accounting techniques dan customer orientation
Accounting for Multiple Deliverable
Arrangements
21 November 2012
Niteesh Sharma – Finance Director
Aldee Celis – Compliance Manager
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
• Collectibility is reasonable assured
2
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
- Same concepts as above and following contractual
requirements and provisions
3
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Multiple
Deliveries
4
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
One
Delivery
Based on
PO/Contract
Service
Only
Project
Based
Multiple
Deliveries
5
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Project
Based
Multiple
Deliveries
6
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
7
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
8
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
Requires MD
Analysis
(But Not a
Common Activity)
9
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
Requires MD
Analysis
(But Not a
Common Activity)
Requires MD
Analysis
10
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
Product delivery, product support upgrades and install services
11
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
Product delivery, product support upgrades and install services
12
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
13
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,
delivery and performance of undelivered items must be probable
and substantially in the control of business unit
14
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:
How many deliverables? How many units of accounting?
15
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.
Revenue allocated for the equipment and installation is recognized
after the installation process is completed.
16
RIGHT OF RETURN
Return Provisions
Impact on Revenue
17
RIGHT OF RETURN
Return Provisions
Impact on Revenue
General –
“Manufacturer’s defect”
18
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
19
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
“Within warranty period”
20
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
21
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
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”
22
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
23
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
“Will charge penalty if item B is not
delivered before 30 September 2012”
24
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
Revenue should be recognized upon delivery
of item B. If delivery is late, Company should
accrue penalty cost.
25
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
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 60day trial period”
26
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
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 60- Revenue should not be recognized before the
day trial period”
earlier of acceptance by the customer or the
lapse of a trial period.
27
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.
It will be easy when doing sales forecasts.
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 standalone 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
free items, acceptance provisions).
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
30
DETERMINING RELATIVE SELLING PRICES
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
VSOE (Vendor-Specific
Objective Evidence)
TPE (Third Party
Objective and Reliable
Evidence)
Best Estimate of Selling
Price
31
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
– Analysis may need to be stratified by type, size, volume of
customer (customer class), geographical area, sales channel
32
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
Also known as the competitors’ selling price
33
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
using estimated selling price
34
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
**Commission at 100% if EP are sold on the average price equivalent to 63% of list price
***Average profit margin required for IC
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
Question – How much is the relative selling prices of each unit of
accounting? How much is the fair market value of each unit?
36
How much revenue should be recorded at
DETERMINING RELATIVE SELLING PRICES
Units of
Accounting
Contract
Price
Payment
Terms
Relative
Selling
Price
Basis
(VSOE,
TPE or
ESP)
Fair
Market
Value
Equipment
$ 700
$ 700
?
?
?
Installation
300
300
?
?
?
-0-
-0-
?
?
?
$1,000
$1,000
Training
Total
37
DETERMINING RELATIVE SELLING PRICES
Answer:
Total revenue to be recognized as at 30 September 2012 is $500.
Another $500 will be recognized in October 2012.
Units of
Accounting
Equipment
Installation
Training
Total
Contract
Price
$
Payment
Terms
700
$ 700
300
Relative
Selling
Price
$
Basis
600
VSOE
300
300
-0-
-0-
300
$1,000
$1,000
$1,200
Fair
Market
Value
$
Delivered
as of 30
Septembe
r 2012?
Revenue
500
Yes
TPE
250
No
-
ESP
250
No
-
$1,000
$
$
38
500
500
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
39
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
40
QUESTIONS?
41
Actual Example – Old OPF
Actual Example – New OPF
43
Arrangements
21 November 2012
Niteesh Sharma – Finance Director
Aldee Celis – Compliance Manager
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
• Collectibility is reasonable assured
2
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
- Same concepts as above and following contractual
requirements and provisions
3
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Multiple
Deliveries
4
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
One
Delivery
Based on
PO/Contract
Service
Only
Project
Based
Multiple
Deliveries
5
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Project
Based
Multiple
Deliveries
6
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
7
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
8
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
Requires MD
Analysis
(But Not a
Common Activity)
9
HOW MUCH REVENUE SHOULD BE
RECOGNIZED?
