Presenter. Preparing to Adopt the New Revenue Recognition Standard. August 17, Preparing to Adopt the New Revenue Recognition Standard

Transcription

1 Preparing to Adopt the New Revenue Paul Lundy, CPA 1 Presenter Paul Lundy Partner, Assurance Services Atlanta, Georgia paul.lundy@dhgllp.com 2 DHG Birmingham CPE Seminar 1

2 Objectives Describe the reasons behind and purpose of the new guidance on recognizing revenue from contracts with customers Explain the basic 5 step framework used to evaluate contracts and recognize revenue Share the expected impacts and time line related to the implementation of the new guidance 3 Why a New Revenue Standard 4 DHG Birmingham CPE Seminar 2

3 Problems with the Current State US GAAP Significant volume of industry and transaction specific guidance Economically similar transactions accounted for differently Disclosures inadequate IFRS Principles difficult to understand and apply Limited guidance Disclosures inadequate GAAP and IFRS often differ and were not always comparable 5 Goals of The Changes? Provide a robust framework Comparability across capital markets and industries Eliminate complex, prescriptive rules and options while providing improved guidance Improved information in financial statements 6 DHG Birmingham CPE Seminar 3

4 Polling Question Where is your organization in evaluating the new revenue standard? a) Been there, done that, have the t-shirt. b) Feeling good about it. c) Thinking about it, but haven t started it. d) What is Revenue Recognition? 7 The New Revenue Recognition Model 8 DHG Birmingham CPE Seminar 4

5 Scope (Includes) All contracts with customers, except: Leases (Topic 840) Insurance contracts (Topic 944) Financial instruments (Topic 825) Guarantees (Topic 460) Non-monetary exchanges between organizations in same line of business to facilitate sales to customers (Topic 845) Sales of Non-Financial Assets Outside organizations ordinary activity (Topic 610) 9 Major Concept Changes Created single principle based guidance Core Principle Focus is on analyzing the contract not analyzing the transactions by industry Changed From when Realized/Realizable and Earned To When Performance Obligations Satisfied Increased emphasis on disclosures 10 DHG Birmingham CPE Seminar 5

6 Major Structural Changes Eliminated 100 s of existing rules Created 5 step process for recognizing revenue from contracts with customers Guidance on accounting for costs to obtain and fulfill a contract with a customer Increased disclosure requirements 11 5 Step Process ID Contract ID Performance Obligations Determine Allocate Recognize Revenue 12 DHG Birmingham CPE Seminar 6

7 Identify the Contract ID Contract 13 Bar Rescue Clearing the Hurdle to Analysis You deliver equipment to a local bar who is remodeling and rebranding in an effort to save the bar. They pay 25% on delivery, but you recognize that unless the bar rescue works they may not be able to pay the contract in full. How might you handle this? 14 DHG Birmingham CPE Seminar 7

8 Contract Combination ID Contract Combine contracts when 1 or more of the following criteria are met. Negotiated as a package or Pricing in one contract depends on price or performance in the other or Goods and services represent a single performance obligation 15 Contract Modifications ID Contract Modification (change in scope or price) Separate Contract Termination with New Contract (Prospective accounting) Part of Contract (Cum. Catch up) Combination of Above New distinct goods or services and standalone pricing Distinct but does not meet criteria for separate contract Not distinct 16 DHG Birmingham CPE Seminar 8

9 Identify the Performance Obligations ID Performance Obligations It is a Separate Performance Obligation When Both Criteria are Met: Good or Service is Distinct Customer can benefit from good or service On its own Together with other readily available goods or services (including goods or services previously acquired from org.) Good or Service is Distinct (within the contract) Promised good or service is separable from other promises Indicators for separate P.O. s No significant service of integrating the goods or services Good or service does not modify another good or service in the contract Good or service is not highly dependent on or interrelated with other goods or services 17 Example Software and Support ID Performance Obligations Software developer, enters into a contract with a customer to transfer a software license, perform installation service, and provide unspecified software updates and technical support (online and telephone) for a two-year period. License, install service, and tech support sold separately. Installation service includes changing the web screen for each type of user (for example, marketing, inventory management, and information technology). Installation service is routinely performed by other entities and does not significantly modify the software. Software remains functional without updates and tech support. 18 DHG Birmingham CPE Seminar 9

