Revenue Recognition Changes Are Here. Is Your Manufacturing Company Ready?

A five-step approach to recognizing revenue and what considerations manufacturers should make.

In recent years, the Financial Accounting Standards Board (FASB) received feedback that revenue recognition guidance was fragmented at best, confusing at worst. This is significant considering revenue is the key measurement used to determine a manufacturing company’s performance.

In response to this feedback, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, in May 2014, and subsequently amended it. This is the most significant revision to U.S. Generally Accepted Accounting Principles (U.S. GAAP) revenue recognition standards in history.

The new guidance is effective for annual reporting periods for private companies beginning after Dec. 15, 2018.

The core principle of the revenue recognition standard is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” ASU 2014-09 creates a five-step framework for manufacturers to determine when and how much revenue should be recognized, the fifth step potentially being the most difficult to evaluate:

1. Identify the contract(s) with the customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Once a manufacturing entity begins to implement the new revenue recognition standard, there are there are several issues to consider.

1. Identify the Contract(s) With the Customer

The new standard defines a contract as “an agreement between two or more parties that creates enforceable rights and obligations.” Contracts can be in writing, oral, or other customary practices (e.g., email, purchase orders, etc.). The standard goes on to state the contract must meet the following criteria:

1. The contract has been approved and there is commitment from all parties.
2. The contract identifies the rights of all parties involved.
3. The contract identifies the payment terms of the agreement.
4. The contract has commercial substance.
5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services.

If an arrangement does not meet the criteria, and consideration has already been received, revenue will not be recognized until the criteria have been met or one of the following occur:

1. The entity has no remaining obligations and substantially all consideration received is nonrefundable.
2. The agreement has been terminated and the consideration received is nonrefundable.

Once an entity has identified the contracts, move on to step 2.

2. Identify the Performance Obligations in the Contract

The standard defines a performance obligation as a promise in a contract to transfer a good or service. It is important to note that a single contract could have only one performance obligation or it could have many; thus, all performance obligations in a contract should to be identified at this stage. Once performance obligations are identified*, the entity needs to determine which ones are distinct and which ones are not. ASU 2014-09 notes that for a performance obligation to be distinct it must be capable of being distinct, and it must be distinct within the context of the contract.

A good or service is distinct if:

1. The customer can benefit from the good or service either on its own or together with other resources readily available to the customer; and
2. The entity’s obligation to transfer the good or service is separately identifiable from other obligations in the contract.

Example: An entity sells a product to a customer with a warranty. There are two performance obligations in this contract: delivery of the product and honoring the warranty. The two performance obligations are distinct.

If a performance obligation is identified but it is not distinct, then it should be combined with other goods or services until it becomes distinct. Example: The sale of a smartphone. The sale of the smartphone provides two performance obligations: the phone itself and the software that operates that phone.

Both performance obligations are of no use without the other and both would have essentially no value without the other; thus, they need to be combined to become a distinct performance obligation. Once all performance obligations have been met, the entity would move to step 3. This determination of distinction requires substantial judgment, and entities will need to closely evaluate the facts of each contract.

3. Determine the Transaction Price

On the surface, this step appears straightforward. What compensation is the entity receiving for the good or service they are providing? ASU 2014-09 defines the transaction price as the amount of consideration to which an entity expects to be entitled in exchange for the transferring of the promised goods or services, excluding any amounts collected on behalf of a third party (e.g., sales tax). This step provides for a number of considerations in determining the transaction price.

A manufacturing company needs to determine if the consideration to be received is fixed or variable in nature. Variable consideration is any type of consideration that is not fixed when evaluating all relevant factors. Variable consideration includes both positive and negative adjustments. Examples of variable consideration include volume discounts, rebates, price concessions, refunds, performance bonuses, contingencies, royalties, etc.

The concept of variable consideration within ASU 2014-09 could be significant to manufacturers. The standard notes that an entity should include an estimate of the variable consideration in the transaction price at the time the revenue is recognized provided that it is “probable” that a significant revenue reversal will not occur. Manufacturers will need to consider both qualitative and quantitative factors when determining if and how much variable consideration should be included in the transaction price.

If the consideration is variable in nature, ASU 2014-09 notes that it must be determined based upon the expected amount to be received (a probability-weighted amount) or the most likely amount to be received, whichever provides a more accurate prediction.

