Best Practices in Accounting Standard Codification 606

Transcription

1 Best Practices in Accounting Standard Codification 606 Presented By: Mayuri Katare Adityavikram Toshniwal

2 Agenda ASC 606 Guidelines Differences between ASC 605 and ASC 606 Update for the industries Top 3 ASC 606 Challenges and Solutions Impact of ASC 606 on Different Industries Managing Contract Modification Timing of Booking update and Credit Memos Variable Consideration Milestone billing and Project Revenue SSP Analysis Contract Asset vs Unbilled Functionality of RevPro 3.x 2

3 ASC 606 Guidelines Accounting Standard Codification 606 works on Five step model (ASC ) 3

4 Differences between ASC 605 and ASC 606 Following table summarizes the major differences between ASC 605 and ASC 606: Existing Standard New Standard 100+ sources for revenue guidance One standard for all arrangements, all industries Must have persuasive evidence of arrangement Contract value must be fixed and determined Unit of accounting based on standalone value No rules on accounting for modification Guidance specific to software industry Revenue disclosures limited to policy discussion Must have legal binding arrangement Contract value may be estimated if sufficient history exists Unit of account based on distinct goods / services Modification rules may result into complicated accounting Guidance is principal specific Extensive disclosure is required. 4

5 Updates for the industries Updating ERP systems. Updated disclosure requirement. Determination of the transaction price and allocation for IT and Finance industries. Accounting updates in case of updates to a contract. 5

6 Top 3 ASC 606 Challenges and Solutions 6

7 Impact of ASC 606 on Different Industries Software & High Tech: Fair Value calculation methodology. VARs and Solution Providers: Identification of the Performance Obligations in case of various combination in which non-distinct services and software are contracted for. Manufacturing: Some contract manufacturers that currently recognize revenue when products are delivered may meet one of the criteria in ASC 606 for recognition over time. Retail & Distribution: Consideration paid by the entity might get accounted as Variable Consideration. 7

8 Managing various business situations for integration with RevPro

9 Contract Modification - ASC and 11 Change in Price Change in Term Change in Quantity Credit Memos Term Modification Additional Transactions Cancellations/Returns entered Time line in contract modification: Initial Contract Timeline Revision Timeline 9

10 Timings of Booking Updates and Credit memos Best practices around timing of booking updates is as follows: Before Invoicing Full Sales Order (SO) Update is Feasible After Partial Invoicing After Full Invoicing SO update only feasible only to the extent of uninvoiced SO amount Direct SO update is not feasible, Different types of Credit Memos should be used Types of Credit Memos: Booking Cancellation Invoice Cancellations Order Updation Order Cancellation 10

11 Variable Consideration (ASC and 6) Its advisable to include variable consideration (positive and negative) as a part of transaction price if either of the following circumstances exists: 1)The customer has a valid expectation arising from an entity s customary business practices, published policies, or specific statements that the entity will accept the variable consideration. 1)Other facts and circumstances indicate that the entity s intention, when entering into the contract with the customer, is to offer the variable consideration 11

12 Variable Consideration (ASC and 6) Following are the examples of updates in variable consideration: Upward VC Award Fee Performance Incentive Claims Bonuses Downward VC Price Concessions Prompt payment discounts Volume Discounts Price adjustment cost 12

13 Milestone Billing and Project Revenue Business Case Configuration Challenge Entity is into construction business and creates multiple booking lines at every checkpoint. Single invoice line cannot be linked to multiple sales order lines. Billing for these booking are raised only after a specific percent of completion of work. Where an invoice is brought with blank sales order line id reference, system will generate a SO on its own. 13

14 Milestone Billing and Project Revenue 14

15 SSP Analysis (ASC and 34) Standalone Selling Price The best evidence of standalone selling price is the price that the entity charges for the good or service in a separate transaction with a customer. However, in many cases goods or services are sold exclusively as a package with other goods or services rather than on an individual basis Adjusted Market Assessment Approach Expected Cost plus Margin Approach Residual Approach The above methods are just suggested methods suitable for determining SSP, but determining SSP is not just limited to these methods. Even combination of two methods can be used to determine the SSP if the company deems it fit Kindly note that SSP will not apply if revenue contract only has one POB ( ) 15

16 Contract Asset vs Unbilled Contract Asset/Unbilled Account will come into picture If the contract has recognized more revenue when compared to billing Right to Bill No Contract Asset Yes Unbilled Contract Asset - Customer has obligation to payment for entity s performance Unbilled - Entity does not have right to receive payment for performance completed. 16

17 Functionality Tab in RevPro 3.x RevPro 3.x has been designed in order to comply with all the requirements of ASC 606: Step 1: Identification of difference contract entered into. Step 2: Identification of performance obligation Step 1: Rules can be set of different types of contract modifications Step 3:Determines the transaction price 17

18 Functionality Tab in RevPro 3.x Step 4: Allocation of transaction price to different POBs on the basis of Standalone Selling Price (SSP). RevPro has the capability of calculating the SSP on the basis of historical data as well as it can take the manual SSP derived by the management. Step 5: RevPro has the capability of recognizing the revenue after satisfaction of POB, RevPro also performs accounting as well as has the feature to generate revenue related repots. 18

19 Thank You