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Revenue Recognition: SEC Staff Accounting Bulletin Topic 13, ASC 605

SEC Staff Accounting Bulletin (SAB) No. 104
1. In December 1999: SAB 101 added new Topic 13 to the SAB Codification
2. In December 2003: SAB 104 revised Topic 13
3. SAB Topic 13: Revenue Recognition

Revenue Recognition Issues
1. Revenue recognition, general
2. Persuasive evidence of arrangement
3. Delivery and performance
4. Fixed or determinable sales price

 Delivery and performance
1. Bill and hold arrangements
2. Customer acceptance
3. Inconsequential or perfunctory performance obligations
4. License fee revenue
5. Layaway sales arrangements
6. Nonrefundable up-front fees
7. Deliverables within an arrangement

 Fixed or determinable sales price
1. Refundable fees for services
2. Estimates and changes in estimates
3. Contingent rental income
4. Claims processing and billing services

 SEC Staff Accounting Bulletin Codification
Topic 1: Financial Statements
Topic 2: Business Combinations
Topic 3: Senior Securities
Topic 4: Equity Accounts
Topic 5: Miscellaneous Accounting
Topic 6: Interpretations of Accounting Series Releases and Financial Reporting Releases
Topic 7: Real Estate Companies
Topic 8: Retail Companies
Topic 9: Finance Companies
Topic 10: Utility Companies
Topic 11: Miscellaneous Disclosure
Topic 12: Oil and Gas Producing Activities
Topic 13: Revenue Recognition
Topic 14: Share-Based Payment

 

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Revenue Recognition, ASC 605

Revenue Recognition

ASC 605-25 was updated by ASU 2009-13
–> to reflect the contents of EITF 08-1

EITF Issue No. 08-1
“Revenue Recognition with Multiple Deliverables
–> EITF No. 08-1 superseded EITF No. 00-21

EITF Issue No. 00-21
“Revenue Recognition with Multiple Deliverables

General Principles
1. Multiple-Deliverable Revenue Arrangements (MDRA)
–> divided into separate units of accounting
–> if two conditions listed in ASC 605-25-25-5 are satisfied

[Note]
EITF 00-21 had three conditions.
EITF 08-1 deleted one condition.

2. Arrangement consideration is allocated
–> based on the relative selling prices
–> “relative selling price method”

[Note] EITF 00-21 used the “relative fair value method”

 Two conditions for a separate unit of accounting
1. Delivered items have value to the customer
–> on a standalone basis
2. Delivery of undelivered items is
–> considered probable and
–> under the substantial control of the vendor

[Note]
EITF 00-21 had one more condition that was deleted by EITF 08-1
–> Undelivered items should have
–> the objective and reliable “evidence of fair value”

Relative selling price method adpted by EITF 08-1 (ASU 2009-13)
Arrangement consideration is allocated
–> at the inception of the arrangement
–> based on their “relative selling prices”

 Selling price is determined using
–> the “Vendor Specific Objective Evidence” (VSOE) of selling price

 If VSOE does not exist
–> use the “Third-Party Evidence” (TPE) of selling price

 If both VSOE and TPE are not available
–> use the “best estimate” of selling price

Examples of EITF 08-1
1. Cellular telephone contract
2. Can manufacturing equipment
3. Standard equipment installation
4. Automobiles sold with lifetime maintenance services
5. Sale of home appliances with installation and maintenance services
6. Human resources outsourcing services
7. Sale of medical equipment with cartridges and installation
8. Sale of computer system
9. Sale of 12 bolts of fabric
10. Painting contract
11. Agricultural equipment

 

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