It is important to note that the cumulative amount of revenue an entity recognizes from variable consideration should never exceed the amount to which it is reasonably assured to be entitled. An example would be a discount provided to a customer for bulk orders that have historically achieved the metrics for the bulk order discount. If an entity anticipates the customer will earn the bulk discount, the entity would be required to factor in this reduction of revenue as the revenue is recognized throughout the year, rather than when the customer has actually met the requirement for the bulk discount.

Other items that an entity must consider when determining the transaction price include:

• The time value of money (when revenue is recognized over more than one year),
• Any noncash consideration that needs to be recognized and accounted for (noncash consideration should be measured at its fair value), and
• Any consideration payable to the customer (i.e., any amounts that the customer can apply against the amounts owed to the entity should be a reduction of the transaction price)

Once the transaction price has been determined, the entity would move on to step 4 in the framework.

4. Allocate the Transaction Price to the Performance Obligations

ASU 2014-09 states that the allocation of the transaction price to the performance obligations should be based on the amount that represents the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation. In essence, an entity needs to determine what the standalone transaction price of a performance obligation would be at the inception of the contract (assuming the contract has more than one performance obligation). Once the standalone transaction price has been determined, allocate the transaction price of the contract to each performance obligation based on the relative standalone price.

Example: You buy a new car, which includes two years of oil changes (a total of four changes) for $10,000. The car by itself would sell for $11,000, and the oil changes would sell for $160. As such, the $10,000 selling price needs to be allocated to each performance obligation: the transfer of the title of the car and each completed oil change. On a standalone basis the total price would be $11,160. So the car is 98.6 percent of the weighted price and the oil changes are 1.4 percent. As such, $9,860 should be recognized as revenue when the customer takes on the rights of the car for its relative portion of the transaction price. The additional $140 would be recognized as revenue as the oil changes are completed (i.e., $35 per oil change). Once the entity has determined how to allocate the transaction price to each of the performance obligations identified, it will move to step 5.

5. Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation

It is time to recognize the revenue – at least as each performance obligation is satisfied. An entity would recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service, which is when the customer obtains control of that good or service.

A key consideration at this stage is whether the performance obligation is satisfied at a point in time or over a period of time. The standard states that a performance obligation is satisfied over time if just one of the following criteria is met:

1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs its obligations;
2. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
3. The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

If one of these criteria is not met, the standard provides guidance to determine when the performance obligation is satisfied at a point in time. An entity would consider the following as indications of the transfer of control (though this list is not all-inclusive):

1. The entity has a present right to payment for the performance obligation satisfied.
2. The customer has legal title to the good or has received the benefit of the service.
3. The entity has transferred physical possession of the good.
4. The customer has assumed significant risk and rewards related to the ownership of the good.
5. The customer has accepted the good.

If the performance obligation is determined to be satisfied over a period of time, then the entity needs to recognize revenue over a period of time with a consistent method of measuring progress towards completion of the performance obligation. Appropriate methods of measuring progress include the following:

• Output Method (also known as the milestones-reached method): Under this method, an entity would recognize revenue based on the value of the goods or services that have been transferred to date to a customer (e.g., units produced, units delivered, appraisals of results, etc.). The output selected should provide a fair representation of measurement for the satisfaction of the performance obligation the entity is striving to satisfy.
• Input Method: Under this method, an entity would recognize revenue based on the inputs it has incurred in its efforts to satisfy the performance obligation (e.g., costs incurred, machine hours, passage of time, etc.). An entity must adjust this method for any costs that would distort the revenue recognition, such as known waste or scrap costs. Management will need to use judgment in determining what adjustments need to be made to costs incurred that do not contribute to the progress of satisfying the performance obligation.

For most manufacturers, revenue will be recognized at a point in time when goods being produced are distinct performance obligations and control has been transferred to the customer. However, in certain circumstances manufacturers might have to recognize revenue over time, rather than a point in time.

Considerations for Manufacturers

There are several issues to consider as a manufacturing entity starts to implement the new revenue recognition standard.

Customer Control

U.S. GAAP currently requires that the risks and rewards of ownership be transferred to the customer under a sales transaction in order for the entity to recognize the related revenue. ASU 2014-09 requires that the customer has obtained control of the product or benefit of service before revenue can be recognized.

