In June 2010 the FASB issued the Proposed
The new standard’s rules are set to take effect for periods beginning after December 15, 2016, giving companies time to plan and adjust their systems and internal processes accordingly. But don’t under-estimate how long this will take!
Impact on Sell-Through Revenue Recognition:
By far the biggest impact of the new guidance on semiconductor companies is going to be how revenue is recognized on sales to distributors. Many of the semiconductor companies I have worked with as a consultant and for as an employee, use a sell through model for revenue recognition when selling through distributors. Many distributor agreements contain rights to price protection (ship and debit agreements), rights of return, stock rotation policies, or other rebates and credits. Many of these agreements contained clauses that created uncertainty about the amount of revenue the company could recognize at the time of sale, so it made sense to defer the revenue under the old revenue recognition guidance. After all the amount of the credit could never be truly known until after the end customer information was received and the rule of conservatism would dictate it is better to defer revenue under these agreements than to recognize it at the time of sale.
Under the new rules this is likely to change. Semiconductor companies will be required to make their best estimate of the final revenue through these arrangements and recognize that amount upon the sales to the distributor. This change is in line with the original intent of the exposure draft: better representation the true economics of the transaction at the time when goods or services are transferred to the customer. The sale to the distributor, under the new guidance, will most likely qualify as satisfying the performance obligation to the distributor (your customer) as per the exposure draft. As defined: “An entity would recognize revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service.”
Consignment arrangements are discussed in the ED and left to the entity to evaluate whether or not the other party has truly gained control of the product at a certain point in time. It will be important for companies to review their distributor agreements to ensure they support their method of revenue recognition under the new guidance.
Conclusion:
The accounting implications are fairly obvious. Revenue will be recognized at the time of the sale and an estimate will need to be calculated and accrued for, resulting in a more accurate view of the actual transaction at the time the goods were sold. However, the impact doesn’t end there. You may have configured your accounting system to collect data and account for revenue on the sell through model which now needs to be changed. You may have deferred revenue for prior year sales that will now need to be recognized. The language in your distributor agreements will need to be reviewed, and most likely updated so that you can support your revenue recognition process. The extra time given to implement the new standard will allow for companies to be methodical and thorough about how the change will be implemented. Things like how to present comparative financial statements, what internal processes do I need to change, do I need staff with a different skill set, are just a few things that companies can start to plan for so they are not caught off guard when the change needs to be made.
Dan Berube is the