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Revenue toolkit: Step two—Identify performance obligations · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:06
  SPEAKER_03: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_03: I'm Heather Horn.
• 0:11
  SPEAKER_03: Thanks for tuning in to the next episode of our Toolkit series, where we're taking a deep dive each month into a single topic, recapping the basics, but also focusing in on frequently asked questions and judgmental areas.
• 0:26
  SPEAKER_03: This month is all about revenue recognition.
• 0:30
  SPEAKER_03: And this week we're moving on to step two in the RevRec model, identifying the contract.
• 0:37
  SPEAKER_02: Just because you're marketing something as a solution, that doesn't necessarily mean it's going to be one performance obligation.
• 0:45
  SPEAKER_01: It's important that in addition to any written arrangements, you really want to understand representations that are made during negotiations, marketing materials, any business strategies you have, to then identify anything that could be considered a promise in an arrangement.
• 1:03
  SPEAKER_03: As I mentioned last week, Angela Ferguson, a PWC National Office Partner, will join me for each of the five revenue episodes, bringing along with her a PWC specialist to dig into the topic.
• 1:16
  SPEAKER_03: Joining Angela today is PWC National Office Partner Mike Coleman.
• 1:21
  SPEAKER_03: Angela and Mike will help us through this critical second step.
• 1:24
  SPEAKER_03: It's critical because in order to get the rest of the model right, you need to get this step right.
• 1:31
  SPEAKER_03: Sounds like we have some important ground to cover.
• 1:33
  SPEAKER_03: So let's get started.
• 1:43
  SPEAKER_03: So Mike, Angela, welcome to the podcast.
• 1:47
  SPEAKER_03: Looking forward to covering the second step in our five-step model.
• 1:51
  SPEAKER_03: So Angela, very nice to have you back to help us with step two.
• 1:54
  SPEAKER_03: And Mike is always welcome.
• 1:56
  SPEAKER_03: So maybe just to jump straight into things, Angela, I'll start with you.
• 2:01
  SPEAKER_03: Can you give us some background on this step?
• 2:04
  SPEAKER_02: Sure, Heather.
• 2:05
  SPEAKER_02: So last week's podcast, we talked about identifying a contract, which is step one.
• 2:12
  SPEAKER_02: And now we're gonna cover step two in the revenue recognition model, which is identifying the performance obligations in that contract.
• 2:22
  SPEAKER_02: And I know I say this about every step, but this is really a critical step in the revenue recognition process because this is where we determine the unit of account that we're gonna use to apply the rest of the model.
• 2:38
  SPEAKER_02: So, of course, to get the rest of the model right, you're gonna have to get the right unit of account in this step.
• 2:46
  SPEAKER_02: So identifying the performance obligations is going to start with identifying the promises you've made to the customer to transfer goods or services.
• 2:57
  SPEAKER_02: And then each distinct good or service or series of distinct goods or services is accounted for as a separate performance obligation.
• 3:08
  SPEAKER_02: Goods or services that aren't distinct are combined together until you have a distinct bundle of goods or services that are accounted for together.
• 3:20
  SPEAKER_03: All right.
• 3:20
  SPEAKER_03: So I have several questions coming from that.
• 3:22
  SPEAKER_03: But actually, Angela, one I should have asked you last week.
• 3:25
  SPEAKER_03: You know, we talk about these steps as being very linear.
• 3:28
  SPEAKER_03: So step one, step two, and you know, and so forth.
• 3:31
  SPEAKER_03: And to your point, they're all critical.
• 3:34
  SPEAKER_03: In practice, are they as linear as they seem, or do you see that people are kind of going through all these steps at the same time?
• 3:43
  SPEAKER_02: Well, to some extent, it is a linear process because you have to first, of course, have the contract identified before you know how to identify the performance obligations and so on.
• 3:55
  SPEAKER_02: There is a little bit of overlap when it comes to things like variable consideration and allocating variable consideration, but we will get to that when we talk about step four.
• 4:08
  SPEAKER_02: So I'd say in general, it is a bit of a linear process, but there are times where you skip around a little bit.
• 4:15
  SPEAKER_03: That's a good answer.
• 4:16
  SPEAKER_03: But I think the point then is that people should pay attention because now that they know they have a contract, they've got to figure out these performance obligations.