While at first this difference may appear minor, a manufacturing entity will need to consider when a customer takes control of a product. The FASB has indicated that control should be viewed from the customer’s perspective. It may become difficult for a manufacturing entity to determine control as it relates to a manufacturers’ shipping terms with a customer.

Manufacturers often ship products with “Freight on Board” (FOB) terms. Under a traditional FOB shipping contract, control and title of a product shifts to the customer as soon as the product has been loaded into the hauling truck and the revenue is recognized. Under FOB destination terms, the title of the asset does not transfer to the customer until it is delivered and at the time of delivery the revenue would be recognized. However, as an incentive to a customer, many manufacturers will ship FOB shipping point (thus transferring title to the customer when loaded into the hauling truck) but will agree to cover damages in transit. This is commonly known as a synthetic FOB destination agreement. A manufacturing entity might evaluate this synthetic FOB destination contract and determine that there are two separate and distinct performance obligations:

1. Sale of the product, and
2. “Insurance” on the shipping

Under such arrangements a manufacturing entity may have to recognize the portion of the transaction price related to the product sale upon shipment and the remaining transaction price related to the “insurance” on delivery. In such cases, ASU 2014-09 does allow for a practical expedient that will allow an entity the option to treat shipping and handling as a fulfillment activity (not as a separate performance obligation) when shipment occurs subsequent to a customer taking control of the product. This policy should be disclosed in the footnotes of the entity’s financial statements.

Bill-and-Hold Arrangements

Under ASU 2014-09, there are two distinct performance obligations that are recognized under a bill-and-hold arrangement: the sale of the good and the warehousing or storage of the good. The issue with a bill-and-hold arrangement is in determining when “control of the good” has been obtained by the customer. Until the customer has obtained control of the good under the guidance of ASU 2014-09, no revenue would be recognized by the selling entity. In determining if the customer has obtained control, the entity will need to consider whether the customer has obtained legal title to the good and if the selling entity has the right to payment for the sale. In a bill-and-hold arrangement, the manufacturer must also consider the following criteria when determining if the customer has obtained control under ASU 2014-09:

1. The good must clearly be identified as belonging to the customer.
2. The good must be ready for physical transfer to the customer.
3. The entity does not have the ability to use the product or sell it to another customer.
4. There is a substantive reason for the bill-and-hold arrangement, such as customer requests.

As long as these criteria are met, then the manufacturing entity can recognize the portion of the transaction price that is being allocated to the manufactured good. Since the warehousing of the good is a separate performance obligation, it will be allocated a portion of the transaction price in satisfaction of that performance obligation. Most likely, the warehousing performance obligation would be recognized as revenue over a period of time. As such, a portion of the revenue recognized on a bill-and-hold arrangement could be delayed versus the current guidance which provides for revenue recognition once the product is ready for customer pick up.

Customized Products

Under ASU 2014-09, manufacturers that produce and sell highly customized products could be able to recognize revenue sooner. Under current U.S. GAAP, an entity would not be allowed to recognize any revenue on a customized product until the product is completed and the risks and rewards of owning the product have been transferred to the customer. ASU 2014-09 requires revenue to be recognized over time for a customized product that has no alternative use and for which an enforceable right to payment for performance exists. Under this scenario, it would be possible for a manufacturer of a custom product to recognize a portion of revenue during production. It is important to note that in order to qualify for revenue recognition over a period of time rather than at a point in time the custom product being made would have to be customized to the point that it does not have an alternative use and could not be sold to another customer.

Financing Within a Contract

Under ASU 2014-09, a manufacturing entity will need to evaluate its contracts with its customers to determine if there is a significant financing component (either explicitly or implicitly) to any of its contracts. If a contract has a financing component that is deemed to be significant, then the entity will need to evaluate if there are two performance obligations within the contract. The first would be sale of the good, and the second would be the financing of that sale. In order for a manufacturing entity to determine if the financing is significant, it should evaluate the following criteria:

1. Would the transaction price received be different if the financing component of the contract was not included?
2. What is the anticipated length of time between when the customer will receive the product and when payment will be made based on the financing component?
3. Does the financing component save the customer on financing charges (such as interest)? This would have to be evaluated against current interest rates at the time of the sale.

