selling prices to be based on the highest level of evidence but requires a best estimate of selling price to be made if VSOE or TPE do not exist Will result in more separation of deliverables revenue recognition at earlier point Could require significant judgment in determining estimated selling price
Vendor Specific Objective Evidence (VSOE)
Third-Party Evidence (TPE) Third-
Estimated Selling Price
EITF 08-1, Revenue Arrangements with Multiple Deliverables

Final Consensus requires the relative selling price method of allocation allocation Eliminates use of residual method Requires that companies determine VSOE, TPE or estimated selling price for ALL deliverables that meet the other separation criteria Other separation criteria remain the same standalone value and general return rights Contingent revenue provisions unchanged Qualitative and quantitative transition disclosures and expanded ongoing disclosures for all arrangements with multiple deliverables including prior transactions that continue to be accounted for under EITF 00-21
Polling Question #1
Company A provides deliverables X, Y & Z for a total price of $100 in a customer arrangement. There are no contingent payments in the arrangement. Deliverable X does not have VSOE or TPE, however, the best estimate of selling price is $30. Deliverables Y and Z have VSOE of $50 and $40, respectively. On 12/31/XX, Company A has delivered X and Y to the customer. Based on the new guidance in EITF 08-1, how much revenue should be recognized for this arrangement in the period ended 12/31/XX? A. $60 B. $90 C. $80 D. $67
Polling Check #1 Solution
Answer: D - $67 The use of the relative selling price method requires either VSOE, TPE or an estimated selling price for ALL deliverables, including delivered items. Company As estimated selling price for deliverable X is $30. The amount of revenue recognized is therefore calculated as 100 * ((30+50)/120) Under existing guidance under EITF 00-21, $60 would be recognized using the residual method and does not require Company A to determine an estimated selling price for deliverable X.
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EITF 08-1, First Steps to Implementation

1. Inventory the deliverables Identify the specific delivered elements where revenue was based on the residual and not VSOE or TPE Identify typical deliverables within an arrangement that generally have not been separable under EITF 00-21 because VSOE or TPE did not exist 2. Determine whether other separation criteria are met Stand-alone value General return rights 3. Determine highest available evidence for deliverables Reasonable effort required to obtain VSOE or TPE if it exists If VSOE or TPE was used to separate deliverables, same level of evidence for those deliverables unless circumstances change 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG
International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
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EITF 08-1, First Steps to Implementation
4.
Estimate selling price for deliverables where VSOE and TPE do not exist Consider nature of the deliverable and best approach to estimating a stand-alone selling price There is no practicability exception for estimating selling prices for elements Assess potential operational impacts of implementation, such as: Systems and process changes Internal controls over financial reporting Income tax considerations Changes in business practices Training of employees, including sales force
5.
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EITF 08-1, Estimating a Standalone Selling Price

EITF provides no specific guidance but added two examples and modified one example in EITF 00-21 to include considerations in estimating a stand-alone selling price A best estimate of selling price shall be consistent with the objective of determining VSOE Estimated selling price shall be the price at which the vendor would transact if the deliverable were sold by the vendor regularly on a standalone basis considering market conditions as well as entity-specific factors
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EITF 08-1, Estimating a Standalone Selling Price - continued

Practical Framework (five steps) for establishing best estimate of selling price:
STEP 1: Gather all reasonably available data points (e.g. limited or widely-disbursed standalone sales, product costs and margins, published price lists, available third-party or industry pricing data) STEP 2: Consider adjustments based on:
Market Conditions (e.g. demand, competition, trends, constraints) Entity-specific Factors (e.g. pricing strategies and practices, market share and position)
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Practical Framework (five steps) for establishing best estimate of selling price:
STEP 3: Consider whether necessary to stratify selling prices into meaningful groups (e.g. type of customer, deal size or customer volume, geography, distribution channel, or other relevant groups) STEP 4: Weight available information and make best estimate STEP 5: Establish process for ongoing monitoring and evaluation
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Best estimate of selling price point estimate or range? A point estimate is more precise A narrow range may be acceptable Any price within the range should be a valid pricing point Should not use a point estimate plus or minus an arbitrary percentage Consider stratification Operational advantages ability to use stated contract price if all deliverables are within their respective ranges
All deliverables must be within range or relative selling price method would be required Select policy to determine a point within the range for outlier deliverables
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ABC Corp. sells equipment with maintenance and ten days of training for a bundled fee of $564,900 to Customer X and a bundled fee of $551,000 to Customer Y. ABC determines its estimated selling price ranges to be: Equipment Maintenance Training $500,000 $525,000 $50,000 $52,500 $960 to $990 per day Customer X Equipment Maintenance Training 10 days Contract Price $505,000 $50,000 $9,900 $564,900 Customer Y Equipment Maintenance Training 10 days Contract Price $520,000 $26,000 $5,000 $551,000
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All of the stated contract prices within the arrangement with Customer X fall within the narrow ranges and may be used to allocate revenue ABC may allocate based on stated prices in the contract The stated contract prices for maintenance and training in the arrangement with Customer Y fall outside of the ranges, and therefore, ABC will have to perform a relative selling price allocation ABCs policy is to allocate using the midpoint of the range when the stated contract price is not within the selling price range Customer Y Selling Price Ratio Relative Selling Price Allocation
Equipment Maintenance Training
$520,000 $51,250 $9,750 $581,000
89.5% 8.8% 1.7%
$493,145 $48,488 $9,367 $551,000