• 4:24
  SPEAKER_03: Because to your point, even if later some things aren't completely linear, you've got to do these first two steps before you can do anything else.
• 4:32
  SPEAKER_01: Yeah, Heather, and the other thing I would say is the other place you tend to skip around is when you do a gross versus net evaluation.
• 4:40
  SPEAKER_01: And I don't want to dive in here.
• 4:43
  SPEAKER_01: We can dive in on that.
• 4:44
  SPEAKER_01: That's a separate entire podcast.
• 4:46
  SPEAKER_01: But when you get to gross versus net, then you're actually trying to figure out what performance obligations they are, who your customer is.
• 4:54
  SPEAKER_01: So then you really start to skip around a whole lot.
• 4:56
  SPEAKER_03: That's helpful.
• 4:57
  SPEAKER_03: So now that we have that sort of level setting, let me ask one more question.
• 5:00
  SPEAKER_03: And Mike, since you just chimed in, I'll go to you for that, this one.
• 5:04
  SPEAKER_03: And you know, Angela talked about sort of identifying the performance obligations or promises in the contract.
• 5:12
  SPEAKER_03: And what are some of the areas that you really see as judgments when you're doing that?
• 5:17
  SPEAKER_01: Well, generally the promises to the customer are found in the contract.
• 5:22
  SPEAKER_01: Uh that's sort of the purpose of the contract.
• 5:24
  SPEAKER_01: However, they can also be implied.
• 5:27
  SPEAKER_01: And they're generally implied based upon either their business practice or some other type of statement that's made somewhere that's outside of the contract.
• 5:37
  SPEAKER_01: The threshold, though, is does the customer have a valid expect expectation to get that good or service?
• 5:44
  SPEAKER_01: So it's important that in addition to any written arrangements, you really want to understand representations that are made during negotiations, marketing materials, any business strategies you have, to then identify anything that could be considered a promise in an arrangement.
• 6:02
  SPEAKER_03: So then, Mike, what's an example of an implied promise?
• 6:06
  SPEAKER_01: Uh sure.
• 6:06
  SPEAKER_01: Let's say a company sells a product with embedded software.
• 6:10
  SPEAKER_01: There may not be an explicit promise to provide updates or upgrades to the software, but the company does anyway.
• 6:17
  SPEAKER_01: And they do that time and time again.
• 6:19
  SPEAKER_01: Well, that customary business practice of providing those updates routinely creates a valid expectation to the customer that the company will continue to provide those updates.
• 6:31
  SPEAKER_01: That's sort of a classic example.
• 6:33
  SPEAKER_03: All right.
• 6:33
  SPEAKER_03: And then anything else to consider?
• 6:36
  SPEAKER_01: Yeah, one thing to keep in mind is we're only really looking for promises that transfer a good or service to a customer.
• 6:45
  SPEAKER_01: For example, like a setup activity uh that may take place to enable a company to perform doesn't transfer a good or service, so it wouldn't be considered a promise.
• 6:58
  SPEAKER_01: Let's take another example.
• 6:59
  SPEAKER_01: Uh a software vendor promises they aren't infringing on someone else's technology, or a contractor promising they're insured.
• 7:08
  SPEAKER_01: These are very important promises, but a contractor promising that they're insured or their employees are insured, that doesn't transfer a good or service.
• 7:19
  SPEAKER_01: It's the work that transfers the good or service.
• 7:21
  SPEAKER_01: So some of those promises we wouldn't consider performance obligations for step two.
• 7:28
  SPEAKER_01: Okay.
• 7:29
  SPEAKER_01: Also, the revenue standard specifically allows uh companies to disregard promises that are considered immaterial in the context of the contract.
• 7:41
  SPEAKER_01: Okay, so that was added after ASC 606 was issued.
• 7:46
  SPEAKER_01: Uh, but it was intended to make life a little easier for people, make things more operational.
• 7:50
  SPEAKER_01: So the classic example is hey, I sell a product and I have a 1-800 number on the product to call in case you have a question.
• 7:58
  SPEAKER_01: Does that a promise that we have to do some accounting for, or particularly some revenue accounting for?
• 8:04
  SPEAKER_01: So the answer is, well, you can conclude that that's immaterial and not have to do any revenue accounting.
