Oracle Cloud offers a broad portfolio of software as a service applications, platform as a service, and social capabilities, all on a subscription basis. Oracle Cloud delivers instant value and productivity for end users, administrators, and developers alike through functionally rich, integrated, secure, enterprise cloud services.
 Get a Free Magzine ...Profit:The Executive's Guide to Oracle Applications

Subscribe to the OracleAppsHub to receive notifications when there are new posts:

 get RSS feed
 Oracle Fusion Applications (OFA) is a portfolio of next generation suite of software applications from Oracle Corporation. It is distributed across various product families; including financial management, human capital management, customer relationship management, supply chain management, procurement, governance, and project portfolio management
 Get a Free Magzine ...Profit:The Executive's Guide to Oracle Applications

Revenue recognition transition adoption Options- Full or modified retrospective?

Posted on May 10th, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

The deadline for adoption of the new revenue recognition standards under ASC606 is fast approaching.

Public companies need to adopt for fiscal years beginning in 2018 while private companies have until 2019.

The changes in how to account for software and services can be significant, often requiring the break out of underlying performance elements that were bundled together under current reporting standards.

The guidance lays out two alternatives for disclosing the revenue recognition transition , both of which require dual accounting to support the disclosure requirements.

  • Full retrospective
    • Under the full retrospective approach, the full prior two years of financials are restated to the new standards to provide an apples to apples comparison between the years under the new standards.
  • Modified retrospective
    • The modified retrospective approach does not require restatement of prior years but requires disclosure of the year of adoption financials under the old standards to provide the apples to apples comparison under the old standard

Full retrospective

Under the full retrospective approach, the sooner that a multi-book solution can be implemented, the better.

A multi-book approach accounts for new contracts under both standards.

In a perfect world, implementing this type of dual accounting at the beginning of the retrospective period would be ideal, but most companies will need to perform recast calculations on some period of contracts.

The full retrospective also requires two points to calculate a cumulative adjustment.

First, a cumulative adjustment will need to be performed at the beginning of the retrospective period and then again at the date of adoption to adjust the company’s primary books to the new standards as per below diagram.

606 Full Retrospective

Modified retrospective

The modified retrospective is a bit simpler in that it only requires one cumulative adjustment of open contracts as of the date of adoption and only requires the cumulative impact calculation of open contracts vs the period by period recast required to support a full retrospective.

Usually it recommend establishing a multi-book strategy two purposes as below :

modified approach

  • First, the establishment of a legacy GAAP standard book will provide the accounting for the comparative disclosure during the year of adoption.
  • Secondly, the establishment of an ASC606 book reflecting the new standards. This book will assist with calculating the cumulative adjustment as well as providing visibility to accounting differences between the old and new standards leading up to the year of adoption.

High Points and Low points in two Options

Let’s take a quick look for highpoints and low points for each approach, and offer a few reasons why a company might choose one over the other.

 

Full Retrospective Modified Retrospective
  • Sstakeholders and/or shareholders may demand it
  • Useful trend information can be had across all the period presented on your financials
  • This must recast previous financial statements as if the new guidance had always existed for a comparative two-year period prior to the adoption year
  • It’s likely to require significant time and effort
  • If contract volume exceeds even a handful, then finance and accounting automation beyond that provided by Excel spreadsheets will be a necessity
  • Reduced effort in restating prior year amounts
  • No recasting of past revenue can speed implementation
  • Potential for “lost revenue” if the new guidance recognizes less revenue than the previous method would have in a particular period
  • Requires you to keep two sets of accounting records in the year of adoption in order to comply with the requirement to disclose all line items in the financial statements as if they were prepared under today’s guidance
  • Here too, even a modest number of contracts will demand more accounting and finance automation than Excel spreadsheets can reasonably provide

Therefore , regardless of the which method is choosen to disclose revenue recognition transition, there will be a significant effort which need to assess properly .These options include considerations for historical data restating requirements and overall data volume requirements. Discuss and engage your Implemenation partner to plan for this transition and deploy technologies to support these new requirements.

