Implementation Tips for Revenue Recognition Standards. June 20, 2017

Transcription

1 Implementation Tips for Revenue Recognition Standards June 20, 2017

2 Agenda Overview Journey to implement the new standard The challenge ahead Page 1

3 Overview Where are we now? Since the new standard was issued on 28 May 2014, a number of questions have arisen. The Financial Accounting Standards Board (FASB)/International Accounting Standards Board (IASB) Joint Transition Resource Group for Revenue Recognition (TRG) and American Institute of Certified Public Accountants (AICPA) industry task forces are discussing issues submitted to them. Some of the issues discussed by the TRG have resulted in FASB and IASB activity: The FASB issued ASU covering principal versus agent assessments on 17 March The FASB issued ASU covering licenses and performance obligations on 14 April The FASB issued ASU covering narrow scope improvements and practical expedients (including certain transition issues, noncash consideration, sales taxes and collectability) on 9 May The FASB issued ASU covering certain technical corrections discussed with the TRG and stakeholders on 21 December The IASB issued Clarifications to IFRS 15 (containing all of its amendments to IFRS 15) on 12 April The complexity of implementing the new standard should not be underestimated. Page 2

4 Overview Why is the change significant? Services (ASC ) General (CON 5) Multiple-element arrangements (ASC ) Products (SAB Topic 13) Industry guides (e.g., government contractors) Construction-type and production-type contracts (ASC , e.g., completed contract, POC) Software (ASC ) Real estate sales (ASC ) Adoption of Accounting Standards Codification (ASC) 606 Requires evaluation of the policies, processes, systems and controls by which revenue is recognized and disclosed Utilizes more principles than prescriptive guidance and may require more estimates and greater judgment Eliminates industry-specific guidance Potential changes: Change in the number of performance obligations (e.g., identify, track, allocate revenue) Timing of revenue patterns Disconnect between billing and revenue recognition, in some cases Page 3

5 Overview Summary of the ASC 606 revenue recognition model Core principle Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Step 1: Identify the contract(s) with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) each performance obligation is satisfied Page 4

6 Overview What makes this complex? Contracts Performance obligations Transaction price Allocation Recognition timing Strict criteria to be a contract Identifying promised goods and services May not equal contractual price Estimating standalone selling prices Transfer of control: point in time or over time Identifying the customer Contract modifications Identify explicit and implicit contract terms Established business practices Determining performance obligations (i.e., distinct goods and services) Options granting a material right Service-type and assurance-type warranties Variable consideration, incl. bonuses, returns, concessions, discounts Constraint on variable consideration Significant financing component Noncash consideration Exceptions for allocating variable consideration and discounts Measuring progress over time Consignment arrangements Customer acceptance Repurchase provisions Assessing collectibility Principal versus agent Payments to customers Licenses Combining contracts Subsequent changes in transaction price Page 5

7 Overview Transition methods (1) Full retrospective Cumulative catch-up adjustment at 1/1/2016 Financial statements New GAAP New GAAP New GAAP Footnotes ASC 250 disclosures Modified retrospective Cumulative catch-up adjustment at 1/1/2018 Financial statements Legacy GAAP Legacy GAAP New GAAP Footnotes Legacy GAAP (1) This slide does not reflect early adoption Page 6

8 Overview SAB Topic 11.M (SAB 74) disclosures SEC expectations The SEC staff has said that registrants should consider disclosing the effect of adopting the new revenue standard (SAB Topic 11.M or SAB 74 disclosures) no later than in their next year-end filing Registrants should also consider their internal controls related to these disclosures The disclosures in the table on the following slides should generally be considered by registrants These disclosures should be made as soon as possible, but the table notes the SEC s expectations for the latest the information should be disclosed These disclosures should evolve over time, and progress should be reflected period to period SEC staff investors should expect the level of transition disclosures to increase as a company progresses in its implementation plans Page 7

9 Overview SAB Topic 11.M (SAB 74) disclosures SEC expectations SAB 74 requirement A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier. A discussion of the transition methods of adoption allowed by the standard and the transition method expected to be used by the registrant, if determined. Timing considerations If early adopting, consider disclosing the adoption date no later than the last quarterly filing before the adoption date (e.g., a calendar-year company that plans to early adopt should do this in the 30 September 2016 quarterly filing). We have seen some early adopters indicate that early adoption is dependent on process changes being completed in a timely manner. Consider disclosing the transition method no later than the year-end filing issued in the year prior to the adoption date (e.g., a calendar-year company should disclose the transition method in the 2016 year-end filing). Page 8

