View All
Applying IFRS 15 EY
Deloitte September survey
SEC Facts Revenue Recognition

Three ways to identify IFRS 15 and ASC 606 variable considerations

June 2, 2017 3:03:21 PM / by Ali Almohashi, MSA, CMA posted in Internal Controls

Company Golden Bear Golf Inc. is named after legendary golfer Jack Nicklaus. Its fully owned subsidiary is Paragon, which builds golf courses. Paragon executives Boyd and Curbello artificially increased revenue. They conducted fraudulent schemes to manipulate revenue by accelerating project progress, inflating expected revenue, creating fictitious contracts, and not recording unexpected project losses. Boyd and Curbello even started accepting a loss contract where the cost of the contract was higher than the price charged. Then, they did not record losses associated with these contracts. This scheme overstated Paragon revenue by more than $25 million.

Read More


[fa icon="calendar"]

[fa icon="comments"]


[fa icon="plus-square"] What is Revenue Recognition?
  1. Link the contract with a specific customer. There is usually a written contract that defines a financial payment, though it is not necessary to have a written contract; an oral arrangement can be used as the basis for revenue recognition.
  2. Note the performance obligations required by the contract. A performance obligation is essentially the unit of account for the goods or services contractually promised to a customer. The performance obligations in the contract must be clearly identified. This is important in recognizing revenue, since revenue is considered to be recognizable when goods or services are transferred to the customer.
  3. Determine the price of the underlying transaction. This step involves the determination of the transaction price built into the contract. The transaction price is the amount of consideration to be paid by the customer in exchange for its receipt of goods or services. The transaction price does not include any amounts collected on behalf of third parties.
  4. Match this price to the performance obligations through an allocation process. The basic rule is to allocate that price to a performance obligation that best reflects that amount of consideration to which the seller expects to be entitled when it satisfies each performance obligation. To determine this allocation, it is first necessary to estimate the standalone selling price of those distinct goods or services as of the inception date of the contract. If it is not possible to derive a standalone selling price, the seller must estimate it.
  5. Recognize revenue as the various obligations are fulfilled. Revenue is to be recognized as goods or services are transferred to the customer. This transference is considered to occur when the customer gains control over the good or service.
[fa icon="plus-square"] What Are the Transition Methods?

For both public and nonpublic entities, three basic transition methods are available —1full retrospective, retrospective with certain practical expedients, and a cumulative effect approach.

[fa icon="plus-square"] When Does The Standard Become Effective?

Public entities will apply the new standard for annual periods beginning after December 15, 2016, including interim periods therein. Early adoption is prohibited. Therefore, a calendar year-end public entity would reflect the new standard in its March 31, 2017 first quarter, each subsequent quarter, and also in the year ending December 31, 2017.

Nonpublic entities have an additional year to adopt, i.e., the new standard applies for annual periods beginning after December 15, 2017. In addition, the new standard is effective for interim periods within annual periods that begin after December 15, 2018. Therefore, a calendar year-end nonpublic entity would first apply the new standard for the year ended December 31, 2018. If it also prepares interim financial statements, the new standard would first take affect for those interim periods in 2019.

[fa icon="plus-square"] What Does the New Standard Require?

The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled.

5 Step Approach

1. identify the contract 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 in the contract
5.  recognize revenue when (or as) the entity satisfies a performance obligation.

[fa icon="plus-square"] What Industries Are Impacted?
[fa icon="plus-square"] How Will We Be Impacted?

The following areas may be significantly impacted:

  • Judgements & Estimates
  • Compensation based on Revenue - Related Metrics
  • Covenants
    Contract Terms
  • Income Tax Effects
  • Internal Controls
  • Communications with Stakeholders
[fa icon="plus-square"] What Should We Be Doing Now?

Management should familiarize itself with the new standard and begin evaluating its potential impact on each specific revenue stream of the entity, such as the sale of goods vs. the provision of services.

  • Additional investments in training for financial reporting professionals may be necessary.
  • Monitor the activities of the AICPA and the Transition Resource Group, as discussed below. This may be particularly relevant for matters involving a high degree of judgment, where previous U.S. GAAP may have been more prescriptive.
  • Management should begin considering the available transition methods. Conversations with the company’s financial statement users and also peer companies may be useful for this purpose. Further, the SEC staff is expected to address how transition under the new standard will affect the five-year selected financial data table for SEC registrants.
  • Public entities will need to begin drafting SAB 744 disclosures about the anticipated effect of the new pronouncement. While these disclosures will become more specific over time, the SEC staff has informally indicated it expects entities to disclose their chosen method of transition in the period that a decision is reached, which will vary across entities.


[fa icon="plus-square"] What Resources Are Available?

FASB/IASB Joint Transition Resource Group – The TRG was designed to discuss emerging issues and to inform the Boards about interpretive questions that are likely to arise as implementation efforts commence. 

Softrax - Has over 15 years of working with companies trying to bring their business up to speed with the latest guidance, we're happy to offer a modular, open-ended solution that can handle new revenue recognition needs without the need to change or replace the systems your company most relies on. We can even help you understand the potential impacts to your accounting processes, working with you to develop an implementation strategy that ensures your business is ready to meet the challenges of ASC 606 and beyond.

Upcoming Webinar

Overcome The Challenges of ASC 606 Step 3: Determine The Transaction Price

Join Softrax and GAAP Dynamics on September 28th for a one hour webinar discussing the third step in the new 5-step model for recognizing revenue – Determine the Transaction Price. We’’ll discuss key aspects of the third step that are proving complex including calculating variable consideration, while considering the revenue constraint,  factoring in the time value of money, and accounting for discounts and rebates. Learn how companies can manage these complexities, gain real time insight, and mitigate the risk of non-compliance through automation. 
Register Now!
Revenue Recognition Newsletter

Revenue Recognition Newsletter

Receive email updates on the latest revenue recognition news to help companies prepare for coming ASC 606 & IFRS 15 changes.

Sign Up