• 8:10
  SPEAKER_01: But you want to make sure you're careful in pulling that trigger when something's immaterial in the context of the contract.
• 8:15
  SPEAKER_01: If you go out of your way to contract for it or market it, it's then harder to argue it's immaterial if you're spending so much energy marketing it.
• 8:24
  SPEAKER_03: All right.
• 8:25
  SPEAKER_03: But so if I just think about the word immaterial, does that mean if something is considered immaterial, then I wouldn't have to do any accounting for that?
• 8:34
  SPEAKER_01: Yeah, there's not revenue accounting, but there is some accounting, right?
• 8:38
  SPEAKER_01: And that accounting would be to accrue the cost if the revenues recognized before that promise is executed or delivered on.
• 8:49
  SPEAKER_01: Um there's a similar example for shipping and handling of services.
• 8:53
  SPEAKER_01: At a high level, companies that sell a product, they can elect not to account for shipping and handling as its own performance or obligation or its own promise.
• 9:02
  SPEAKER_01: But when they do that, you have the costs of shipping and handling and you accrue those at the time that control transfers to the good.
• 9:09
  SPEAKER_03: And Mike, I don't want to get into detail on shipping and handling, but is that a specific exception that's in the guidance that says you you can exclude that as being part of your obligation?
• 9:20
  SPEAKER_01: Yes, it's very it's a very specific exception.
• 9:23
  SPEAKER_03: All right.
• 9:23
  SPEAKER_03: So that's important that people shouldn't just assume anything like that.
• 9:27
  SPEAKER_03: They can do the same thing.
• 9:28
  SPEAKER_03: So then, Angela, let me go back to you because one of the other points I noticed when you were giving us the overview, it's used the word distinct several times.
• 9:39
  SPEAKER_03: And it's you know important here to identify whether or not a good or service is distinct.
• 9:45
  SPEAKER_03: Um, so can you give us an overview of that guidance?
• 9:49
  SPEAKER_02: Sure.
• 9:50
  SPEAKER_02: So again, a performance obligation is defined as a promise to provide a distinct good or service to a customer or a series of distinct goods or services.
• 10:02
  SPEAKER_02: So there are two parts to assessing whether a good or service is distinct, and you have to meet both of these two criteria.
• 10:11
  SPEAKER_02: So the first is that the good or service is capable of being distinct.
• 10:18
  SPEAKER_02: And then the second requirement is that the good or service is separately identifiable from the other promises in the contract.
• 10:27
  SPEAKER_02: And sometimes you'll hear this referred to as being distinct in the context of the contract.
• 10:33
  SPEAKER_02: So then to walk through each of those in a little more detail, starting with the first requirement capable of being distinct, this one's a little bit more straightforward.
• 10:43
  SPEAKER_02: An item would be capable of being distinct if it can be used on its own, or it could be used with other readily available goods or services.
• 10:55
  SPEAKER_02: So, for example, if you had a piece of equipment that you were delivering to a customer, it would be capable of being distinct if the customer could use that equipment on its own, if it could resell that equipment for an amount greater than scrap value, or if the customer could use it together with services that the customer could purchase separately.
• 11:21
  SPEAKER_02: Also, a good or service would sort of automatically be capable of being distinct if the company sells that item on its own, sells it separately, or if that item is sold separately in the market by other vendors or competitors.
• 11:39
  SPEAKER_02: So if you don't meet this first requirement, you would stop there.
• 11:43
  SPEAKER_02: The good or service is not distinct, and you would have to combine it with other goods and services in the contract.
• 11:51
  SPEAKER_02: However, if you do meet this first requirement, then we're gonna move on to the second requirement, which is assessing whether it's separately identifiable or distinct in the context of the contract.
• 12:04
  SPEAKER_03: All right.
• 12:04
  SPEAKER_03: And then Angela, I know from prior discussions about uh 606 that this can be a more challenging requirement to apply.
• 12:13
  SPEAKER_03: So, what are some of the things to think about?
• 12:15
  SPEAKER_02: Yes, good memory.
• 12:16
  SPEAKER_02: This is definitely the more challenging uh requirement that requires more judgment.
• 12:21
  SPEAKER_02: And so the objective of this assessment is to determine whether the company is promising to transfer individual goods or services to the customer, or if the company is promising to transfer a combined item, and the individual goods or services are inputs into that combined item.