10 Overview SAB Topic 11.M (SAB 74) disclosures SEC expectations SAB 74 requirement A discussion of the effect that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made. Timing considerations Consider disclosing the quantitative effect (or a reasonably estimable range) no later than the last year-end filing immediately prior to the adoption date (e.g., a calendar-year company should disclose the quantitative effect in its 2017 year-end filing). If the effect cannot be reasonably estimated quantitatively, consider making a qualitative disclosure on the significance of the effect, including the effect on accounting policies and a comparison to current policies. In addition, consider discussing the implementation process status and the significance of any matters yet to be addressed (e.g., a calendaryear company should consider disclosing the qualitative effect in its 2016 year-end filing). Page 9

11 Journey to implement the new standard Determining the appropriate approach for your organization Key project milestones cannot be established until you determine your transition method. Factors affecting preference: Financial statement user requests New standard s impact to revenue and other key performance indicator (KPI) trends Impact on amount and timing of tax payments Constituency requests Approaches taken by industry and other peers Relative difference in cost and business impacts of available approaches Factors affecting ability: Magnitude of required and/or desired changes Availability of finance and human resources Ability of current and/or new systems and processes to provide comparative historical results Access to required contracts, data and new accounting estimates support Entity s overall ability to manage potentially significant change across the organization Page 10

12 Journey to implement the new standard Role of business requirements Steps in the operational implementation journey Applying each step to the new revenue recognition standard Operational implementation journey Define the objective Develop the business requirements Develop the solutions Implement the solutions Achieve the objective Accurately reporting revenue under the new revenue recognition standard Requirements defining the ability to accurately report revenue under the new revenue recognition standard Determining necessary system, process, control and other organizational changes Implementing and testing updated systems, processes, controls and other changes Accurately reporting revenue under the new revenue recognition standard Page 11

13 Journey to implement the new standard Timeline of key implementation activities The timeline below outlines the recommended latest dates by which calendar-year public entities should complete certain key activities to implement the new revenue recognition standard on time. This is illustrative in nature and will depend on specific client facts and circumstances, including consideration that the starting point may not be representative of the efforts completed to date. Prior to March 2017 March 2017 April 2017 May 2017 June 2017 July 2017 August 2017 September 2017 Project plan and revenue stream scoping Accounting policy conclusions Auditor agreement with policy conclusions Develop and test approach to transition calculation* Finalize transition calculation approach Contract reviews Transition method decision Complete disclosure gap analysis Draft initial disclosures Identification of tax impact Accounting whitepapers on specific issues Development of business requirements System** and process design Auditor concurrence with diagnostic work Identification of data for accounting and disclosures Internal control design October 2017 November 2017 December 2017 January 2018 February 2018 March 2018 After March 2018 Auditor agreement with calculation approach Finalization of tax impact Implementation of, training for and testing of updated systems**, processes, controls, disclosures and data requirements; socialization with investor relations * Will be dependent on the transition method selected Perform final calculation, net of tax Finalization of updated systems**, processes, controls, disclosures and data requirements (including workarounds) ** Depending on the system solution, this may take substantially more time Calendar-year public entity effective date Process transactions and report under ASC 606 Finalize SAB 74 disclosure for K First quarterly filing under ASC 606 Design sustainable ongoing system**, process, control, disclosure and data solutions to replace any temporary workarounds Report externally under ASC 606 at interim and annual periods beginning with Q Page 12

14 Journey to implement the new standard Implementation process transition from diagnostic Where do we need to identify impacts? Diagnostic Design and planning How do we identify these impacts? Design and implement Solution development Implementation Accounting Identify revenue streams Perform contract analyses Analyze issues in whitepapers Finalize accounting policy decisions Data Current state Develop vision for future state Incorporate updated accounting policy decisions into future state vision Develop training plan Future state Perform iterative testing Processes Systems Controls Understand the current state Develop business requirements that define the future state Perform gap analysis for data, process, system, control and disclosure Design, test and implement solutions for data, processes, systems, controls and disclosures Disclosures Entity-level evaluation Maintain internal control over the implementation process Transaction-level execution Page 13

