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Revenue Recognition: How the Big Boys are Adjusting

FASB and the International Accounting Standards Board designed their converged revenue recognition standard to enhance comparability across industries. But the standard has presented different implementation challenges to the various business sectors, reports accounting trade publication Journal of Accountancy.

The following Journal of Accountancy’s analysis of public company financial statements provides a snapshot of issues various industries are experiencing as they adopt the new standard:

Retail: Gift card changes.
Walmart expects its most significant timing change to result from the revenue associated with the unredeemed portion of company-issued gift cards. Likewise, Home Depot reports a change in its method of recognizing gift card breakage income, which is based on historical redemption patterns under current GAAP.

Under the new standard, income associated with unredeemed gift cards “will be recognized over the expected redemption period of the gift card … rather than waiting until the likelihood of redemption becomes remote or waiting for the gift card to expire,” Walmart reported.

Software: Timing change.
Microsoft, which early adopted the standard effective July 1, 2017, reports that the most significant effect of the standard relates to its accounting for software license revenue. For Windows 10, Microsoft will recognize revenue predominantly at the time of billing and delivery rather than ratability over the life of the related device.

Under the new standard, point-in-time recognition is required when a license is a right to use an entity’s intellectual property as it exists at the point in time when the license is granted. Adoption of the standard therefore will result in the recognition of additional revenue of $6.6 billion for fiscal year 2017 and $5.8 billion in FY 2016, with an increase in the provision for income taxes of $2.5 billion in FY 2017 and $2.1 billion in FY 2016.

IBM also expects the timing of its revenue recognition for certain software licenses to change but does not expect material changes to its financial statements as a result.

Aerospace and defense: Accelerated recognition.
Boeing reports that most of its defense, space, and security contracts will recognize revenue under the new standard under a costs-incurred measurement method. Under current GAAP, recognition takes place as deliveries are made or performance milestones are achieved.

For some contracts, aerospace and defense manufacturers may be switching from a units-delivered to a costs-incurred measurement method because the new standard states that output methods don’t take into account work that’s in process that belongs to the customer. Similarly to Boeing, Lockheed Martin reports that it expects an acceleration on certain contracts as revenue is recognized under a costs-incurred method under the new standard rather than as units are delivered.

Telecommunications: Revising allocation. Sprint and Verizon report that the allocation of revenue under fixed-term wireless service plans will result in more revenue allocated to equipment and earlier recognition compared with current GAAP.

The new revenue recognition standard eliminated the contingent cap requirement, which limited the revenue that could be recognized upon delivery of a cellphone handset, on the presumption that the revenue was contingent upon providing wireless service. So now, more revenue may be recognized upon delivery of the equipment as the transaction price is allocated to the performance obligations based on the stand-alone selling price of each performance obligation.

and Verizon also expect that the timing of recognition of sales commission expenses will be affected. Verizon expects commission expenses to decline as wireless customers continue migrating from fixed-term service plans to device plans that have lower commission structures.

Oil and gas: Excluding certain taxes collected.
Chevron and ExxonMobil say that after the new standard takes effect, their revenue will exclude sales-based taxes collected on behalf of third parties, which will have no effect on earnings.

The new standard states that amounts collected on behalf of third parties should be excluded from the transaction price.                                                                        
SOURCE: Journal of Accountancy

FASB Simplifies Reporting Rules on Some Transactions

After what seemed an endless flow of new accounting rules that have made the audits of micro and small cap companies more complex and difficult, the Financial Accounting Standards Board (FASB) has updated two areas of accounting that may offer reporting relief for micro and small cap companies.
The changes include simplifying accounting requirements for companies that issue equity-linked financial instruments (e.g. convertible debt or convertible preferred stock, or warrants) with down round features, which will substantially reduce the number of derivative liability instruments that have become commonplace on the balance sheet of small cap companies.
Read the full story written by Weinberg’s Firm Managing Partner, Corey Fischer: [full story].

Treasury to Cut Tax Regulations

The Treasury Department is calling for the immediate elimination or mitigation of eight regulations that it has identified as burdensome to taxpayers and which it believes have impeded economic growth. In a just released report, Treasury said that it is doing a comprehensive review of all regulations that impose an undue financial burden on U.S. taxpayers. Treasury’s review already has identified over 200 regulations that it believes should be repealed, starting in the fourth quarter of 2017.

“This is only the beginning of our efforts to reduce the burden of tax regulations,” Treasury Secretary Steven Mnuchin said in a statement. “Our tax code has been broken for too long, and this retrospective review, along with our efforts on tax reform, will ensure that we have a tax system that fosters economic growth.” [Treasury Report]


Ring it up for Samsung

Apple and Samsung may be bitter litigants over alleged design patent infringement, but they’re best bros when it comes to the Apple iPhone X, which goes on sale next month. That’s because Samsung’s parts operation is supplying screens and memory chips for the new iPhone, potentially representing billions of dollars for the South Korean company. An analysis conducted by Counterpoint Technology Market Research for The Wall Street Journal “finds Samsung is likely to earn roughly $4 billion more in revenue from iPhone X parts than from components made for the Galaxy S8 in the 20 months after the new iPhones go on sale Nov. 3.”