• 12:47
  SPEAKER_02: So in this case, the standard doesn't give prescriptive criteria to meet, but it does talk about three factors that would indicate that goods or services are not separately identifiable.
• 13:02
  SPEAKER_02: And this is not necessarily intended to be a complete list, but we would generally look at these three factors.
• 13:10
  SPEAKER_02: So the first would be if the company is providing a significant service of integrating goods and services together.
• 13:20
  SPEAKER_02: The second would be if a good or service significantly modifies or customizes another good or service in the contract.
• 13:30
  SPEAKER_02: And then the last and everyone's favorite factor is when the goods or services are highly interdependent or highly interrelated.
• 13:39
  SPEAKER_03: All right.
• 13:39
  SPEAKER_03: So I know that you and Mike actually did record another podcast on this topic that we'll make sure to get into the show notes.
• 13:46
  SPEAKER_03: And now there's obviously a lot to say.
• 13:49
  SPEAKER_03: But Mike, from your perspective, what are some of the primary observations that you would have in terms of challenges in making this assessment?
• 13:58
  SPEAKER_01: Sure.
• 13:59
  SPEAKER_01: The first the first two factors Angela spoke about are generally easier to apply.
• 14:05
  SPEAKER_01: Uh, that is assessing whether the goods or services are being integrated together or modifying each other.
• 14:12
  SPEAKER_01: It's that third factor, highly interdependent or highly interrelated.
• 14:17
  SPEAKER_01: That's the one that's usually a lot more challenging to apply.
• 14:22
  SPEAKER_01: So it's important to remember that it's a two-way dependency.
• 14:27
  SPEAKER_01: Both elements need to affect each other.
• 14:30
  SPEAKER_01: So, for example, an on-prem software that's installed locally at the customer and related services provided through the cloud.
• 14:40
  SPEAKER_01: So if the benefit provided by the services is only additive to the benefit from the software, there isn't that two-way dependency.
• 14:51
  SPEAKER_01: If the software and services have to be used together, and then they create new functionality that enhances the software and enhances the service, then there may that may indicate there's that two-way interdependency, unless the elements are highly interdependent and highly interrelated.
• 15:12
  SPEAKER_01: The takeaway, you need to have a really good, really strong analysis to support making that assertion of highly interdependent and highly interrelated.
• 15:22
  SPEAKER_03: All right.
• 15:22
  SPEAKER_03: So then, Mike, Angela, if I was listening and understood this correctly, then to be distinct, I have to be both capable of being distinct and separately identifiable from other promises in the contract.
• 15:35
  SPEAKER_03: So two requirements.
• 15:37
  SPEAKER_03: I have to meet both of them.
• 15:38
  SPEAKER_03: What if I don't meet both of them?
• 15:41
  SPEAKER_02: Right.
• 15:41
  SPEAKER_02: So if you don't meet the criteria, or if a good or service does not meet both of those criteria, then it is not distinct.
• 15:49
  SPEAKER_02: And it would have to be combined with other promises in the contract until you have a bundle of goods or services that's distinct.
• 15:58
  SPEAKER_02: And it is possible that all of the promises in the contract are combined into one performance obligation.
• 16:06
  SPEAKER_02: But you do need to go through the analysis to determine that.
• 16:09
  SPEAKER_02: You wouldn't want to just jump to that conclusion.
• 16:12
  SPEAKER_03: All right.
• 16:12
  SPEAKER_03: So then, Angela, basically identify all your promises, go through each of them and see if they're distinct, then start looking at bundles of them if the individual ones don't meet that criteria.
• 16:23
  SPEAKER_03: Is that again very high-level summary for a very complicated topic?
• 16:27
  SPEAKER_02: Yes, you've got it.
• 16:28
  SPEAKER_03: All right.
• 16:29
  SPEAKER_03: So then with that, then I know you also mentioned something else earlier that I want to go back to, which that could be a promise to provide a series of distinct goods or services to customer.
• 16:41
  SPEAKER_03: And I know there's many questions that can come up when we get to that topic.
• 16:46
  SPEAKER_03: So can you elaborate on what this means?
• 16:48
  SPEAKER_02: Sure.
