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CFO Financial Forum Webcast Implementing EITF 08 08 - - 1 1 and EITF 09 09
 

CFO Financial Forum Webcast

Implementing

Implementing EITF

EITF 0808--11 and

and EITF

EITF 0909--33

K P M G

L L P

Mark Bielstein

Tamara Mathis

David Elsbree

Meredith Canady

Cecil Mak

Department of Professional Practice

October 22, 2009

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1

Administrative

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Administrative CPE regulations require online participants take part in online questions You must respond to a
 

Agenda

  • Introduction Introduction

  • 1, ““Revenue

Issue

Issue 0808--1,

Revenue Arrangements

Arrangements with

with Multiple

Multiple Deliverables

Deliverables

First Steps

  • Steps toto Implementation

First

Implementation

  • Estimating Estimating aa Standalone

Standalone Selling

Selling Price

Price

  • Transition Transition && Disclosures

Disclosures

  • Issue Issue 0909--3,

3, ““Certain

Certain Revenue

Revenue Arrangements

Arrangements That

That Include

Include

Software

Software Elements

Elements””

  • Other Other Considerations

Considerations

  • Questions Questions and

and Answers

Answers

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

© 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.

33

 
 

References

EITF

EITF

FASB

FASB

ASC

ASC

ASU

ASU

SOP

SOP

IASB

IASB

CPE

CPE

VSOE

VSOE

TPE

TPE

PCS

PCS

Emerging

Emerging Issues

Issues Task

Task Force

Force

Financial Accounting

Financial

Accounting Standards

Standards Board

Board

Accounting Standards

Accounting

Standards Codification

Codification

Accounting Standards

Accounting

Standards Update

Update

AICPA Statement

AICPA

Statement of

of Position

Position

International Accounting

International

Accounting Standards

Standards Board

Board

Continuing

Continuing Professional

Professional Education

Education

Vendor Specific

Vendor

Specific Objective

Objective Evidence

Evidence

Third

Third Party

Party Evidence

Evidence

Post--Contract

Post

Contract Customer

Customer Support

Support

EITF EITF FASB FASB ASC ASC ASU ASU SOP SOP IASB IASB CPE CPE VSOE VSOE

© 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.

44

 

References, Continued

 
 
 

Original Pronouncements

FASB Accounting Standards

 

Codification

EITF 00-21

Revenue Arrangements with Multiple Deliverables

Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements

SOP 97-2

Software Revenue Recognition

Subtopic 985-605, Software – Revenue Recognition

SOP 81-1

Accounting for Performance of Construction-Type and Certain Production-Type Contracts

Subtopic 605-35, Revenue Recognition - Construction-Type and Production- Type Contracts

EITF 03-5

Applicability of SOP 97-2 to Non- Software Deliverables in an

Subtopic 985-605, Software – Revenue Recognition (ASC paragraph 985-605-

Arrangement Containing More- Than-Incidental Software

15-3(c))

FAS 154

Accounting Changes and Error Corrections

Topic 250, Accounting Changes and Error Corrections

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

© 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.

 

5

 
 

References, Continued

 
 
 

Consensus / Accounting Standards

FASB Accounting Standards

 
 

Update

Codification

EITF 08-1

ASU 2009–13

Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements

EITF 09-3

ASU 2009–14

Subtopic 985-605, Software – Revenue Recognition

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

© 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, Revenue Arrangements with Multiple Deliverables

EITF 08-1 will amend EITF 00-21 EITF 00-21 required objective and reliable evidence of fair Vendor

EITF 08-1 will amend EITF 00-21

EITF 00-21 required objective

and reliable evidence of fair

Vendor Specific

Vendor

Specific Objective

Objective Evidence

Evidence (VSOE)

(VSOE)

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

Third

Third--Party

Party Evidence

Evidence (TPE)

(TPE)

Will result in more separation

of deliverables – revenue

recognition at earlier point

Could require significant

judgment in determining

estimated selling price

Estimated Selling

Estimated

Selling Price

Price

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

© 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, Revenue Arrangements with Multiple Deliverables

  • Final Final Consensus

Consensus requires

requires the

the relative

relative selling

selling price

price method

method of

of al

allocation

location

Eliminates

Eliminates use

use of

of residual

residual method

method

Requires that

Requires

that companies

companies determine

determine VSOE,

VSOE, TPE

TPE or

or estimated

estimated selling

selling

price for

price

for ALL

ALL deliverables

deliverables that

that meet

meet the

the other

other separation

separation criteria

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

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

© 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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Polling Question #1

 
Company A provides deliverables X, Y & Z for a total price of $100 in a

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 © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of
  • D. $67

© 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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9

 
 

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 A’s 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. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of

deliverable X.

© 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

  • 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 ob tain 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.

    11

    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

  • 5. 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

  • © 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.

    12

     

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    13

     
     

    EITF 08-1, Estimating a Standalone Selling

     

    Price - continued

    Practical Framework (five st eps) for establishing best

    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. prici ng strategies and practices, market

    share and position)

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    14

     

    EITF 08-1, Estimating a Standalone Selling

     

    Price - continued

    Practical Framework (five st eps) for establishing best

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    15

     
     

    EITF 08-1, Estimating a Standalone Selling

     

    Price - continued

    Best estimate of selling price – point estimate or range?