15 Journey to implement the new standard Solution development activities Ongoing project management Individual contracts or revenue streams Define business rules Finalize new accounting policy and determine data requirements for enhanced disclosure requirements Transition method selection Quantify potential financial impacts for individual contracts or revenue streams Extrapolate potential financial impacts to population for predictive impact Training on company-specific policies and procedures Project outputs Transition method impact analysis Projection of potential financial impacts New accounting and tax policy Inventory of system and process changes Implementation project plan Training plan and materials Tax memorandums Identify tax method changes and other considerations; I/C prices, transfer pricing and indirect taxes, and finalize tax policy Develop and design policy changes design system and process enhancements Follow TRG, FASB research projects and peer group implementation developments Determine transition approach for contracts and data and capture method until future state environment is live Assess and implement changes to customer contracting process, legal terms or business practices and finance planning and analysis Timely discussion of key implementation considerations with the auditors Page 14

16 Journey to implement the new standard Implementation activities Ongoing project management Train and implement new policy (including business processes, internal controls and IT systems) Test and remediate I/C changes Document, train and execute new tax policies and procedures File method changes and adjust transfer pricing Go live in future state environment Sustain I/C environment Project outputs Cumulative catch-up adjustment New business processes and systems policy Result of I/C testing Configuration document(s) Test cases for unit, system, business integration and UAT testing Detailed production cut-over plan Business readiness checklist Planned revisions to global tax return Form 3115s and statements Tax memorandums Follow TRG, FASB research projects and peer group implementation developments Determine transition approach for contracts and data and capture method until future state environment is live Assess and implement changes to customer contracting process, legal terms or business practices and finance planning and analysis Timely discussion of key implementation considerations with the auditors Page 15

17 The challenge ahead More than an accounting change Training and communication Control environment Tax Sales and other commercial operations Processes and systems Organizational impacts Sector issues Project management Management information Employee incentives Investor relations Page 16

18 The challenge ahead Drivers of complexity Less complex More complex Shorter revenue cycle Long-term contracts Single line of business Multiple, diverse businesses Domestic operations only Global operations Highly centralized Decentralized Well-controlled process currently provides revenue estimates No change to existing performance obligations One global enterprise resource planning (ERP) system More and more complex estimates and judgments required by new revenue recognition standard Additional performance obligations under new model Multiple, disparate IT systems Strong organizational change management Organization struggles to implement change Page 17

19 The challenge ahead Key questions Financial impacts What revenue streams and unique contracts exist? What is the magnitude of the financial impact to KPIs, such as revenue growth, margin and earnings before interest, taxes, depreciation and amortization (EBITDA)? Transition impacts How long will the transition take, and when should you start? What resources and budget are required? What other internal projects overlap? Does your organization have a preferred transition method? Organizational and system impacts Does this affect the structure of your contracts with customers? Will you need to reconfigure your ERP systems to generate different revenue, cost of goods sold and other journal entries, including those required for transition? Do you have the ability to accurately capture the contractual and other required data points? Will the standard create new book/tax differences and/or method changes? How do your company s implementation plans benchmark against your competitors? How and when will you communicate to internal and external stakeholders? Page 18

20 The challenge ahead Enterprise considerations for companies facing significant changes Project management Investor relations Employee incentives Develop a comprehensive project management function that is appropriately staffed and includes meaningful executive sponsorship Enable a governance structure with appropriate organizational representation and appropriate authority to quickly respond to risks and opportunities Establish realistic time, human resource and cost budgets Consider enabling technology that allows PMO resources to evaluate project status rather than spending time tracking it Develop a top-down implementation plan that considers all relevant project drivers and time-sequenced dependencies Identify program risks and implement process/tools for addressing/monitoring those risks throughout program Design, plan and implement prioritized and sequenced risk remediation actions to resolve root-cause issues in an accelerated and predictable manner Execute a fact-based point-in-time health check analysis at specific phases of a program, using as input to stage gate decisions and to inform management on major risks prior to making key go/no-go decisions Develop mechanism to monitor standard-setting changes Develop an external communication plan for key constituencies Understand analysts expectations Exercise discipline, especially in early communications when many uncertainties will exist Benchmark external communications relative to peer group Identify employee compensation plans that are based on the entity s reported revenue; determine the impact to the amount and timing of employee compensation with special consideration given to cumulative adjustment Evaluate alignment of compensation plans with new revenue model, including revising commission structures and terms of share-based payment arrangements Develop appropriate and timely communication plans around any changes Page 19