Posted in ASC606 | No Comments »

Revenue Standard : Approach to transition to the new standard

Posted on May 9th, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

Question : Is there an approach to transition to the new accounting standard?

A: The standard states that the methods to transition to the new standards are as follows:

Entities are permitted to apply the new revenue standard either retrospectively subject to some practical expedients (that is, to restate prior periods for a consistent basis of accounting and presentation) or through an alternative transition method [full retrospective ].

The alternative transition method requires an entity to apply the proposed guidance only to contracts not completed at the date of initial application. Then, recognize the cumulative effect of adoption as an adjustment to the opening balance of retained earnings in the year of initial application. Under this approach, the financial statements before and after implementation will not be comparable.

Moreover , Retrospective transition requires applying the new guidance to all prior periods (subject to certain practical expedients).

From a timing standpoint, the critical issue is that an entity presenting three years of comprehensive income will likely need to run parallel systems for two years before the year of adoption

Posted in Oracle Application | No Comments »

ASC 606 ) Step5 :Recognize revenue as performance obligations are satisfied

Posted on May 4th, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

Lets take a quick look on Step 5 which is Recognize revenue as performance obligations are satisfied

RECOGNIZE REVENUE AS PERFORMANCE OBLIGATIONS ARE SATISFIED

Finally, the business can recognize revenue when they meet the performance obligations.

If that fulfillment happens at a distinct point in time, revenue can be recognized right then.

If the obligation is satisfied over time—for example, a technical support contract—the business needs to decide how to measure the progress and completion of that obligation.

More details herewith:

Performance Obligations Satisfied Over Time – An entity will recognize revenue over time if any of the following criteria are met:

The customer concurrently receives and consumes the benefits provided by the entity’s performance as the entity performs.

  • The entity’s performance creates or enhances a customer-controlled asset.
  • The entity’s performance does not create an asset with an alternative use and the entity has a right to payment for performance completed to date.

Regarding the last bullet, a right to payment exists if an entity is entitled to payment for performance completed to date if the customer terminates the contract for reasons other than the entity’s nonperformance.

Performance Obligations Satisfied at a Point in Time – An entity will recognize revenue at a point in time (when control transfers) for performance obligations that do not meet the criteria for recognition of revenue over time.

To determine when a customer obtains control, the entity should consider the following indicators (not all indicators have to be met in order to recognize revenue):

  1. The entity has a present right to payment for the asset.
  2. The entity transferred legal title to the asset.
  3. The entity transferred physical possession of the asset.
  4. The entity transferred the significant risk and rewards of ownership to the customer.
  5. The customer accepted the asset.

Measuring Progress Toward Satisfying a Performance Obligations Satisfied Over Time

  • Output Methods – Units produced or delivered, contract milestones, or surveys of work performed.
  • Input Methods – Costs incurred, labor hours expended, time lapsed, or machine hours used.

Posted in ASC606 | No Comments »

( ASC 606 ) Step 4 : ALLOCATE THE TRANSACTION PRICE

Posted on May 3rd, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

Lets take a quick look on Step 4 which is Allocation of Transaction Price

ALLOCATE THE TRANSACTION PRICE

Step 4 allocates the transaction price to the distinct POBs in a contract. An entity typically allocates the transaction price to each POB based on the relative standalone selling prices of each distinct good or service promised in the contract.

If a contract has more than one performance obligation, the business needs to provide an accurate estimation as to that obligation’s standalone selling price versus the total agreed upon amount.

ASC 606 allows for includes three methods of figuring this amount—adjustment market assessment, expected cost plus margin, and residual.

To be continued

Posted in ASC606 | No Comments »

( ASC 606 ) Step3 : Determine the transaction price

Posted on May 2nd, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

( ASC 606 ) Step1 : Identify the contract with a customer

( ASC 606 ) Step2 : Identify the performance obligations in the contract

Lets take a quick look on Step 3:

DETERMINE THE TRANSACTION PRICE

The next step is to determine the transaction price, the amount of consideration that the seller expects to be entitled to in exchange for transferring the control of goods or services promised in the contract.