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    16

    EITF 08-1, Estimating a Standalone Selling Price - continued ABC Corp. sells equipment Customer X Contract
    EITF 08-1, Estimating a Standalone Selling
    Price - continued
    ABC Corp. sells equipment
    Customer X
    Contract Price
    with maintenance and ten days
    Equipment
    $505,000
    of training for a bundled fee of
    $564,900 to Customer X and a
    Maintenance
    $50,000
    bundled fee of $551,000 to
    Customer Y.
    Training 10 days
    $9,900
    ABC determines its estimated
    $564,900
    selling price ranges to be:
    Customer Y
    Contract Price
    Equipment
    $500,000 -
    $525,000
    Equipment
    $520,000
    Maintenance
    $50,000 -
    Maintenance
    $26,000
    $52,500
    Training 10 days
    $5,000
    Training
    $960 to $990 per
    day
    $551,000
    © 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.
    17
    EITF 08-1, Estimating a Standalone Selling
    Price - continued
    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
    ABC’s policy is to allocate using the midpoint of the range when the
    stated contract price is not within the selling price range
    Relative Selling
    Customer Y
    Selling Price
    Ratio
    Price Allocation
    Equipment
    $520,000
    89.5%
    $493,145
    Maintenance
    $51,250
    8.8%
    $48,488
    Training
    $9,750
    1.7%
    $9,367
    $581,000
    $551,000
    © 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.
    18
     

    EITF 08-1, Estimating a Standalone Selling

     

    Price - continued

    Ongoing monitoring and evaluation

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    19

     
     

    Polling Question #2

     
    Assume Vendor A does not have VSOE or TPE for a deliverable

    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 © 2009 KPMG LLP, a U.S. limited liability partnership and a
    • D. None of the above

    © 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.

     

    20

    20

    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

    © 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.

    21 21

    Transition

    Transition Effective Date Prospective for revenue arrangements entered into or materially modified in fiscal years beginning

    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

    © 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.

    22 22

    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 A’s 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.

    © 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.

    23 23

    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

    © 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.

    24 24

     

    Polling Question #3

     
    When does your company plan to adopt EITF 08-1 and

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    25

     
     

    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 © 2009 KPMG LLP, a U.S. limited liability partnership and a

    as granting concessions to customers

    © 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.

     

    26

    26

     

    Prospective Transition – Material Modification

     
    Some possible guidance to consider:

    Some possible guidance to consider:

     
    • FASB’s 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 © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm

    as separate contracts

    © 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.

     

    27

    27

     
     

    Prospective Transition – Material Modification

     
    Other factors to consider when determining whether an arrangement is

    Other factors to consider when determining whether an arrangement is

    materially modified:

     
    • If new deliverables are included as a re sult 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? © 2009 KPMG LLP, a U.S.

    vendor without a bona fide renegotiation of the original arrangement?

    © 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.

     

    28

    28

     

    Prospective Transition – New Arrangements

     
    When does a new arrangement exist?

    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 © 2009 KPMG LLP, a U.S. limited liability partnership and

    Purchase orders under master purchase agreements

    © 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.

    29

    29

     
     

    Disclosure Requirements - Objective

     
    • The objective of the disclosure guidance is to provide:

     
    • Qualitative and quantitative information about a vendor’s 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.

     
    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    30

     

    Disclosure Requirements - Transition

    Minimum Transition Disclosures

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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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    Disclosure Requirements - Transition

    Minimum Transition Disclosures

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    32

     

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

     
     
    Scoping Principle

    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

    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

    33
     

    33

     
     

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

     
    Rebuttable presumption that software elements are

    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

    34

    34

     

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

     
    The hardware components must substantively

    The hardware components must substantively

    contribute to the tangible product’s 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

    35
     

    35

     
     

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

     
    Other guidance

    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

    Disclosures, transition and effective date consistent with EITF

     

    08-1

    36
     

    36

     

    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.

     
    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    37

     
     

    Polling Question #4

     
    Vendor sells a personal computer that includes an operating system

    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 © 2009 KPMG LLP, a U.S. limited liability partnership and a
    • D. None of the above

    © 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.

     

    38

    38

     

    Polling Question #4 - Solution

     
     
    Answer: A

    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. © 2009 KPMG LLP, a U.S. limited liability partnership

    system would be included in SOP 97-2.

    © 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.

     

    39

    39

     
     

    Other Considerations – Contingent Revenue

     
    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    40

     

    Other Considerations – Contingent Revenue Illustration

    Contingent Revenue Consider a vendor that sells equipment and installation services for $100. VSOE for the

    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.

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    41

     
     

    Other Considerations – Interaction of EITF 08-1 with FTB 90-1 (ASC Subtopic 605-20)

    FTB 90-1, Accounting for Se parately Priced Extended

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    42

     

    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 computer’s

     

    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

    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    43

     
     

    Polling Question #5 - Solution

     
    • Answer: B – False

    • Company B would allocate the arrangement consideration using the

    relative selling price method for the deliverables.

     
    © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG

    © 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.

    44

    Question & Answer Session The information contained herein is of a general nature and is not
     

    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.

     

    © 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.

     

    45

     
    Question & Answer Session The information contained herein is of a general nature and is not
     

    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.

     

    © 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.

     

    46