21 The challenge ahead Enterprise considerations for companies facing significant changes Tax accounting and methods Consider new temporary differences that may arise and/or existing temporary differences that may be computed differently; evaluate if such changes require revisions to processes and data collection tools Evaluate if changes in deferred tax assets, temporary difference reversals or expected future taxable income may affect judgments regarding the realizability of deferred tax assets Consider any impact on statutory reporting (where statutory reporting follows or is based on International Financial Reporting Standards (IFRS)) and the related tax implications Evaluate the current and deferred tax consequences of the cumulative effect adjustment reported in the period of adoption Consider taxpayers applying a deferral method for advance payments and understand the potential impact given the amounts deferred for tax purposes are determined by reference to the amounts deferred for financial statement purposes Consider whether a change in revenue recognition for financial statement purposes is also a permissible method for tax purposes Evaluate intercompany prices and transfer pricing policies where adoption changes revenue, profits or third-party comparables used in determining transfer pricing Consider implications on indirect taxes for jurisdictions with taxes on gross receipts, revenues or net worth Sector issues Understand that with more judgment and estimates, some variability may occur within the sector Monitor and understand how others in your sector are approaching the standard, including external disclosures, anticipated transition methods and expected magnitude of impact Page 20

22 The challenge ahead Enterprise considerations for companies facing significant changes Processes and systems Commercial operations Training and communication Update key processes and controls for any changes in how transactions, including in-scope costs, are accounted for under the new standard Develop processes and enhance IT systems for incremental data requirements and transaction processing logic for the current, interim and future environments Evaluate risks related to completeness and accuracy of data (e.g., contracts, performance obligations, pricing, completions of obligations) and enhance process, control and system design to adequately manage risks Determine potential impact of further segregating revenue accounting from billing and identify need to expand capability for calculating and recording unbilled or deferred revenue Enhance reporting systems for new transaction price elements and to provide year-over-year comparative reporting Plan activities to update systems for cumulative effect adjustments (e.g., adjust revenue schedule waterfalls for deferred revenue that will reclass to retained earnings) Plan for financial statement presentation changes, including significantly expanded footnote disclosures Identify key revenue streams across products and services, geographies, quantitative metrics, enabling systems and processes, key contract attributes, current internal control over financial reporting (ICFR) risk assessment and compliance scores and availability of electronic/physical contracts Consider opportunity to modify contracting procedures while maintaining a balance with historical sector practices Understand any effects on existing regulatory requirements Address the historical challenges around estimating refunds, discounts, returns, penalties, concessions, etc., and communicate information needed for those estimates to the finance function Monitor potential effects on financial covenants Monitor protocols for proper maintenance and organization of all contract documentation Explore opportunity to simplify product hierarchy and pricing policies to limit complexity in commercial operations Identify, plan and deliver training to all affected staff Develop communication plan for affected internal functions and external stakeholders Maintain effective communication protocols between functions Page 21

23 The challenge ahead Enterprise considerations for companies facing significant changes Control environment Management information Update enterprise risk management activities to encompass added risks in addressing new revenue recognition standard Evaluate need for additional processes and controls required to support increased judgments and estimates in revenue amounts and the increased interim and annual disclosures required Identify incremental controls required by transition, including those supporting completeness of contract identification, consistent policy application and potential non-routine processes enabling comparative reporting Update process and control policy documentation and test for effectiveness Consider opportunity for internal control optimization across the new revenue process leveraging greater reliance on automated system controls and monitoring Update internal control monitoring plans (e.g., internal audit plan, Sarbanes-Oxley testing scope) to encompass changes to control environment related to new revenue recognition risks and controls Test updated controls for design effectiveness and for operating effectiveness Consider what monitoring controls and software (e.g., governance, risk and compliance tools) can be leveraged to manage revenue recognition risks Apprise audit committee on impact of new revenue recognition standard to risk and control environment and management s plan to address the impact Adjust financial planning and analysis based on effects of the new standard Consider changes to internal management reporting to align with the new standard Plan for potential adjustments to KPIs to account for differences caused by the new standard Consider providing reconciliation between the current and new standards to facilitate performance measurement for non-accounting management Page 22