Tensoft hosted another installment of our free revenue recognition series on June 16, and I presented on the topic of “The New Revenue Recognition Standard.” We covered both background information about this topic, as well as the most recent developments in the new standard. If you missed it, you can view the recorded session, at your convenience. As in past sessions, we publish some of the questions asked during the webcast, along with my responses. Here are a few of these:
1. When there are cash refunds or partial refunds allowed in the contract would you deduct the refunds value to come up with the transaction price?
Yes, you would estimate what those refunds or other items would be in order to subtract them from the transaction price. You would also need either historical experience or a reasonable amount of evidence. There is much more flexibility and subjectivity in the determination of these types of estimates under the new revenue standard then there is under current US GAAP, particularly in regards to refunds and penalties. Under the new standard if there is a lack of evidence you would defer the maximum. In addition, there is also flexibility in regards to coming up with a reasonable estimate of the amount of the refunds and including the estimate in the determination of the transaction price. However, there is still an estimation process and if there is some variability in the determination of the transaction price, you would need to make an estimation. There is more flexibility with the determination of that estimate under the new revenue standard then there is now under current US GAAP, which has much more stringent requirements as to what constitutes as a fixed determinable fee.
Another example is that under US GAAP if there is a performance bond which is a contractual element of an arrangement you defer for that performance bond until the bond expires. Under the new standard if you have a history of never paying out on performance bonds you might not reduce the transaction price for that performance bond. There are lots of other examples of similar types of contingencies that under current US GAAP would be deferred, whereas under the new standard they would not.
2. What about Paypal fees and other fees?
These types of fees would most likely be a question of whether you are recognizing the revenue as gross or net. You would follow similar criteria as to current US GAAP as to whether it is an expense or a reduction of revenues.
3. To allocate the transaction price to each obligation, do we have to use the same method each time (adjusted market assessment, cost plus margin, residual approach) or can we use a different method for each transaction?
I think it would be best to have a consistent method for each obligation or each type of obligation. For example, if you were to sell product A in transaction 1 and in transaction 2, you would use the same estimated value in both. However, if you had products or services A, B & C, you might use one methodology for A and a different one for B and C. Once you establish a value for the product or obligation you should use it consistently. This is similar to the current relative selling price method, in which we use consistent ESP for the allocation of the contract price.
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