Revenue Recognition as it relates to valuation of a company prior to stock issuance

Revenue recognition Revenue recognition still receives a great deal of attention from the SEC. Some of the most common topics include the following:

• Software revenue recognition

• Multiple-element arrangements

• Gross versus net revenue presentation

• Reseller arrangements

• Collaboration agreements

• Barter transactions

• Bill and hold/consignment sales

• Upfront fees

New revenue recognition guidance issued by the Financial Accounting Standards Board (FASB) will affect almost all entities and significantly increase required disclosures. While current guidance is often industry-specific and spread across various pieces of accounting literature, Accounting Standards Codification (ASC) 606, “Revenue from Contracts with Customers,” provides a single, comprehensive model to be applied in all industries. The standard is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. For non-public entities, the standard is effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted only as of annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Companies contemplating an IPO should begin an assessment of the impact of the new standard on the organization so they can articulate to investors, investment bankers and other stakeholders the potential impact of the adoption of the new guidance.

https://asc.fasb.org/imageRoot/32/79982032.pdf

Summary Why Is the FASB Issuing This Accounting Standards Update (Update)? On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued a converged standard on recognition of revenue from contracts with customers. In June 2014, the FASB and the IASB (collectively, the Boards) announced the formation of the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG). One of the objectives of the TRG is to inform the Boards about potential implementation issues that could arise when organizations implement the new revenue guidance. The TRG also assists stakeholders in understanding specific aspects of the new revenue guidance. The TRG does not issue authoritative guidance. Instead, the Boards evaluate the feedback received from the TRG and other stakeholders to determine what action, if any, is necessary for each potential implementation issue. Implementation questions submitted to the TRG and discussions at TRG meetings informed the Board about a few issues in the guidance on identifying performance obligations and licensing. Those issues include: 1. Identifying Performance Obligations: a. When identifying performance obligations, whether it is necessary to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract b. Determining whether promised goods and services are separately identifiable (that is, distinct within the context of the contract) c. Determining whether shipping and handling activities are a promised service in a contract or are activities to fulfill an entity’s other promises in the contract. 2. Licensing: a. Determining whether the nature of an entity’s promise in granting a license is to provide a right to access the entity’s intellectual property, which is satisfied over time and for which revenue is recognized over time, or to provide a right to use the entity’s intellectual property, which is satisfied at a point in time and for which revenue is recognized at a point in time b. The scope and applicability of the guidance about when to recognize revenue for sales-based or usage-based royalties promised in exchange for a license of intellectual property c. Distinguishing contractual provisions that require an entity to transfer additional licenses (that is, rights to use or access intellectual property) to a customer from contractual provisions that define the 2 attributes of a promised license (for example, restrictions of time, geographical region, or use). To address those issues, the Board decided to add a project to its technical agenda to improve Topic 606, Revenue from Contracts with Customers, by reducing: 1. The potential for diversity in practice at initial application 2. The cost and complexity of applying Topic 606 both at transition and on an ongoing basis.