If after evaluating the above criteria it is determined that the financing component is significant, the entity would need to allocate the transaction price between the two performance obligations. Most likely the financing portion of the revenue would be recognized over a period of time.

ASU 2014-09 provides a practical expedient when the financing terms of a contract are for one year or less: The entity does not have to factor in the time value of money when recognizing the revenue related to the financing component. This practical expedient can also be applied to contracts over one year, when the time period between meeting the performance obligation of the sale and payment of the transaction price on that performance obligation is one year or less. If a manufacturer utilizes this practical expedient, than it must disclose this policy within its financial statements.

ASU 2014-09 specifically highlights three times when the financing component of a contract would not be considered significant to the overall contract:

1. An entity pays in advance for the goods or services to be received and the transfer of the goods or services is at the customer’s discretion.
2. The contract’s transaction price is determined to be substantially all variable consideration and the amount and timing of the consideration is based on the occurrence or nonoccurrence of a future event that is outside of the control of the entity or the customer.
3. The difference in timing of delivery of the product and the receipt of payment stems from a reason other than financing either to the entity or the customer and the difference is proportional to the reason for the difference in time.

Under any of the three scenarios above, the financing component would not be considered a separate distinct performance obligation for which a portion of the transaction price would need to be allocated.

Discounts on Purchases

ASU 2014-09 requires that discounts on purchases be taken into consideration when determining the transaction price that would be allocated to the completion of a performance obligation. Discounts are typically provided under one of two scenarios. The first is a discount for bundling separate goods and services together and the second is a discount for volume purchases:

1. Bundled Discounts: Under ASU 2014-09, if a manufacturer offers its customers a discount for bundling various goods or services together, the discount should be allocated to all performance obligations under the contract of bundled goods, unless the contracts meets all three of the following criteria:

1. The entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a standalone basis.
2. The entity regularly sells on a standalone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the standalone selling prices of the goods or services in each bundle.
3. The discount attributable to each bundle of goods or services described in point b. is substantially the same as the discount in the contract, and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs.

If the criteria above are met, it might be possible that the manufacturing entity would allocate the discount only over certain performance obligations identified.

2. Volume Discounts: If a manufacturer provides a customer with a volume discount on a product being sold, and that volume discount is customary to the manufacturer’s business, there are no special considerations under ASU 2014-09 (the volume discount would need to be factored into the transaction pricing as noted above).

But what if a manufacturing entity offers a discount that is well outside of what is customarily offered to its customers? For example, they may offer a right to purchase additional goods in the future at a heavy discount. This could be a strategic play by the manufacturer to create new opportunities to expand its customer base. However, under ASU 2014-09, if a deep discount is offered to a customer that is outside of the customary terms of that manufacturer, additional consideration might be needed to determine the accounting impact. If there is a deep discount given to a customer for the option of additional goods or services, then the manufacturing entity needs to consider if a “material right” has been granted. If it determined that the contract provides the customer with a material right to that discount, then a separate performance obligation has been created. The revenue related to this performance obligation would be recognized either when the customer exercises the right to the additional goods or the option for the additional goods expires.

If the above example was based on a retrospective volume rebate – meaning, once a set number of items were purchased – the discount would then be applied to purchases made up to that point. Management would need to use its judgment to determine if it believed the customer would purchase the volume threshold and estimate the discount in its current recognition of revenue and allocation of the transaction price.

Customer loyalty programs should also be considered as these might require significant accounting changes if a material right is determined to exist.

Services Within a Contract

Under ASU 2014-09, if an entity offers services that are bundled within a customer contract for the sale of an item, it may be required to recognize such services as a separate performance obligation.

Service revenue is typically recognized over time based on the output or input methods as discussed above. Manufacturing entities will need to assess their contracts with customers closely, as products and services that have historically been an implicit part of a contract may now need to be broken out into separate performance obligations and the revenue recognized accordingly. For example, if a manufacturer installs a product that a customer has purchased, the manufacturer most likely now will have two separate performance obligations (even if historically the manufacturer had recognized all of this revenue at the time of sale):

1. The sale of the product, which would most likely be recognized at a point in time, and
2. The installation service, which, depending on the time for installation, might be recognized over a period of time.