Timing of
Delivery
Product
Only
Service
Only
Project
Based
One
Delivery
Based on
PO/Contract
Based on
PO/Contract
Requires MD
Analysis
Multiple
Deliveries
Requires MD
Analysis
(Series of Order
Negotiated for
One Main
Contract)
Requires MD
Analysis
(But Not a
Common Activity)
Requires MD
Analysis
10
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
Product delivery, product support upgrades and install services
11
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
Product delivery, product support upgrades and install services
12
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
13
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,
delivery and performance of undelivered items must be probable
and substantially in the control of business unit
14
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:
How many deliverables? How many units of accounting?
15
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.
Revenue allocated for the equipment and installation is recognized
after the installation process is completed.
16
RIGHT OF RETURN
Return Provisions
Impact on Revenue
17
RIGHT OF RETURN
Return Provisions
Impact on Revenue
General –
“Manufacturer’s defect”
18
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
19
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
“Within warranty period”
20
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
21
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
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”
22
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
23
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
“Will charge penalty if item B is not
delivered before 30 September 2012”
24
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
Revenue should be recognized upon delivery
of item B. If delivery is late, Company should
accrue penalty cost.
25
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
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 60day trial period”
26
RIGHT OF RETURN
Return Provisions
General –
“Manufacturer’s defect”
“Within warranty period”
Specific –
“Will return item A if item B is not
delivered before 30 September 2012”
“Will charge penalty if item B is not
delivered before 30 September 2012”
Impact on Revenue
Revenue can be recognize if Company can
estimate product returns
Revenue can be recognize if Company can
estimate warranty costs
Revenue should not be recognized for the
delivered item
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 60- Revenue should not be recognized before the
day trial period”
earlier of acceptance by the customer or the
lapse of a trial period.
27
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.
It will be easy when doing sales forecasts.
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 standalone 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
free items, acceptance provisions).
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
30
DETERMINING RELATIVE SELLING PRICES
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
VSOE (Vendor-Specific
Objective Evidence)
TPE (Third Party
Objective and Reliable
Evidence)
Best Estimate of Selling
Price
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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
– Analysis may need to be stratified by type, size, volume of
customer (customer class), geographical area, sales channel
32
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
Also known as the competitors’ selling price
33
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
using estimated selling price
34
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
**Commission at 100% if EP are sold on the average price equivalent to 63% of list price
***Average profit margin required for IC
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
Question – How much is the relative selling prices of each unit of
accounting? How much is the fair market value of each unit?
36
How much revenue should be recorded at
DETERMINING RELATIVE SELLING PRICES
Units of
Accounting
Contract
Price
Payment
Terms
Relative
Selling
Price
Basis
(VSOE,
TPE or
ESP)
Fair
Market
Value
Equipment
$ 700
$ 700
?
?
?
Installation
300
300
?
?
?
-0-
-0-
?
?
?
$1,000
$1,000
Training
Total
37
DETERMINING RELATIVE SELLING PRICES
Answer:
Total revenue to be recognized as at 30 September 2012 is $500.
Another $500 will be recognized in October 2012.
Units of
Accounting
Equipment
Installation
Training
Total
Contract
Price
$
Payment
Terms
700
$ 700
300
Relative
Selling
Price
$
Basis
600
VSOE
300
300
-0-
-0-
300
$1,000
$1,000
$1,200
Fair
Market
Value
$
Delivered
as of 30
Septembe
r 2012?
Revenue
500
Yes
TPE
250
No
-
ESP
250
No
-
$1,000
$
$
38
500
500
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
39
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
(i.e. agreement, delivery, priced fixed, terms running & collectability)
40
QUESTIONS?
41
Actual Example – Old OPF
Actual Example – New OPF
43