Accounting for Multiple Deliverable
Arrangements
21 November 2012
WHEN IS REVENUE RECOGNIZED?
4 Basic Criteria for Revenue Recognition
• Persuasive evidence of an arrangement
• Delivery has occurred or services have been performed
• Fixed and determinable price
3
WHEN IS REVENUE RECOGNIZED?
Common Misconceptions
- Not when customers make a sale commitment - Not when orders are recorded by COP
- Not when invoices are prepared by Finance
- Not when we receive advance payment from customer for products not yet delivered or services not yet performed
- Not based on payment terms agreed with customer
- Not based on project milestones determined by project team
Standard orders
- Generally, when products are delivered to the customer in accordance with INCO terms (proof of delivery)
- Generally, when substantial risk and rewards are transferred to the customer
Services
- Generally, when services are performed proportionately over the service period (testing and commission report, field service report)
Projects
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One Delivery
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HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on PO/ContractBased on
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HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on PO/ContractBased on Requires MD Analysis
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on PO/ContractBased on Requires MD Analysis
Multiple Deliveries
Requires MD Analysis
(Series of Order Negotiated for
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HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on PO/ContractBased on Requires MD Analysis
Multiple Deliveries
Requires MD Analysis
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery Product Only Service Only Project Based
One
Delivery PO/ContractBased on PO/ContractBased on Requires MD Analysis
Multiple Deliveries
Requires MD Analysis
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MULTIPLE DELIVERABLE ARRANGEMENT
– Selling multiple products and services under the terms of one
agreement /arrangement – delivered at different times
A series of contracts entered into near the same time (usually 6
months) may need to be evaluated as a single contract
– Anything offered or promised to the customer may be a separate
element of the arrangement or deliverable
– Common Multiple Deliverable Arrangements include: Product delivery and install services
Product delivery, install services and training (not free)
Delivery of two or more products at different times
MULTIPLE DELIVERABLE ARRANGEMENT
– Selling multiple products and services under the terms of one
agreement /arrangement – delivered at different times
A series of contracts entered into near the same time (usually 6
months) may need to be evaluated as a single contract
– Anything offered or promised to the customer may be a separate
element of the arrangement or deliverable
– Common Multiple Deliverable Arrangements include: Product delivery and install services
Product delivery, install services and training (not free)
Delivery of two or more products at different times
13
STEPS IN MULTIPLE DELIVERABLE ANALYSIS
1. Separate deliverables into units of accounting
2. Determine selling price of each unit and allocate total contract revenue to each
3. Watch out for Contingent Revenue and Customer Acceptance Provisions
4. Recognize revenue for each separate unit of accounting when the above & 4 basic revenue recognition criteria are met for each unit
SEPARATING DELIVERABLES INTO UNITS OF
ACCOUNTING
Multiple deliverable arrangements must be divided into separate units of accounting based on criteria :
A. Delivered item has stand-alone value to the customer
Customer could re-sell item and substantially recover its original sales value (not sold for scrap)
Customer could procure undelivered items and utilize delivered item
B. If there is a general right of return provided to all customers,
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SEPARATING DELIVERABLES INTO UNITS OF
ACCOUNTING
Case Study 1:
Emerson Network Power Thailand (the “Company”) manufactures and installs a highly specialized equipment. The Company entered into an arrangement with Customer Bangkok for delivery of one of its highly
specialized equipment, 1-year preventive maintenance and installation. The installation process is a highly complex and requires a high degree of knowledge regarding the equipment.
Customer Bangkok does not have the know-how to perform the
installation and no other vendors provide the installation services. In addition, the Company owns a patent used in manufacturing the
equipment, no other vendor sell similar equipment.
Questions:
SEPARATING DELIVERABLES INTO UNITS OF
ACCOUNTING
Answer:
There are 3 deliverables: (1) equipment (2) preventive maintenance (3) installation.
There are 2 units of accounting: (1) equipment and installation (2) preventive maintenance.
The equipment is not separable since it could not be used or sold independently in an arrangement without impacting its quality and functionality.
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RIGHT OF RETURN
RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
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RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
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RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
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RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
“Will return item A if item B is not
RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
“Will return item A if item B is not
delivered before 30 September 2012” Revenue should not be recognized for the delivered item
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RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
“Will return item A if item B is not
delivered before 30 September 2012” Revenue should not be recognized for the delivered item
“Will charge penalty if item B is not
RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
“Will return item A if item B is not
delivered before 30 September 2012” Revenue should not be recognized for the delivered item
“Will charge penalty if item B is not
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RIGHT OF RETURN
Return Provisions Impact on Revenue
General –
“Manufacturer’s defect” Revenue can be recognize if Company can estimate product returns
“Within warranty period” Revenue can be recognize if Company can estimate warranty costs
Specific –
“Will return item A if item B is not
delivered before 30 September 2012” Revenue should not be recognized for the delivered item
“Will charge penalty if item B is not
delivered before 30 September 2012” Revenue should be recognized upon delivery of item B. If delivery is late, Company should accrue penalty cost.