10 Example Custom Molds ID Performance Obligations XYZ Corp makes molds used to cast faux marble countertops and sinks from plastic. XYZ enters into a contract with a customer to sell a custom mold and replacement parts manufactured specifically for the custom mold. XYZ sells custom molds and replacement parts together and no other entity sells either product. The customer can use the mold without the replacement parts, but the replacement parts have no use without the custom mold. How many performance obligations are in the contract? 19 Example Appliance Manufacturer ID Performance Obligations Ormé manufactures and sells high end appliances through a network of authorized distributors. Ormé has a customary business practice of providing free installation services to end user customers without involving the resellers. Both parties expect the Company to continue to provide this service. How many performance obligations are in the contract? 20 DHG Birmingham CPE Seminar 10

11 Example Construction ID Performance Obligations Acme Construction enters into a contract to design and build an office building. Acme is responsible for overall management of project and identifies goods and services to be provided including architectural, engineering, site remediation, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finish carpentry. Acme regularly sells these goods and services individually to other customers. How many performance obligations are in the contract? 21 Example Warranties ID Performance Obligations Treat as a separate performance obligation if Customer has option to purchase separately or warranty provides an additional service It is not a separate performance obligation if Customer does not have an option to purchase separately and warranty does not provide an additional service Consider the following in determining whether warranty provides an additional service: Whether warranty is required by law Length of warranty period Nature of tasks to be performed under warranty 22 DHG Birmingham CPE Seminar 11

12 5 Step Process ID Contract ID Performance Obligations Determine Allocate Recognize Revenue 23 Determine the Determine The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). 24 DHG Birmingham CPE Seminar 12

13 Determine the Determine Variable Consideration Expected value Most likely amount Constraint Significant Financing Adjust consideration if timing provides customer or entity with significant benefit of financing Non Cash Consideration Measure at fair value unless cannot be reasonably estimated Consideration Payable to Customer Reduction of the TP unless in exchange for a distinct good or service 25 Variable Consideration Determine Examples: bonuses, penalties, price concessions, rights of returns or milestones Estimate based on expected value or the mostlikely amount, whichever is more predictive Subject to a constraint Only include amount for which it is probable that a significant reversal in cumulative revenue recognized will not occur Exception for sales-based or usage-based royalties on licenses of intellectual property 26 DHG Birmingham CPE Seminar 13

14 Determine the Determine Variable Consideration Significant Financing Expected value Most likely amount Constraint Adjust consideration if timing provides customer or entity with significant benefit of financing Non Cash Consideration Measure at fair value unless cannot be reasonably estimated Consideration Payable to Customer Reduction of the TP unless in exchange for a distinct good or service 27 Example Consulting Firm Determine Consulting firm enters into a contract with Customer Inc to install and integrate a cloud-based ERP system for $100,000 plus a performance bonus of $50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by $5,000 per week for every week beyond the agreedupon completion date. The contract requirements are similar to contracts Consulting firm has performed previously and management believes that such experience is predictive for this contract. Contractor concludes that the expected value method is most predictive in this case. 28 DHG Birmingham CPE Seminar 14

15 Example Consulting Firm (cont d) Determine Consulting firm estimates there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late. How should Contractor determine the transaction price? 29 Determining the Determine Completion Performance Bonus Probability Estimated Bonus On-time $50,000 60% $30,000 1 week late $45,000 30% $13,500 2 weeks late $40,000 10% $4,000 Weighted average bonus $47,500 Fixed fee $100,000 Total transaction price $147, DHG Birmingham CPE Seminar 15

16 5 Step Process ID Contract ID Performance Obligations Determine Allocate Recognize Revenue 31 Allocate Allocate Allocate to each performance obligation the amount to which the entity expects to be entitled. Based on relative stand alone selling price: Observable Estimate Residual estimation techniques Discounts and contingencies applied entirely to specific performance obligation only if specified criteria met 32 DHG Birmingham CPE Seminar 16

17 Allocate Allocate An entity enters into a contract with a customer to sell Products A, B, and C in exchange for $100. The entity will satisfy the performance obligations for each of the products at different points in time. The entity regularly sells Product A separately, and, therefore the standalone selling price is directly observable. The standalone selling prices of Products B and C are not directly observable. 33 Example Allocate Product Selling Method A 50 Directly observable B 25 Estimated - market C 75 Estimated - market $150 The $50 discount, and therefore the transaction price, is allocated as follows: Product Alloc. A $33 ($50 $150 $100) B 17 ($25 $150 $100) C 50 ($75 $150 $100) $ DHG Birmingham CPE Seminar 17