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Ongoing monitoring and evaluation Estimated selling prices likely will change over time
Allocation in previous arrangements should not be modified New arrangements should reflect changes in estimates
Extent and frequency of changes is based on nature of deliverables, markets and entity-specific factors
New offerings or markets Rate of product obsolescence Seasonality adjustments
Monitor changes in data points used Monitor the level of evidence available Changes in business practices could result in VSOE or TPE existing in the future
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Polling Question #2
Assume Vendor A does not have VSOE or TPE for a deliverable and determines that estimating a selling price would be difficult and require significant judgment. Other separation criteria have been met. Which of the following should Vendor A do? A. Combine the deliverables into one unit of accounting B. Use the residual method as a proxy for the estimated selling price C. Use the stated contract price as the estimated selling price D. None of the above
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Polling Check #2 Solution
Answer: D None of the above An estimate of selling price must be made if VSOE and TPE do not exist Difficulty in estimating a selling price is not a basis not to separate Residual method is prohibited but could provide a data point in estimating a selling price cannot simply use as a proxy Stated contract prices should not be presumed to be representative of estimated selling price may provide a data point in estimating a selling price
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Transition
Effective Date Prospective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 Earlier application is permitted as of the beginning of fiscal year but can be applied in a period other than the first period of a fiscal year by retrospective application to beginning of year Option for retrospective application if meet practicability requirements in Statement 154 (ASC Topic 250) for retrospective application
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Transition Illustration
Company A, a public entity with a calendar year-end, elects to early adopt as of June 30, 2010. Because adoption is not in the first fiscal quarter of Company As fiscal year, the requirements are applied retrospectively to the first quarter of 2010. Company A would present the following in its June 30, 2010 financial statements: Statement of operations for the six months ended June 30 would reflect six months of revenue under EITF 08-1 for any new or materially modified arrangements entered into or modified on or after January 1, 2010. The statement of operations for the three months ended June 30 would reflect revenue for the second quarter under EITF 08-1 for those same arrangements.
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Transition Illustration - continued

Company A would be required to disclose the following information, at a minimum, for all previously reported interim periods in the year of adoption: revenue, income before income taxes, net income, earnings per share, and the effect of the change for the appropriate captions presented Company A would not be required to file amendments to its previously filed first quarter Form 10-Q
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Polling Question #3
When does your company plan to adopt EITF 08-1 and EITF 09-3? A. Early adopt in fiscal 2009 B. Early adopt in fiscal 2010 C. When the requirement is effective D. Have not determined yet
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Prospective Transition Material Modification

EITF 08-1 may be adopted prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The determination of whether a modification represents a new arrangement or a modification that is material will require the use of judgment A material modification generally: Would result from a substantive renegotiation or amendment of an existing arrangement that is material Would not be expected to arise from non-substantive changes such as granting concessions to customers
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Some possible guidance to consider: FASBs deliberations in the Joint FASB/IASB Revenue Recognition Project on the interdependency of pricing of the modification with pricing of deliverables in existing arrangements (June 10, 2009 FASB meeting) Paragraph 64 of SOP 81-1 (ASC paragraph 605-35-25-29) for guidance when determining whether contract additions are treated as separate contracts
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Other factors to consider when determining whether an arrangement is materially modified: If new deliverables are included as a result of the modification, is the increase in the price under the modified contract consistent with the price customers would pay in a standalone sale? Are any new deliverables included in the modification closely interrelated with the deliverables in the original arrangement in terms of design, technology or function? Is there evidence that the pricing of the modification included consideration of the pricing in the existing arrangement? Is the contract modification a unilateral grant of a concession by a vendor without a bona fide renegotiation of the original arrangement?
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Prospective Transition New Arrangements