“Option to return after the lapse of a
WHY IS IT IMPORTANT TO BREAK IT DOWN?
If we cannot break it down to units of accounting, we can only
recognize 100% of the revenue when you deliver the last product and/or perform the last service.
The main objective is to break the project activities into units of
accounting so that we can recognize revenue as we deliver the product and/or perform the service
.
BREAK IT DOWN!
Separate the deliverables in the OPF by type of equipment,
construction activity and service activity.
If an In-Country deliverable requires construction of 5 data centers,
break it down by equipment and by construction activity (with stand-alone values).
If there are 10 different equipment delivered that requires testing and
commission, global service items should be broken into 10 service line items in the OPF.
Free items (such as training, warranty) or anything promised during
negotiation to the customer should be included in the OPF and will be considered a deliverable.
Identify units of accounting and provide information to Asia
Accounting Group (AAG).
Provide information to AAG side agreements concerning (deliverables
STEPS IN MULTIPLE DELIVERABLE ANALYSIS
1. Separate deliverables into units of accounting
2. Determine selling price of each unit and allocate total contract revenue to each
3. Watch out for Contingent Revenue and Customer Acceptance Provisions
4. Recognize revenue for each separate unit of accounting when the above & 4 basic revenue recognition criteria are met for each unit
Objective and reliable evidence of Relative Selling Prices must be
determined for each separate unit of accounting using:
– Vendor Specific Objective Evidence (VSOE) first, – Third Party Evidence (TPE) second,
– Management Estimated Selling Price (ESP) last
DETERMINING RELATIVE SELLING PRICES
DETERMINING RELATIVE SELLING PRICES
VSOE (Vendor-Specific Objective Evidence)
TPE (Third Party Objective and Reliable
Evidence)
Best Estimate of Selling Price
VENDOR SPECIFIC OBJECTIVE EVIDENCE
(VSOE)
VSOE is preferable and limited to price of same product or service
when sold separately (stand-alone basis) by the business unit, considerations to demonstrate:
– Substantial majority of recent stand-alone sales transactions
priced in a relatively narrow range of discounts from price list
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THIRD-PARTY EVIDENCE (TPE)
If VSOE is not available, TPE may be acceptable, considerations are:
- Price the business unit charges when it sells a similar item
separately. Items are similar if they are largely interchangeable - Price a competitor charges when it sells a similar item separately - More sources of data the better
ESTIMATED SELLING PRICE (ESP)
If VSOE and TPE are not available, use management’s assessment of
Estimated Selling Price
– Need to document why VSOE and TPE does not exist before
DETERMINING RELATIVE SELLING PRICES
Emerson Products (EP)
– VSOE, if available
– TPE, if available*
– ESP (List price x 63%** price multiplier)
In-Country Products (IC)
– ESP (Budgeted cost x 125%*** price multiplier)
Service Items (GS)
– ESP (List price x 100% price multiplier)
*Market unit to provide information to AAG
DETERMINING RELATIVE SELLING PRICES
Case Study 2
Business unit sells a manufacturing solution, consisting of equipment, installation and
3 hours of training for $1,000
Business unit regularly sells equipment separately for $600 (VSOE)
Business unit does not separately sell installation services and training on a regular
basis, however, other vendors do. Based on TPE, business unit determines selling price of the installation is $300
Business unit is not aware of other vendors selling similar training; Using ESP, business
unit estimates selling price of training at $100/hr or $300
Equipment considered to have stand-alone value; active market exists for
similar/interchangeable equipment
Business unit installation services and training not essential to functionality of
equipment. There is no general or specific right of return or contingent revenue
Equipment is standardized; tests indicate meets customer specifications before
shipping. Delivered on 23 September 2012 install and training on 3 October 2012
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DETERMINING RELATIVE SELLING PRICES
Units of
Accounting Contract Price Payment Terms
DETERMINING RELATIVE SELLING PRICES
Units of
Accounting Contract Price Payment Terms
Relative
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STEPS IN MULTIPLE DELIVERABLE ANALYSIS
1. Separate deliverables into units of accounting
2. Determine selling price of each unit and allocate total contract revenue to each
3. Watch out for Contingent Revenue and Customer Acceptance Provisions
4. Recognize revenue for each separate unit of accounting when the above & 4 basic revenue recognition criteria are met for each unit
STEPS IN MULTIPLE DELIVERABLE ANALYSIS
1. Separate deliverables into units of accounting
2. Determine selling price of each unit and allocate total contract revenue to each
3. Watch out for Contingent Revenue and Customer Acceptance Provisions
4. Recognize revenue for each separate unit of accounting when the above & 4 basic revenue recognition criteria are met for each unit
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