Question

In: Accounting

ASC 606 in practice. Please find a company who has either already adopted ASC 606 or...

ASC 606 in practice. Please find a company who has either already adopted ASC 606 or who has provided significant disclosures about the impending impact of ASC 606 AND for which the adoption of ASC 606 has or will significantly alter revenue recognition. My company is General dynamics Company .Your job is to discuss the changes and what the underlying codification was under ASC 605 vs. ASC 606. This may require you to research ASC 605 guidance, SEC Topic 13 and any legacy accounting guidance from EY or the other Big 4.

Solutions

Expert Solution

ASC Topic 606 prescribes a new five-step model entities should follow in order to recognize revenue in accordance with the core principle. These five steps are:

Identify the contract(s) with a customer.

Identify the performance obligations in the contract.

Determine the transaction price.

Allocate the transaction price to the performance obligations in the contract.

Recognize revenue when (or as) the entity satisfied the performance obligations.
1: Identify the contract(s) with a customer, specifically the changes, if any, to existing guidance. In this series’ subsequent posts, we will cover the other steps in the new revenue recognition model.

According to ASC Topic 606, a contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral or implied by an entity’s customary business practices.

An entity should account for a contract with a customer that is within the scope of ASC Topic 606 only when all of the following criteria are met:

The parties to the contract have approved the contract and are committed to perform their respective obligations.

The entity can identify each party’s rights regarding the goods or services to be transferred.

The entity can identify the payment terms for the goods or services to be transferred.

The 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 that will be transferred to the customer.

Does this differ from current guidance? Perhaps. Let’s take a look at an example.

Practical Example

Metro Man, Inc. produces and sells custom leather man bags. Metro Man receives a large order on December 15 from Paulie’s Purses, an existing customer in good standing. Metro Man’s normal and customary business practice for such transactions is to receive a written sales agreement from the customer that requires the signatures of authorized company representatives and approval from their sales committee. Authorized representatives from both Metro Man and Paulie’s Purses have signed the agreement. However, the sales committee for Paulie’s Purses is currently on a “mancation” and will not be able to formally approve the order and sign the agreement until January. They did verbally approve the contract on a phone call. Due to the size of the order and their existing relationship with Paulie’s Purses, Metro Man decides to ship the man bags the last week in December. The man bags arrive at Paulie’s Purses prior to December 31.

Can Metro Man recognize revenue at December 31, as it is highly unlikely that Paulie’s Purses sales committee will not approve the order?

Answer: Old Guidance (ASC 605 / SAB 104)

No. The arrangement does not follow Metro Man’s normal and customary business practices.

SAB 104 requires persuasive evidence of an arrangement to exist in order to recognize revenue. According to the SEC, persuasive evidence of a sale represents the “agreement of the sale.” Without it, delivery means nothing in terms of transferring the risks and rewards of the sold item. If a written contract is considered evidence of normal business practice, all criteria are not met until signed by both parties!

Whatever is determined to be “persuasive evidence” should be applied consistently for all transactions of the same kind within a company. Oral agreements typically are not acceptable and delivery cannot be used as a substitute. The agreement either exists in its final form or it does not.

Answer: New Guidance (ASC 606)

It depends on whether the contract was deemed “legally enforceable” on December 31 and the other contract criteria had been met.

With ASC Topic 606, the definition of a contract emphasizes that a contract exists when an agreement between two or more parties creates enforceable rights and obligations between those parties. Note that the agreement does not need to be in writing to be a contract. Whether the agreed-upon terms are written, oral or evidenced otherwise (for example, by electronic assent), a contract exists if the agreement creates rights and obligations that are enforceable against the parties.

Determining whether a contractual right or obligation is enforceable is a question to be considered within the context of the relevant legal framework that exists to ensure that the parties’ rights and obligations are upheld. The factors that determine enforceability might differ between jurisdictions.

https://www.google.com/url?url=http://www.ey.com/publication/vwluassetsdld/technicalline_04043-171us_revrec_assetmanagement_29june2017/%24file/technicalline_04043-171us_revrec_assetmanagement_29june2017.pdf%3FOpenElement&rct=j&sa=U&ved=2ahUKEwivgtDAtM3aAhUGNo8KHbhyAzwQFjAAegQIBxAB&q=asc+606+legacy+guidance+accounting+in+EY+section+topic+13+&usg=AOvVaw0TPhz9krF1De0f18rmoNrh

Above link of EY legacy guidance accounting please read carefully .