When does a new arrangement exist?
Arrangements considered new in the period that the key terms of an arrangement are agreed to between a vendor and its customers, consistent with persuasive evidence of an arrangement For example, Company A and Customer Z both sign a multiple deliverable arrangement on December 31, 2010 but delivery takes place January 15, 2011. If Company A adopts EITF 08-1 prospectively on January 1, 2011, this arrangement would still be accounted for under EITF 00-21 since persuasive evidence of the arrangement existed prior to January 1, 2011. New arrangements may include: Substantive contract renewals Purchase orders under master purchase agreements
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Disclosure Requirements - Objective

The objective of the disclosure guidance is to provide: Qualitative and quantitative information about a vendors revenue arrangements and about the significant judgments made about the application of EITF 08-1 Changes in those judgments or in its application that may significantly affect the timing or amount of revenue recognition Specific disclosure requirements are significantly expanded under EITF 08-1 as compared to EITF 00-21 and apply to all multiple element arrangements.
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Disclosure Requirements - Transition
Minimum Transition Disclosures

Qualitative information: Changes in the units of accounting Changes in the allocation of arrangement consideration Changes in the pattern of revenue recognition Whether adoption is expected to have material effect on periods subsequent to period of adoption
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Disclosure Requirements - Transition
Minimum Transition Disclosures

If the effect of adoption is material, supplement with quantitative disclosure to allow users to understand the impact of adoption and assess trends Preparers have discretion to determine the quantitative disclosures that would achieve the overall objective. Examples include: Amount of revenue recognized subject to EITF 08-1 and amount that would have been recognized if transactions subject to EITF 00-21 Amount of revenue that would have been recognized in the preceding year if transactions had been subject to EITF 08-1 Revenue recognized in the current period and the amount of deferred revenue at the end of the current period for those arrangements still under EITF 00-21 as well as those arrangements under EITF 08-1
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EITF 09-3, Certain Revenue Arrangements That Include Software Elements

Scoping Principle Modifies scope of SOP 97-2 to exclude tangible products containing both software and non-software components that function together to deliver the product's essential functionality All tangible components now scoped out
EITF 03-5 eliminated for tangible products, but concepts retained to determine if service deliverables are considered software deliverables
Determine what software is now scoped out EITF 08-1 applies to arrangements that are scoped out of SOP 97-2
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Rebuttable presumption that software elements are considered essential to functionality of the tangible product if sales of the tangible product without the software elements are infrequent Selling the software on a stand-alone basis does not taint this assessment Software does not have to be embedded on hardware to qualify Different product models with same functionality except that one model is sold with the software and the other without would be considered the same product for purposes of this evaluation
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The hardware components must substantively contribute to the tangible products essential functionality not simply a delivery mechanism For example, a software vendor could not avoid the scope of SOP 97-2 by delivering its software products to customers on read-only storage devices
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Other guidance Stand alone sales of essential software are under SOP 97-2 Undelivered elements (e.g. PCS and upgrades) related to the essential software are scoped out of SOP 97-2 Bifurcate undelivered elements into software and non-software Apply EITF 08-1 to separate software deliverables accounted for under SOP 97-2 from hardware and related software deliverables scoped out
Initially allocate consideration to software deliverables as a group and non-software deliverables Look to SOP 97-2 to further separate software deliverables
Disclosures, transition and effective date consistent with EITF 08-1
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Allocation of Arrangement Consideration Illustration

ABC Co. enters into an arrangement to sell Software A, bundled with one year of PCS and Software B on a hosted basis (outside the scope of SOP 97-2) for total fee of $1.2 million. ABC regularly sells Software A bundled with one year of PCS for $1.6 million (VSOE for bundled group). VSOE for Software B hosting is $400,000. ABC would allocate the arrangement consideration using the relative selling price method to the software group and to the hosting as follows: Hosting (non-software) $240,000 [$1.2 million x ($400,000 / $2 million)] Software A and PCS (group) $960,000 [$1.2 million x ($1.6 million / $2 million)] ABC would then follow the guidance in SOP 97-2 to determine whether Software A and PCS can be separated into units of accounting.
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Polling Question #4
Vendor sells a personal computer that includes an operating system that, along with the hardware, provides the basic functionality of a personal computer. The vendor rarely sells the personal computer without the operating system but does sell the same operating system for the personal computer separately. Based on the factors provided in EITF 09-3, which deliverables would be excluded from the scope of SOP 97-2? A. Personal computer including the operating system B. Stand-alone sale of the operating system C. Both A & B D. None of the above
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Polling Question #4 - Solution
Answer: A The personal computer including the operating system would be excluded from the scope of SOP 97-2. Sales of the personal computer without the operating system are infrequent and the fact that the operating system is also sold separately does not affect the assessment of the essential nature of the operating system when sold with the computer. However, the stand-alone sale of the operating system would be included in SOP 97-2.
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Other Considerations Contingent Revenue

Contingent Revenue EITF 08-1 does not change the existing contingent revenue guidance Arrangement consideration allocated to delivered items is limited to amounts not contingent upon the delivery of other items Amount allocated to delivered items would be the lesser of amount initially allocated on a relative selling price method or non-contingent amount The change to the relative selling price method from the residual method may result in the conclusion that contingent revenue exists resulting in differences in how arrangement consideration is allocated
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Other Considerations Contingent Revenue Illustration

Contingent Revenue Consider a vendor that sells equipment and installation services for $100. VSOE for the installation service is $25 which is also the stated contractual price. The estimated selling price of the hardware is $100. $75 of the arrangement consideration is due upon delivery of the equipment and $25 is not due until the installation is complete. Assume the separation criteria in EITF 08-1 are met for the equipment and installation. Under the relative selling price method, the arrangement consideration would be allocated as follows:
Equipment $80 [$100 x ($100/$125)] Installation services $20 [$100 x ($25/$125)]
However, because $5 of the amount allocated to the equipment is contingent on the delivery of installation, the amount allocated to the equipment is limited to $75.
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Other Considerations Interaction of EITF 08-1 with FTB 90-1 (ASC Subtopic 605-20)
FTB 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts
EITF 08-1 does not change the existing guidance in FTB 90-1 FTB 90-1 defines a product maintenance contract as an agreement to perform certain agreed-upon services to maintain a product for a specified period of time. The PCS deliverable must be separately priced within the arrangement to be within the scope of FTB 90-1 A PCS deliverable that relates only to the maintenance of the hardware elements of a tangible product is likely within scope of FTB 90-1 A PCS deliverable that includes rights to unspecified upgrades and enhancements of the software element is likely outside scope of FTB 90-1
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Polling Question #5
Company B sells a personal computer (computer processor and operating system software) and provides one year of PCS on the operating system software. The operating system software is essential to the personal computers functionality and scoped out of SOP 97-2. The PCS relates to the essential software and is also considered to be a separate deliverable excluded from SOP 97-2. Company B has VSOE for the PCS but not for the operating system software and hardware. Company B would allocate the arrangement consideration to the personal computer and the PCS using the residual method. A. True B. False
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Polling Question #5 - Solution

Answer: B False Company B would allocate the arrangement consideration using the relative selling price method for the deliverables.
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Question & Answer Session

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Thank You!
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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CFO Financial Forum Webcast

Implementing EITF 08-1 and EITF 09-3 0809-

FASB Accounting Standards Codification

Revenue Arrangements with Multiple Deliverables Software Revenue Recognition

Consensus / Accounting Standards Update

FASB Accounting Standards Codification

ASU 200913 ASU 200914

EITF 08-1, Revenue Arrangements with Multiple Deliverables

Vendor Specific Objective Evidence (VSOE)

Third-Party Evidence (TPE) Third-

Estimated Selling Price

EITF 08-1, Revenue Arrangements with Multiple Deliverables

Polling Check #1 Solution

EITF 08-1, First Steps to Implementation

EITF 08-1, First Steps to Implementation

EITF 08-1, Estimating a Standalone Selling Price

EITF 08-1, Estimating a Standalone Selling Price - continued

EITF 08-1, Estimating a Standalone Selling Price - continued

EITF 08-1, Estimating a Standalone Selling Price - continued

EITF 08-1, Estimating a Standalone Selling Price - continued

EITF 08-1, Estimating a Standalone Selling Price - continued

Equipment Maintenance Training

$520,000 $51,250 $9,750 $581,000

89.5% 8.8% 1.7%

$493,145 $48,488 $9,367 $551,000

EITF 08-1, Estimating a Standalone Selling Price - continued

Polling Check #2 Solution

Transition Illustration - continued

Prospective Transition Material Modification

Prospective Transition Material Modification

Prospective Transition Material Modification

Prospective Transition New Arrangements

Disclosure Requirements - Objective

Disclosure Requirements - Transition

Minimum Transition Disclosures

Disclosure Requirements - Transition

Minimum Transition Disclosures

EITF 09-3, Certain Revenue Arrangements That Include Software Elements

EITF 09-3, Certain Revenue Arrangements That Include Software Elements

EITF 09-3, Certain Revenue Arrangements That Include Software Elements

EITF 09-3, Certain Revenue Arrangements That Include Software Elements

Disclosures, transition and effective date consistent with EITF 08-1

Allocation of Arrangement Consideration Illustration

Polling Question #4 - Solution

Other Considerations Contingent Revenue

Other Considerations Contingent Revenue Illustration

Polling Question #5 - Solution

Question & Answer Session

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CFO Financial Forum Presentation New Rev Rec 102209 B&W

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