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ASC 606 & IFRS 15: Revenue from Contracts with Customers

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

As we all know, on May 28, 2014, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) together issued a converged standard about recognition of revenue from contracts with customers.

Known as ASC 606, Revenue from Contracts with Customers, the standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally, the Boards say.

Under the new revenue reporting regulations, which would establish a comCapturemon revenue standard for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), an entity will have to implement the following five steps for contract creation process .

  1. Identify the contract(s) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

There is a misconception by some that ASC 606 only applies to SaaS companies. While recurring revenue companies are certainly impacted, any company with contractual obligations to their customers are impacted.

The new rules will affect companies that use even moderately complex contracts in their dealings with customers. They include, for example, contracts that are structured using tiered pricing or volume discounts or ones that routinely involve modifications, such as adding or dropping users, or that allow seasonal changes to services

More reading : ASC 606 Revenue Recognition

FASB’s new single, principle-based approach to accounting for revenue from contracts with customers is a turnaround from the existing rule-based system, and auditors and consultants are providing a lot of guidance regarding the new standard in regards to how it changes revenue accounting and related disclosures:

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Revenue Standard : effective dates for reporting using the new accounting standards

Posted on June 11th, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

Q :What are the effective dates for reporting using the new accounting standards

A : The expected effective dates are

  • For public entities, the effective date starts with reporting periods beginning on or after December 15,2017.
    Fornonpublic entities, the effective date will be deferred for one year to annual reporting periods beginning after December 15, 2018 and interims beginning after December 15, 2019.

Early adoption is permitted one year prior to these dates.

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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

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( 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.

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( 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 :

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Main Provisions under Revenue Recognition

Posted on March 9th, 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.

The core principle as stated in the IFRS is to:

“Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

The five-step framework is the core structure of IFRS 15; it consist of the five different steps for revenue recognition
clasical steps 606

The guidance in this Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).

The new standard states that you cannot recognize revenue for billed revenue amounts associated with the billing amount until the performance obligation to the customer is satisfied.

  • For each performance obligation, an entity must apply consistent method of measuring the progress
  • Performance obligation is satisfied at a point in time or over time. This is the trigger to recognize the revenue.
  • Recognize Costs to obtain or fulfill the contract
  • Under disclosure requirements, qualitative and quantitative information is required about contracts, changes, transaction price, costs, etc.

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Revenue Standard : Replacing Deferred Revenue accounting with Performance Obligation accounting

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

asc606-readyAs we know new IFRS15 standard replaced Deferred Revenue accounting with Performance Obligation accounting.

At a certain point, you owe your customer to deliver what they have ordered.

Infact, IFRS15 has not replaced the accounting principle that orders do not go on the balance sheet.

Rather, at the point when “either party acts in reliance on the contract”, you must accrue your obligation to perform.

The offset is an asset is your right to invoice for what you will have performed.

The table below explains the differences between deferring revenue and accruing performance obligations. The timing is different, the valuation is different, and the supporting data is different.

 

Old Standard: Deferred Revenue Accounting New Standard: Performance Obligation Accounting
You defer that part of a sales invoice you can’t recognize as revenue You accrue for goods and services that you owe to customers because either you or they have relied on the contract.,You don’t actually defer
You value the deferral at fair value, and it is “non-monetary” You value the accrual at estimated consideration, and it is a “monetary” debt
Calculate and book the liability when you issue invoices Calculate the liability at inception, and book it when “either party acts” – earliest of “shipping” or invoicing*
Liability is a list of invoices not yet posted to the P&L, in full or in part, for future release to the P&L Liability is a list of goods & services you actually owe to customers, for future satisfaction via transfer
Book the invoiced amount to the P&L when you meet the regulatory definition (special by industry) Book revenue into the P&L when you satisfy the customer no “special” rules), billed or not

Though The core principle as stated in the IFRS is to:
“Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

The Core principle identifies five classical steps for an entity should take in order to comply as below:

  • Identify the contract(s) with the customer
  • Identify the Separate Performance Obligations
  • Determine the Transaction Price
  • Allocate The transaction Price
  • Recognize the Revenue when a performance obligation is satisfied

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Revenue Standard :Why are FASB and IASB issuing this Accounting Standards Update

Posted on November 9th, 2016 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

As we know In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued a new joint standard on revenue recognition.

This new standard, when implemented, will replace the accounting standards for revenue recognition that currently exist under U.S. GAAP and IFRS.

Many of us are curious why are FASB and IASB issuing this Accounting Standards Update or chaging standard ?

If you refer to note of PWC , KPMG note , it indicate as below:

The prior revenue recognition guidance in U.S. GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. IFRS provided limited guidance and, consequently, the two main revenue recognition standards, IAS 18, Revenue and IAS 11, Construction Contracts, could be difficult to apply to complex transactions.

Additionally, IAS 18 provides limited guidance on important revenue topics such as accounting for multiple-element arrangements.

The Financial Accounting Standards Board and the International Accounting Standards Board initiated a joint project to clarify the principles to recognize revenue and develop a common revenue standard for U.S. GAAP and IFRS that would:

  1. Remove inconsistencies and weaknesses in revenue requirements.
  2. Provide a more robust framework for addressing revenue issues.
  3. Standardize revenue recognition practices across entities, industries, jurisdictions, and capital markets.
  4. Provide more useful information to users of financial statements through improved disclosure requirements.
  5. Simplify the preparation of financial statements by reducing the number of guidelines to which an entity must refer

asc606-ready

Moreover , The core principle as stated from IFRS is to “Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to exchange for those goods or services.”