The transaction price is the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of a third party (i.e. sales taxes).

The transaction price is the amount the business expects to receive in return for transferring the goods or services outlined in Step 1. The amount can be fixed, variable, or a combination, but is allocated specifically to the performance obligations outlined in Step 2.

Therefore , once these performance obligations are fulfilled, the business can recognize this as revenue.

When a certain amount of cash is transferred to the business simultaneously with the promised goods or services, this is quite easy. But, more complex payment arrangements require additional thought.

Variable Consideration and the Constraint on Revenue Recognition:

  • The transaction price may be variable or contingent upon future events, including discounts, refunds, rebates, credits, incentives, performance bonuses, etc.
  • Variable consideration should be estimated based on either the expected value or the most likely amount, defined as follows:
    • Expected Value – Sum of the probability weighted amounts for various possible outcomes.
    • Most Likely Amount – The most likely amount in a range of possible amounts.

There is some suggestion that companies that implement ASC 606 rules early might be able to recognize more upfront revenue on sales, but that shouldn't be taken as a guarantee

To be continued.

Posted in ASC606 | No Comments »

( ASC 606 ) Step2 : Identify the performance obligations in the contract

Posted on May 2nd, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Last post we have seen step 1

  • ( ASC 606 ) Step1 : Identify the contract with a customer

Lets take a quick look on Step 2:

IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT

A performance obligation is the basically promise to transfer goods or services to a customer.

In this step, the business needs to identify all the distinct performance obligations in an arrangement.

A good or service is defined as distinct if

  1. the customer can benefit from it on their own, or with resources they already have, and
  2. can be transferred independent of other performance obligations.

Any goods or services that can't be deemed distinct should be bundled together until they can be.
Performance obligations can also cover an obligations the customer might expect because of their history, which can make this step more complex.

Posted in ASC606, Oracle Application | No Comments »

( ASC 606 ) Step1 : Identify the contract with a customer

Posted on May 1st, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

Revenue is one of the most important key performance indicators (KPIs) used by investors when assessing a company’s performance and prospects.

Revenue recognition represents one of the highest risks on financial statements, and it is one of the leading causes of restatements. Every publicly traded company has to follow the
guidelines set by the Securities and Exchange Commission (SEC) to communicate their financials effectively to investors. Based on the operations in different countries, businesses sometimes need to comply with more than one set of standards.

Most of the companies located in North America or Europe comply with generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). Recently, the standards-setters developed new revenue-related standards (IFRS 15 and Accounting Standards Codification [ASC] 606), which ensure clarity and transparency in reporting revenue. These new guidelines require a substantial change in the way currently revenue is being reported compared to the new revenue recognition standards.

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Lets take a quick look on Step 1:

1.IDENTIFY THE CONTRACT WITH A CUSTOMER

ASC 606 dictates that a business can account for a contract when all these criteria are met.

  • Both parties should approve the contract (in writing, orally, or via some other agreed-upon practice)
  • Both parties can identify what goods or services are to be transferred to the customer
  • Accounting for the contract will need to be applied when all of the following occur:
    • The parties have approved the contract and intend to perform their respective obligations.
    • Each party's rights regarding the goods or services to be transferred can be identified.
    • The payment terms can be identified.
    • The risk, timing, or amount of the entity's future cash flows are expected to change (contract has commercial substance).
    • It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services transferred

Regarding the collectability criteria, the entity will assess at the inception of the contract whether it is probable it will collect the transaction price.

Credit losses arising from a contract that was probable of collection at inception will be recognized as an expense in the income statement.

For Contract Modifications - Accounted for as a separate contract if the modification adds one or more distinct performance obligations and the price increases accordingly. Otherwise, a modification is accounted for as an adjustment to the original contract, either prospectively or through a cumulative catch-up adjustment depending on whether the remaining goods or services in the contract are distinct

to be continued :

Posted in ASC606, Oracle Application | No Comments »

Page 1 of 11