LifeLock offers to protect you from the Equifax breach – by selling you services provided by Equifax

That’s the headline from a recently posted story in the Los Angeles Times (9/18/17 by business columnist Michael Hiltzik) reporting that ID theft protection firm LifeLock “…is certainly one of the big winners from the big data breach suffered by Equifax,” continuing, “that LifeLock has been going to town on the Equifax breach, with ads and press releases trumpeting how the breach proves how valuable its own services can be to protect your from identity theft.”
The Times story goes on to explain “what LifeLock isn’t advertising so widely: When you buy its protection, you’re signing up for credit reporting and monitoring services provided by, yes, Equifax.”

And while we’re on the subject…

“Taken aback.” Those are the exact words used by leaders of the U.S. Senate Committee when they learned that the IRS signed a $7.25 million sole source contract with Equifax in order to verify taxpayer identities after the company admitted to a massive data breach exposing the personal information of about half of all Americans. [Letter to IRS Commissioner]


Here, from thought-leader website Business Pundit, is its Top 10 list of the worst business decisions ever:

AOL Merging with Time Warner –
Valued at about $400 billion and representing the largest merger in business history at the time, the companies, now separated, are today worth less than 10% of their values going into the deal. It is now a business school case study (no pun intended) of the worst deal in history.

Kodak Hesitating to Go Digital
– Kodak actually invented digital photography decades before digital photography took off, but decided that although it was a good idea, it would cut into their primary operation, which was selling film. By the time they started producing digital cameras it was too late.

Decca Records Declining to Sign The Beatles –
“Not to mince words, Mr. Epstein, but we don’t like your boys’ sound. Groups are out. Four-piece groups with guitars particularly are finished. The Beatles have no future in show business.” In 1962, an executive at Decca Records said that to The Beatles’ manager, Brian Epstein, after the band performed a 15 song set for him in an audition.

Excite Passing up Google for Under a Million —
Google founders Larry Page and Sergey Brin tried to sell Google to Excite CEO George Bell for $1 million. After some negotiation, the price was dropped down to $750,000 only to still be rejected.

Mars CEO Declining a Candy Cameo in E.T. —
Mars Inc. makes M&Ms and it was approached to do an advertising deal with E.T. The candy would be featured in the movie, and then Mars Inc. would be able to use E.T. for its advertisements going forward. Hershey ended up taking advantage of the deal, promoting Reese’s Pieces. The payoff was incredible, the profits from Reese’s Pieces jumped 65% in just two weeks after E.T. was released.

Motorola Failing to Capitalize on the Razr Craze —
The Motorola Razr was a big player in Motorola’s 22% market share in mobile phones in 2006. However, the corporation didn’t launch its own generation of smartphones to continue the Razr brand and take advantage of its popularity, and by 2007 Motorola was selling discounted versions of the Razr. Sales in 2006, which were over $43 billion for Motorola, dwindled to $22 billion by 2010. Between October 2006 and March 2009, the company’s shares fell a staggering 90% from over $107 to a measly $13 per share.

CBS & NBC Networks Fumbling Big Time —
Back in 1969, both CBS and NBC rejected the rights to broadcast Monday Night Football. It began airing on ABC in 1970. It holds the record for the second longest running prime time show, bested only by 60 Minutes.

Blockbuster Rejecting Netflix —
In 2000, Netflix knew that Blockbuster was the biggest name in movie rentals, and attempted to strike a deal. It would have cost Blockbuster $50 million. CEO John Antioco practically laughing Netflix executives out of his office, had to watch Netflix laugh all the way to the bank as his company got buried. Blockbuster filed for bankruptcy in 2010 and finished closing the doors on its retail locations (and copycat DVD-by-mail service) in 2013. By that time, Netflix was valued at over $20 billion.

Ron Johnson Being Too Honest —
Ron Johnson was pure of heart when he opened up about the pricing techniques of clothing retailers after he was hired as the CEO of J. C. Penney in 2012. He moved their stores to an everyday low prices strategy instead of using what he called fake sale pricing. Customers complained, the company lost money and Johnson was fired after 17 months.
Western Union Turning Its Back on the Tech of the Century — Western Union began as a telegram service and was lauded as the top company in the communications business in the 19th century. Alexander Graham Bell tried to sell them his invention, the telephone, back in 1876. His asking price was $100,000 (about $2 million today), but Western Union’s executives didn’t see the telephone taking off. After it began to see success, Western Union hired Thomas Edison to come up with something better. Bell sued Western Union on the basis of patent infringement and won. 


Simply the right choice


Weinberg & Company is a leading, international, full service, multi-office CPA firm serving clients throughout the United States and the Pacific Rim. Founded over two decades ago, the practice groups include: Assurance and Audit, Tax and Accounting, and Advisory Services. Weinberg has a depth of knowledge and experience to meet the needs of both public and privately held companies, high net worth individuals, entrepreneurs, family offices, and can provide customized business management services. www.weinbergla.com

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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Corey Fischer
Firm Managing Partner



Jeffrey B. Engler
Director of Tax,
Los Angeles 


Bruce Weinberg
Florida Managing Partner




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