• 16:49
  SPEAKER_02: So a series of distinct goods or services is a new concept that was introduced by ASC606, and it can be confusing at times.
• 16:59
  SPEAKER_02: So to explain what it means, when you have a series, you're delivering or providing multiple goods or services that are individually distinct, but we're going to call them a series because each good or service is substantially the same.
• 17:20
  SPEAKER_02: And the good or service is recognized over time and would have the same pattern of transfer.
• 17:27
  SPEAKER_02: That is, we've used the same measure of progress to recognize revenue for the individual items within the series.
• 17:36
  SPEAKER_02: So to give an example, which is probably the easiest way to explain this, a lot of services are really a series of distinct services.
• 17:45
  SPEAKER_02: So to give a simple example, if you had a promise or a contract to provide bookkeeping services, even though the exact activities you might perform every day may vary, you're providing the same service of bookkeeping each period.
• 18:06
  SPEAKER_02: And you could do that for a month, you could do it for a year, you could do it for two years.
• 18:12
  SPEAKER_02: It's sort of a repetitive activity, a repetitive service, but each individual period would be distinct or stand on its own.
• 18:22
  SPEAKER_02: So the distinct service within this series is really each time period of providing the service.
• 18:30
  SPEAKER_02: So that could be a day or a week.
• 18:34
  SPEAKER_02: But another way of describing this contract would be that it's a series of daily bookkeeping services.
• 18:42
  SPEAKER_03: All right.
• 18:43
  SPEAKER_03: I think I understand.
• 18:44
  SPEAKER_03: Can you give an example of a service that wouldn't be a series?
• 18:48
  SPEAKER_02: Sure.
• 18:49
  SPEAKER_02: So services that aren't repetitive, so they're not substantially the same over time, but build on each other to a final deliverable or final outcome would not be a series.
• 19:03
  SPEAKER_02: So if you had a specific project to implement a new software system, you're working towards that final deliverable or final outcome.
• 19:13
  SPEAKER_02: That would not be a series.
• 19:15
  SPEAKER_02: And usually things like RD services aren't going to be a series because, again, the services are building on them on themselves to sort of a final outcome.
• 19:26
  SPEAKER_02: I'd also note that although a series is usually a service because you have to have, you have to meet the overtime criteria for the items within the series.
• 19:39
  SPEAKER_02: It is possible to have a series of distinct goods if the goods within the series would be recognized over time, such as certain like customized goods.
• 19:52
  SPEAKER_02: But it's not as common to see a series of distinct goods.
• 19:56
  SPEAKER_03: So then, Angela, maybe a question, I might have two follow-up questions, but why does it matter if it's a series?
• 20:03
  SPEAKER_02: When you have a series, the entire series is accounted for as a single performance obligation.
• 20:10
  SPEAKER_02: So instead of having to account for each individual item within the series on its own, you can account for the whole thing as one performance obligation.
• 20:24
  SPEAKER_02: So usually it's one service being provided.
• 20:28
  SPEAKER_02: This was intended to simplify the guidance somewhat.
• 20:33
  SPEAKER_02: So if you think about if you were having to account for each item within the series, so in my earlier example, each day of bookkeeping services, then you'd have to have transaction price that's then allocated to every single day within the series.
• 20:51
  SPEAKER_02: And it would just potentially be more complicated.
• 20:54
  SPEAKER_02: So the idea was to somewhat simplify things by saying we'll just account for the entire contract to provide bookkeeping services as one performance obligation.
• 21:07
  SPEAKER_02: But there are a couple of ways that a series is special, if you will, in the guidance.
• 21:15
  SPEAKER_02: And one is when you're accounting for modifications.
• 21:19
  SPEAKER_02: Normally, when you have a single performance obligation that you're modifying, you would do that accounting on a cumulative catch-up basis.
• 21:29
  SPEAKER_02: But for a series, modifications are generally going to be accounted for prospectively because the rest of the series is distinct from the previous performance.
• 21:42
  SPEAKER_02: And then another way that a series can be special is when it comes to allocating variable consideration.
• 21:50
  SPEAKER_02: You may end up doing that specifically to elements within a series, but I won't get it too ahead of ourselves because we'll talk about.
• 22:00
  SPEAKER_02: That again when we get to step four.
• 22:02
  SPEAKER_03: All right.
• 22:02
  SPEAKER_03: And I think this is complicated enough.
• 22:04
  SPEAKER_03: So let me go back then to your point about goods.
• 22:07
  SPEAKER_03: And you made the point that this is often a series who would be more customized goods.
• 22:11
  SPEAKER_03: So if I had a contract that I was getting like raw materials each month from my factory, and it's the same type of raw materials, same specifications and everything else, then those wouldn't be a series, those would be individual performance obligations.
• 22:28
  SPEAKER_02: Likely, because a raw raw materials probably individually would be recognized at a point in time, not over time, because a delivery of a raw material probably is not going to meet the criteria to be recognized over time.
• 22:44
  SPEAKER_02: So again, the items within the series have to be have to meet the criteria to be recognized over time.
• 22:53
  SPEAKER_02: That's why we generally see this for services.
• 22:56
  SPEAKER_03: All right.
• 22:58
  SPEAKER_03: And then, well, this is back to my question if things are linear.
• 23:02
  SPEAKER_03: I guess this you kind of think about both together.
• 23:05
  SPEAKER_03: So all right.
• 23:06
  SPEAKER_03: I think I understand.
• 23:08
  SPEAKER_03: Thank you for all that.
• 23:09
  SPEAKER_03: So, Mike, anything else then we should be talking about when we're talking about step two?
• 23:14
  SPEAKER_01: Yeah, I think the other thing we want to add to it is uh customer options.
• 23:19
  SPEAKER_01: And so let's talk about that a little bit.
• 23:21
  SPEAKER_01: And so it's very common that a contract will include an option for a customer to either renew the contract and get more service or purchase additional goods in the future.
• 23:33
  SPEAKER_01: Okay.
• 23:34
  SPEAKER_01: Now the optional purchases themselves are not included as part of the contract.
• 23:40
  SPEAKER_01: Only the goods and services that are committed by that the customer is committed to purchase are included.
• 23:46
  SPEAKER_01: So Angela and Pat covered this concept in step one of the podcast.
• 23:51
  SPEAKER_01: Um so, for example, if a customer can terminate a contract for convenience and only the committed period is part of that contract, and the customer is effectively the option to renew by not terminating.
• 24:03
  SPEAKER_01: So that same type of thought process.
• 24:06
  SPEAKER_01: Optional purchases we don't include as part of the contract.
• 24:10
  SPEAKER_01: However, if the option is at a discount compared to the price that would be charged to similar customers, that is, the customer only gets the discount because they're entering into the current contract, then the discount provides a material right.
• 24:28
  SPEAKER_01: And when an option provides a material right, the material right is included as a performance obligation in the contract.
• 24:36
  SPEAKER_01: So again, not the optional purchase, but the material right related to the optional purchase.
• 24:41
  SPEAKER_01: So at a high level, what are we doing?
• 24:43
  SPEAKER_01: We're we're trying to defer a portion of that revenue in the future to because that is being that discount is being funded currently.
• 24:52
  SPEAKER_01: So you want to defer some revenue and account for it at the same time that that right is being used.
• 24:56
  SPEAKER_01: So some common examples are renewal rights, volume discounts, and loyalty programs.
• 25:01
  SPEAKER_03: All right.
• 25:02
  SPEAKER_03: And so what are some of the areas of judgment then when we're dealing with these types of options?
• 25:06
  SPEAKER_01: Uh the biggest area is whether one exists.
• 25:10
  SPEAKER_01: So it's a it you're just trying to figure out do I have a material right?
• 25:16
  SPEAKER_01: Because just because I offer a discount on an option doesn't automatically mean there's a material right there.
• 25:22
  SPEAKER_01: So the question really is the customer only getting that discount because of the current contract?
• 25:28
  SPEAKER_01: And what is the group of similar customers that you would compare that to?
• 25:33
  SPEAKER_01: So those are the judgments that we get into in customer options.
• 25:37
  SPEAKER_03: Before you go on then, so what you're saying is if I say, oh, I'm gonna give you this special discount, but then you give that quote special discount to every single one of your customers or everyone of that size or whatever else, then you would say, okay, well, that's not really a material right.
• 25:54
  SPEAKER_01: That that's right.
• 25:55
  SPEAKER_01: And I and I know in our example, I I would trust that if you said I got a special discount, you would know it was really special.
• 26:04
  SPEAKER_03: It would not be for Angela, too, and everyone else who called me.
• 26:07
  SPEAKER_03: Yes.
• 26:07
  SPEAKER_01: But if you did give that special discount to others, and it wasn't so special.
• 26:12
  SPEAKER_01: All right.
• 26:13
  SPEAKER_01: Then that's where we'd have to have to do the accounting.
• 26:16
  SPEAKER_03: All right.
• 26:16
  SPEAKER_03: And then how about from an accounting perspective?
• 26:18
  SPEAKER_03: I assume this can get very complicated.
• 26:21
  SPEAKER_01: Yeah, it does.
• 26:22
  SPEAKER_01: Um, you know, loyalty programs would be a common example of something that's really complicated.
• 26:28
  SPEAKER_01: Um, so you have to figure out the SSP of the points.
• 26:33
  SPEAKER_01: Um, what if people don't use their points and you have breakage?
• 26:36
  SPEAKER_01: How are you tracking the points?
• 26:38
  SPEAKER_01: How are they then going to deliver on the points?
• 26:41
  SPEAKER_01: So you get into very uh difficult accounting models with some of the material rights in determining what you're allocating to the right and then how you recognize when the right is either used or not used.
• 26:53
  SPEAKER_03: All right, and then just to make sure all our casual listeners know everything you just said, SSP, what does that stand for?
• 27:01
  SPEAKER_01: Standalone selling price.
• 27:03
  SPEAKER_03: All right.
• 27:03
  SPEAKER_03: See that we'll learn some revenue lingo in the uh podcast today.
• 27:09
  SPEAKER_03: So um, all right, that makes a lot of sense.
• 27:11
  SPEAKER_03: So definitely a lot to think about when we talk about step two.
• 27:15
  SPEAKER_03: It seems very straightforward on the surface until you start digging in, obviously.
• 27:20
  SPEAKER_03: So, Angela, maybe starting with you, what would be a key takeaway for you for step two?
• 27:25
  SPEAKER_02: Sometimes I what I hear from um from companies is that when they're providing goods, multiple goods and services together as a solution, then it must automatically automatically be one single performance obligation.
• 27:44
  SPEAKER_02: And what I say is you can't really shortcut that.
• 27:49
  SPEAKER_02: So just because you're marketing something as a solution, that doesn't necessarily mean it's going to be one performance obligation.
• 27:57
  SPEAKER_02: You really need to go through the criteria that Mike and I just talked about to make to get to that conclusion.
• 28:05
  SPEAKER_03: All right, Mike, how about from you?
• 28:07
  SPEAKER_01: Yeah, and sometimes you've got either a good or service that needs to work with another good or service.
• 28:14
  SPEAKER_01: And so we commonly hear, hey, these two things that need to work together, or product A needs product B or service B to work, so they have to be combined.
• 28:26
  SPEAKER_01: And that's not really true.
• 28:27
  SPEAKER_01: There are many products that are designed to work with something else.
• 28:32
  SPEAKER_01: Um, and they can be separate and distinct if they meet the conditions.
• 28:37
  SPEAKER_01: So they can have the capability of being distinct, even if they have to work with something else, and they can be distinct in the contract, the context of the contract, even though they have to work with something else.
• 28:48
  SPEAKER_03: All right, so this is where people really need to focus on the meaning of these words and not just think about the words when they're doing their accounting.
• 28:56
  SPEAKER_03: So go back and listen to what we just talked about to make sure you understand all of that.
• 29:01
  SPEAKER_03: All right.
• 29:01
  SPEAKER_03: So, Angela, if our listeners would like to do more, where is the best place to go?
• 29:06
  SPEAKER_02: Well, you mentioned earlier that we do have a separate podcast that Mike and I did on identifying performance obligations.
• 29:13
  SPEAKER_02: So we go through more examples on that podcast of going of this assessment of whether a good or service is distinct.
• 29:21
  SPEAKER_02: Um, and then we also cover this step in chapter three of our uh guide, our revenue from contracts with customers guide.
• 29:31
  SPEAKER_03: All right, very helpful.
• 29:32
  SPEAKER_03: So then final segment, and um, Angela, you brought new help this week.
• 29:36
  SPEAKER_03: So hopefully Mike will be able to help you as much as Pat did.
• 29:39
  SPEAKER_03: And that would be on our stump the guests.
• 29:42
  SPEAKER_03: Uh, very interesting questions this week.
• 29:45
  SPEAKER_03: So uh hope you and Mike can get these.
• 29:48
  SPEAKER_03: So, first one is actually sort of easy because it's a multiple choice.
• 29:52
  SPEAKER_03: So ASU 201409, which as I know the two of you know, created topic 606.
• 29:59
  SPEAKER_03: So reminder for our listeners, was broken into three parts A, B, and C.
• 30:06
  SPEAKER_03: How many words were in all three parts?
• 30:10
  SPEAKER_03: So if you'd like to just give a random guess, you can, or I'll give you a multiple choice.
• 30:15
  SPEAKER_03: So A is 50 to 100,000, B is a hundred to two hundred thousand, and C is over two hundred thousand.
• 30:25
  SPEAKER_01: Whatever the largest one is, that's what I'm going with.
• 30:28
  SPEAKER_03: I was gonna say if you've been helping uh your high school senior with college essays, you might be able to guess if you knew the number of pages here, but we'll go with C.
• 30:37
  SPEAKER_03: You'll go with C.
• 30:38
  SPEAKER_03: All right, so I'll let the listeners know.
• 30:44
  SPEAKER_03: Fact check.
• 30:46
  SPEAKER_03: Mike got this one right by picking the biggest choice.
• 30:49
  SPEAKER_03: By the podcast team's count, there are approximately 234,000 words spread across 700 pages.
• 31:01
  SPEAKER_03: The next ASU issued on revenue was 2015-14.
• 31:06
  SPEAKER_03: So we started with 2014-9, and then they issued more guidance in 2015-14.
• 31:12
  SPEAKER_03: Do you remember what that ASU did?
• 31:14
  SPEAKER_02: Well, I think the first one was the principal versus agent amendments, if I remember correctly.
• 31:21
  SPEAKER_01: Was the next one licenses?
• 31:23
  SPEAKER_02: Anyone after that was licenses, right?
• 31:26
  SPEAKER_02: And then there were some minor amendments after that.
• 31:30
  SPEAKER_02: So we may not have the order exactly right, but we just know they're all out there.
• 31:35
  SPEAKER_02: That's what's important.
• 31:37
  SPEAKER_03: Well, and I think for our listeners, they just know to look in 606, but I will give them the answer to that question as well.
• 31:47
  SPEAKER_03: Fact check.
• 31:49
  SPEAKER_03: This one actually was a bit tricky.
• 31:52
  SPEAKER_03: The question asks, what did the ASU do?
• 31:55
  SPEAKER_03: So the answer we were looking for was that it deferred the effective data 606 by one year.
• 32:06
  SPEAKER_03: So both, as always, appreciate your insights and for being a good sport on my questions.
• 32:12
  SPEAKER_03: So thanks so much for joining me today.
• 32:16
  SPEAKER_03: That's our show for today.
• 32:18
  SPEAKER_03: Next Tuesday's show will be the halfway mark of our revenue toolkit series.
• 32:23
  SPEAKER_03: So join me for our discussion on step three of the revenue model, allocating the transaction price.
• 32:29
  SPEAKER_03: And don't forget to join me this Thursday for a new episode in our finance 2025 series.
• 32:35
  SPEAKER_03: This week, I'm talking to two PWC partners who are the authors of a new book, Beyond Digital.
• 32:43
  SPEAKER_03: You'll get a chance to listen to me go a bit fangirl as we talk about some of my favorite parts of the book, and we get to hear them talk about some strategies for maximizing the future.
• 32:55
  SPEAKER_03: And although a lot of the book is written in the context of what CEOs should be doing as they think about their companies, it's something all of us will be able to apply, whether just thinking about our own leadership or leading our teams.
• 33:09
  SPEAKER_03: So, definitely a lot to cover, and you don't want to miss it.
• 33:12
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• 33:21
  SPEAKER_03: From Thought Leadership at PWC, I'm Heather Horn.
• 33:25
  SPEAKER_03: Thanks for tuning in.
• 33:31
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