Warranties

Many manufacturing entities will offer some type of warranty on the products that they produce and sell. Warranties will be directly impacted by ASU 2014-09, which classifies all warranties into one of two categories:

• Assurance-Type Warranties: Provides the customer with assurance that the product will function as the parties intended because the product will comply with specific agreed-upon specifications.
• Service-Type Warranties: Provides the customer with additional benefits that are not part of the agreed-upon specifications.

Under ASU 2014-09, an entity will need to evaluate and determine if separate performance obligations result from the warranty offered. This is determined by two factors:

1. Is the warranty included as part of the normal purchase, or does the customer have the option to purchase the warranty? If the customer has the option to purchase the warranty separate from the transaction, then the warranty is a separate performance obligation and would need to be accounted for as such. If the warranty is part of the original purchase, then the entity needs to determine if it is an assurance-type warranty or a service-type warranty.

Most assurance-type warranties would not be considered a separate performance obligation under ASU 2014-09 and would be accounted for under Accounting Standards Codification (ASC) Topic 460: Guarantees. Under the new guidance, service-type warranties are to be treated as separate performance obligations. This means that the contract’s transaction price will have to be allocated to the service-type warranty and the sale of the product, resulting in deferring revenue recognition and creating a contract liability for the service-type warranty. If the service-type warranty is truly under a separate contract, the entity would be required to recognize separate revenue related to the warranty contract, versus as an allocation of the transaction price for the sale of the good. The key here is that the new standard does not require service-type warranties to be separately priced to result in a separate performance obligations or potentially a separate contract.

2. Consider the true economics of the warranty. If the basic warranty is an assurance-type warranty but in practice the manufacturing entity is providing its customers with a service-type warranty, the entity would need to evaluate the warranty to determine if it is really an assurance-type or a service-type warranty. Entities will need to carefully review their current warranty practices to determine if the new standard will require a revenue deferral.

Contract Costs

These represent costs that an entity incurs in delivering its products or providing services to its customers under the contracts entered into. These costs are generally incurred by the entity prior to any revenue being recognized. Historically, an entity would make an accounting policy election to determine if these costs were capitalized or expensed as incurred, but the majority of companies currently expense these costs as incurred.

Under ASU 2014-09, the incremental costs incurred to obtain a contract should be capitalized on the balance sheet as a contract asset, to the extent that the entity expects to recover these costs. Incremental costs are defined as those costs that would not have been incurred had the contract not been obtained or entered into. The most common incremental cost incurred to obtain a contract relates to sales commissions paid for acquiring a customer contract. Note that this standard only applies if the costs are not covered in the scope of another topic within the FASB codification.

ASU 2014-09 also addresses costs incurred in fulfilling a contract with a customer. If the following three criteria are met, these costs would be capitalized as a contract asset as well:

1. The cost relates directly to a contract or a specific anticipated contract.
2. The cost generates or enhances resources that would be used to satisfy performance obligations under a contract in the future.
3. The costs are expected to be recovered.

The capitalized costs, whether related to obtaining or fulfilling a contract, will then need to be amortized in a systematic method that reflects the transfer of goods or services under the contract for which the costs were incurred. ASU 2014-09 does allow for a practical expedient related to these capitalized contract costs in that they may be expensed as incurred if the amortization period is determined to be one year or less. This policy should be disclosed in the entity’s footnotes.

Effective Dates and Implementation

Complying with the new standard will have an impact on all manufacturing companies. Public companies will be required to comply with the new standard for the calendar year ending Dec. 31, 2018, while nonpublic companies are provided an additional year requiring compliance during the calendar year ending Dec. 31, 2019.

ASU 2014-09 does require companies to adopt the standard on a retroactive basis. The standard provides for two methods to accomplish this:

1. Full Retrospective Method: The entity will report all periods presented under the new standard, with the option to elect any or all of the following practical expedients (which must be disclosed):

1. For completed contracts, an entity does not need to restate contracts that both begin and end in the same reporting period.
2. For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
3. For all reporting periods presented before the date of the initial application of the new standard, the entity needs not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount of revenue.

2. Modified Retrospective Method: Companies are able to apply the new revenue standard to only the current year. To use this method (for nonpublic companies), any contracts that are open or new will be subject to the new standard’s requirements as of Jan. 1, 2019. Contracts that have been completed or are substantially complete at that date may be excluded. Contracts that are partially, not substantially, complete will require a cumulative-effective adjustment to the opening balance of retained earnings on Jan. 1, 2019.