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Release 12.2.5 AR Enhacement : Apply Receipts Automatically based on Match Score and Knapsack Method

Posted on July 23rd, 2016 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

This is one of R12.2.5 Enhancement in EBS AR.

The Automatic Cash Application improves accuracy and on-time application of cash receipts with the introduction of two new methods for automatically applying cash receipts.

  • The first method generates match scores using the Levenshtein distance algorithm and automatically applies the receipt based on a score threshold.
  • The second methods applies receipts by knap sacking the receipt amount and the open transactions of the customer.

Both methods provide suggested matches when a receipt cannot be applied automatically

Background information on the Levenshtein distance algorithm [ From Wikipedia, the free encyclopedia ]

In information theory and computer science, the Levenshtein distance is a metric for measuring the amount of difference between two sequences (i.e., the so called edit distance).

The Levenshtein distance between two strings is given by the minimum number of operations needed to transform one string into the other, where an operation is an insertion, deletion, or substitution of a single character. A generalization of the Levenshtein distance (Damerau–Levenshtein distance) allows the transposition of two characters as an operation. Some Translation Environment Tools, such as translation memory leveraging applications, use the Levenhstein algorithm to measure the edit distance between two fuzzy matching content segments.

The metric is named after Vladimir Levenshtein, who considered this distance in 1965.It is often used in applications that need to determine how similar, or different, two strings are, such as spell checkers.
For example, the Levenshtein distance between "kitten" and "sitting" is 3, since the following three edits change one into the other, and there is no way to do it with fewer than three edits:

  1. kitten -> sitten (substitution of 's' for 'k')
  2. sitten -> sittin (substitution of 'i' for 'e')
  3. sittin -> sitting (insert 'g' at the end).

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Oracle E-Business Suite Release 12.2.5 Highlights

Posted on July 15th, 2016 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

Oracle E-Business Suite R12.2.5 has been around for a while now. If you are still using an older version, you can think to upgrade. Having the the most up to date version of EBS guarantees that you are utilizing the latest and greatest features that Oracle has to offer.

There are some significant advances in Release 12.2 and specifically Release 12.2.5. Release 12.2.5 has many functional enhancements.

MODERN USER EXPERIENCE AND MOBILITY

Oracle E-Business Suite 12.2.5 embraces the modern look and feel of other Oracle products so that users navigating between Oracle E-Business Suite and Oracle Cloud applications can have a consistent user experience.

Key business benefits include:

  • Latest Oracle Look and Feel: Business users can leverage touch-friendly, icon-based or tab navigation as well as other new interactions and widgets
  • Tablet Optimized HTML User Interfaces: Receiving, Discrete MES Supervisor
  • Information Discovery: New Areas: Fixed Assets, Customers, Quoting, iStore, OIC, and CMRO; Mobile Templates, DFF Support, Global Search, Quick Links. Rename from Endeca Extensions

FUNCTIONAL ADVANCEMENTS ACROSS THE SUITE

Oracle E-Business Suite 12.2.5 delivers customer-driven functional advances across the integrated suite to help organizations further optimize their business processes. Key advances include:

  • Financials: Oracle General Ledger integrates with the Approvals Management framework (AME) to increase automation of journal approvals and improve governance, control and compliance. Oracle Receivables provides new methods for automated receipt application.
  • Procurement: Oracle Procurement Command Center, a new product, allows increased visibility and access to purchasing activities for more value creation. Oracle iProcurement Information Discovery helps improve buying decisions with ratings and reviews for catalog items and services. iProcurement uploads catalogs via the Oracle Supplier Network (OSN) to automate catalog management.
  • Projects: Oracle Advanced Project Planning and Control, a new product, allows increased visibility to project status for more proactive management. Oracle Projects can improve project control with a contractual schedule of values
  • Order Management and Logistics: Oracle Order Management extends support for flexible ordering of products, services, subscriptions, and warranties. Oracle Contract Renewal Command Center, a new product, helps improve visibility to service and lease renewals for higher loyalty. Flexible serial tagging in inventory and warehouse management organizations reduces overhead by capturing serial numbers only at point of use. Zone picking in Oracle Warehouse Management provides reduced idle time and improves picking efficiency.
  • Manufacturing: Outsourced Mfg, Component Availability Mgt
  • Asset Management: Map Visualization, Linear Asset Enhancements
  • Service: Oracle Service enables shared service center operation using multi-org access control (MOAC), with service execution users accessing just the service requests in their operating unit. Configurable HTML UIs in Oracle Field Service and Oracle TeleService helps increase the productivity of field service dispatchers and call center agents
  • Human Capital Management: A flexible, HTML payroll dashboard allows quick validation of payroll readiness and provides improved monitoring of payroll runs. Organizations can configure talent matrices of different dimensions to organize their talent

OPERATIONAL EFFICIENCY

  • Online Patching: Support for Simplified Dev Environments, Patching Progress Monitoring Tool
  • Technology Stack: Middle Tier Technology Checker
  • Automated System Management: Streamlined Patch Wizard Reports, Patch Wizard Export

TECHNICAL INSIGHTS

  • E-Business Suite R12.2.5, Patch 19676458 with 9 Zip files with 4.3GB in total size
  • Preliminary Pre-Requirements for R12.2.5 Upgrade
    • Oracle E-Business Suite 12.2.5 Release Update Pack requires Fusion Middleware Technology Stack (FMW) 11.1.1.7 (11gR1 PS6) or higher.
    • Apply the Latest AD and TXK Delta Release Update Packs
    • Minimum RDBMS Version is 11.2.0.4 or Higher

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