Related Solutions

Based on FASB ASC 606, when a company has multiple performance obligations, how should they allocate...
Based on FASB ASC 606, when a company has multiple performance obligations, how should they allocate the transaction price?
Within ASC 606-10 (the revised revenue model), where can a researcher find: a. The core principle?...
Within ASC 606-10 (the revised revenue model), where can a researcher find: a. The core principle? b. The five steps for applying the core principle? c. The objective of the guidance in this topic? d. Guidance on the incremental costs of obtaining a contract with a customer?
Revenue Recognition for ABC Software Company under ASC 606 ABC COMPANY was stumped by U.S. accounting...
Revenue Recognition for ABC Software Company under ASC 606 ABC COMPANY was stumped by U.S. accounting rules for revenue recognition and gave up trying to comply with them.  The Japanese giant recognized this would lead to the delisting of its ADR shares on NASDAQ.  ABC also said it would be able to file its 2006 annual report under U.S. GAAP and it couldn’t vouch for its financial statements since 2000.  ABC COMPANY said a restatement was not practicable because of the complexities.  ABC noted...
Please find a supply chain practice conducted by a company of your choice that achieves any...
Please find a supply chain practice conducted by a company of your choice that achieves any of the triple-A standards (Agility, Adaptability, and Alignment). USE YOU OWN WORDS AND EXAMPLE
Question 1 has already been answered. Please answer question 2 below the table only. Find out...
Question 1 has already been answered. Please answer question 2 below the table only. Find out the NPV, IRR and Payback period for each of the following three projects. Assume I=6%.                                                                                                                                    (60 points) Project CF0 CF1 CF2 CF3 CF4 CF5 A -12,000 3000 3000 4000 4000 1000 B -12,000 4000 4000 3000 3000 1000 C -12,000 3000 3000 3000 3000 1000 D -12,000 5000 3000 5000 3000 0 E -12,000 3000 3000 3000 3000 5000 F...
Company has the following cash flow stream. CF1 = 420 CF2 = 606 CF3 = 953...
Company has the following cash flow stream. CF1 = 420 CF2 = 606 CF3 = 953 Cash flow is expected to be constant after year 3, with a growth rate of 4%. The WACC is 10%. In addition, the company has 10 millions in cash, and 64 millions debt, with 17 millions shares outstanding. What is the stock price, P0 , today?
You are caring for a patient who has a visual disturbance. You have already tested their...
You are caring for a patient who has a visual disturbance. You have already tested their CNII. Can you explain to this patient the pathway that electromagnetic radiation in the visible spectrum takes through the eye to get to the sensory receptors?
Please post something that has not already been posted. Imagine that one of your colleagues has...
Please post something that has not already been posted. Imagine that one of your colleagues has offered you the opportunity to become a partner in a new business venture. The colleague stipulates that due to your past relationship, there is no reason to draw up a partnership agreement. From the information you’ve gathered from Form 1065, identify the different partnership roles and select the one with the least potential liability if the business fails. Discuss the pros and cons of...
The Deli Company is planning an investment in the consumer electronics market. The company already has...
The Deli Company is planning an investment in the consumer electronics market. The company already has an established brand recognition in this market, and believes it can capture 5% of the whole market. Table 1 sets out data on the relevant consumer electronics market. Table 1: Consumer electronics market (numbers in millions) Annual sales revenues £100,000 Annual costs (variable) £50,000 Annual growth in sales/costs 3% Beta of sales and cost cash flows 1.5 Table 2: Deli's investment project Investment cost...
OM Practice: Provide one example of a company who you believe has good operations. Explain your...
OM Practice: Provide one example of a company who you believe has good operations. Explain your choice - what aspects / examples of the company’s operations supports your company choice. If your previous response has not done so, list two big OM innovations – explain each innovation and why it is a big idea (its benefits).
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT