To: [The CFO of Coconut’s]
From: [Kaiyuan Jiang]
Date: [10/11/2014]
Re: [Changes of the financial statements under the new revenue standard]
On May, 2014, the FASB and IASB issued a new standard on revenue from contracts with customers. Under the new revenue recognition standard, I believe there are some changes in your company’s financial statements. I will answer and analysis those questions you asked.
According to the new standard on revenue from contracts with customers, I will suggest the March 1, 2014 contract should be accounted for as a new contract. The February 1, 2014 contract begin at March 1, 2014 which means your company signed the agreement on March 1 could be a new contract or a modification of the February 1 contract. According to FASB, an entity shall account for a contract modification as a separate contract if both of the following conditions are present:
a. The scope of the contract increases because of the addition of promised goods or services that are distinct.
b. The price of the contract increases by an amount of consideration that reflects the entity’s standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.
In your case, for the first condition, the addition of promised goods or service -- the training services and an additional year of PCS are distinct. Because Buffett can benefit from the training service and an additional year of PCS, also these two goods or services are separately identifiable from the February 1 contract. Hence, the March 1 contract fulfills the first condition. For the second condition, as we known, Buffett immediately paid consideration of $4,500 for the additional services. The standalone relative selling price of the training services and additional PCS were $3,000 and $2,000. Apparently, the second condition is also fulfilled. All in all, the March 1, 2014 contract should be accounted for as a separate new contract.
I believe it is possible to achieve the opposite result by changing the structure and/or timing of the contracts. Under the new revenue recognition standard, to make the March 1 contract being a modification of the February 1 contract, all you need to do is to make sure the addition of promised goods or services are not priced at the standalone selling price or they are not distinct. In your case, you can put the PCS and training services as supplemental service in your contract which means you will provide free PCS and training services to customer who buys Volcano system. And under this circumstance, the prices of PCS and training are no
