MoldMaking Technology

APR 2017

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42 MoldMaking Technology —— APRIL 2017 THE BOTTOM Changes to Revenue Recognition Requirements By Quinn R. Martin, Matthew J. Frazier and Michael J. Devereux to in exchange for the goods or services. This will often be the amount specified in the contract or purchase order, but not always. 4. Allocate the transaction price to separate performance obligations. If multiple performance obligations are identi- fied in the contract or purchase order, the amount allocated to each separate performance obligation would be the amount of consideration which the mold builder expects to receive for meeting the milestones outline in the agreement with the customer. 5. Recognize revenue when (or as) each performance obliga- tion is satisfied. That is, revenue is recognized as performance obligations are met. Transitioning and Reporting Requirements The ASC 606 revenue standard includes extensive disclosure requirements intended to enable users of financial statements to understand the amount, timing, risks and judgments related to revenue recognition and related cash flows. For example, it requires disclosure of both qualitative and quantitative infor- mation about contracts with customers. Basically, a narrative and amounts explaining how revenue is recognized. And, for U.S. GAAP only, provides some simplified disclosure options for nonpublic entities. That is, companies must disclose the methodology they used to determine the proper amount of revenue to be recognized. Mold builders may retrospectively apply the new revenue standard or use a simplified method that provides for certain practical expedients. The retrospective transition method of ASC 606 requires all reporting periods presented in the finan- cial statements to be reported under the new guidance, and Privately Held Companies Public Companies Annual reporting Periods beginning on or after December 15, 2018 (2019 for calendar-year taxpayers) Period beginning on or after December 15, 2017 (2018 for calendar-year taxpayers) Interim reporting Periods beginning on or after December 15, 2019 (January 1, 2020 for calendar-year taxpayers) Period beginning on or after December 15, 2017 (January 1, 2018 for calendar-year taxpayers) Early adoption Periods beginning after December 15, 2016 (2017 for calendar-year taxpayers) Periods beginning after December 15, 2016 (2017 for calendar-year taxpayers) Revenue is considered one of the most important financial statement measures. It is used to assess a company's past financial performance, future growth potential and finan- cial well-being. This makes revenue recognition one of the accounting topics most scrutinized by business owners. The Accounting Standards Codification (ASC) 606 standard, Revenue from Contracts with Customers, which could take effect as early as this December, could result in different accounting for similar transactions. The standard, once effective (see chart), will eliminate many existing revenue standards and replace about 180 pieces of industry and transaction-specific rules under U.S. Generally Accepted Accounting Principles (GAAP). The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. Once the new standard takes effect, mold builders will apply the same standards for revenue recognition as those in similar and dissimilar industries. That is, the same standard for rev- enue recognition will be applied from everything from the sale of a mold to the production of a plastic part to a bakers' con- tract to produce cookies for a local retailer. The Core Principle The core principle of the new standard is that a company would recognize revenue as it transfers goods or services (tools or design services) to customers in an amount reflecting the consideration (the price outlined in the customer contract or purchase order) it expects to receive, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue standards. To achieve this core principle, tool builders will follow these five steps: 1. Identify the contract(s) with the customer (purchase orders, change orders or customer contracts). 2. Identify the separate performance obligations contained in a contract. A performance obligation is a promise to a customer to transfer a good or service. For mold builders, these will be the functionality and performance specifications outlined in the pur- chase order or agreement. 3. Determine the transaction price of the contract. The transaction price is the amount of consideration that a vendor expects to be entitled

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