Additionally, the entity must disclose the amount by which each financial statement line item is affected in the current reporting period by the application of ASU 2014-09, as compared to the guidance that was in effect prior to ASU 2014-09. This means that an entity will have a dual reporting requirement to account for revenue recognition under current U.S. GAAP to disclose the financial statement line item differences between the old and new U.S. GAAP revenue recognition standards.

New Disclosure Requirements

ASU 2014-09 will significantly increase the disclosures required in a manufacturing entity’s financial statements. Nonpublic companies are required to make the following disclosures under ASU 2014-09:

• Companies will be required to present or disclose revenue disaggregated separately by revenue from its contracts with customers, revenue in accordance with ASC Topic 606, and those revenue transactions accounted for in accordance with other accounting standards.

ASU 2014-09 also requires an entity to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Examples include major product lines, geographical regions, types of customer classes, etc.

The standard requires this disaggregated revenue disclosure to be reconciled to the revenue presented in the financial statements.

ASU 2014-09 does allow nonpublic companies to elect not to apply this new quantitative disaggregation of revenue disclosure requirement. However, if a nonpublic entity elects not to quantitatively disclose disaggregated revenue, it will be required to disclose qualitative information related to economic factors that affect the nature, amount, timing, and uncertainty of its revenue. Additionally, nonpublic companies will still be required to disaggregate revenue according to the timing of revenue recognition (a point in time versus over time) and disclose in their footnotes.

• Companies need to disclose information about the performance obligations in their contracts, including when the entity typically satisfies a performance obligation (i.e., upon shipment or upon delivery).
• Companies will need to disclose significant payment terms (e.g., payment due dates, if variable consideration exists, if there are any financing components, etc.).
• Companies will need to disclose the nature of the goods and services they are providing.
• Companies will need to disclose any obligations they have for returned products, refunds, or any other similar obligation.
• Companies will need to disclose any type of warranty they are providing and any related obligations.

Additional disclosure requirements exist when a nonpublic entity elects a practical expedient (noted throughout above) offered within ASU 2014-09. Public companies also have significantly more disclosure requirements which are outlined in ASU 2014-09.

Implementation of ASU 2014-09 is going to be difficult and potentially costly to manufacturing companies. However, there are steps that manufacturing companies can start to take now to help ease the difficulty and the cost of implementing:

• Take time now to properly identify contracts, including their terms and potential performance obligations.
• Determine if any contracts will have variable consideration and what impact the new standard might have on those specific contracts.
• Start to evaluate what the transaction price will be for current contracts and how it will be allocated to the various performance obligations identified.
• Look for areas that will require key estimates and judgments, and start to develop processes to ensure that solid information is provided to make those estimates and judgments.
• Determine what the nature of any warranties offered is and if the warranty will be a separate performance obligation.
• Determine what your shipping terms are and when control is transferred to a customer based on the guidance in ASU 2014-09.
• Take the time to read about the new standard and make sure that staff members fully understand the new standard.

It is clear that ASU 2014-09 will require manufacturers to reevaluate the way they recognize their revenue. Manufacturers should use solid judgment and good estimates in applying the five-step framework, and they should not wait until the last minute to do so. Now is the time to begin assessing the impact the new standard will have on manufacturers and their current and future contracts. What’s more, manufacturers will want to make sure that they have strong systems and processes in place for the implementation of this new guidance and that they can support their judgments and assumptions with good, solid information. The cost of a reporting misstep could be high.

*The FASB has amended ASC 606 to help reduce the cost and complexity of identifying performance obligations by allowing the following:

• If a promised good or service is immaterial to the contract with the customer, no assessment is required. The company should evaluate both quantitative and qualitative factors, including the customer’s perspective, when performing this assessment. Additionally, if multiple goods or services are deemed to be immaterial individually but would be material in the aggregate, then the company should not disregard these goods or services when identifying performance obligations.
• An accounting policy election can be made to account for shipping and handling activities that occur after the customer obtains control as an activity to fulfill the promise to transfer the good instead of a separate obligation.

Disclaimer: The information presented herein is general in nature and should not be acted upon without the advice of a professional.