18 5 Step Process ID Contract ID Performance Obligations Determine Allocate Recognize Revenue 35 Revenue Recognition Recognize Revenue Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service Performance obligations satisfied over time, if specified criteria are met Revenue is recognized by measuring progress towards complete satisfaction of the performance obligation All other performance obligations satisfied at a point in time Revenue is recognized at the point in time when the customer obtains control of the promised asset 36 DHG Birmingham CPE Seminar 18

19 Performance Obligations Over Time Recognize Revenue Determine if satisfied (and revenue recognized) over time based on meeting any of the following criteria: Customer simultaneously receives and consumes benefits as the entity performs Entity s performance creates or enhances an asset that customer controls as it is created or enhanced Entity s performance does not create an asset with an alternative use to the entity and there is an enforceable right to payment for performance completed to date If satisfied over time, select method of progress toward completion (e.g., output or input method) 37 Performance Obligations Point in Time Recognize Revenue Recognize revenue when customer obtains control based on consideration of several indicators, including when customer has: Present obligation to pay Legal title Physical possession Significant risks and rewards of ownership Accepted the asset 38 DHG Birmingham CPE Seminar 19

20 Polling Question What do you see as being your biggest challenge in implementing the Revenue? a) Identifying performance obligations in our contracts b) Allocating the transaction price c) Preparing financial statement disclosures d) Determining the impact of the new standard on my tax accounting 39 Specific Guidance Areas 40 DHG Birmingham CPE Seminar 20

21 Implementation Guidance Warranties Licenses Right of return Customer options for additional goods or services Breakage Principal versus agent Bill and hold Repurchase agreements Nonrefundable up front fees Customer acceptance 41 Contract Costs Incremental Costs to Obtain a Contract Recognize as an asset if Incremental Expected to recover If less than one year can simply expense Costs to Fulfill a Contract Recognize as an asset if Directly relate to the contract or anticipated contract that is specifically identifiable; Generate or enhance resources that will be used to satisfy performance obligations in the future; and Are expected to be recovered. 42 DHG Birmingham CPE Seminar 21

22 Disclosure To enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Annual and interim disclosures for public business entities greatly expanded Private company disclosure requirements are extensive as well, but substantially less than those of public business entities 43 Disclosures Disaggregation of Revenue Categories that depict how revenue and cash flows are affected by economic factors Relationships with segment disclosures Contract Balances Remaining Performance Obligations Opening and closing Amount recognized from contract liabilities Explain significant changes in contract balances price allocated to remaining performance obligations Quantitative or qualitative explanation of when amounts will be recognized as revenue Interim All quantitative disclosures in annual and interim 44 DHG Birmingham CPE Seminar 22

23 Differences for Non Public Entities Disclosures not required Quantitative disaggregation Contract balances Remaining performance obligations Explanation of why methods used provide a faithful depiction of the transfer of goods or services Significant judgments made in evaluating when a customer obtains control Methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price 45 Implementation Considerations 46 DHG Birmingham CPE Seminar 23

24 Effective Dates Current Effective Dates 2018 for Public Organizations If using retrospective transition contracts entered into in 2016 must be evaluated 2019 Non Public Organizations 47 Transition Options Full retrospective application Apply new standard to all prior periods Certain practical expedients are allowed Retrospectively with cumulative effect adjustment No restatement of prior periods Apply new standard to in-progress contracts as of the initial application date and to subsequent contracts Recognize a cumulative effect adjustment at initial application date for effects of applying new standard to inprogress contracts Disclose in the period of adoption the effect on each line item in the financial statements as a result of adoption (ie: how things would have been recognized differently under standards in effect for prior years) 48 DHG Birmingham CPE Seminar 24

25 Implementation Planning Socialize the changes Within the organization With key stakeholders Create a transition plan Team (internal and external) Obtain education Analyze process and timing Decision making framework Documentation Timeline 49 Consider Key Process Inputs Marketing and Sales Operations Key Legal Agreements Debt Covenants Tax Key Financial and Operational Controls Technology Geographic Impacts People Stakeholders 50 DHG Birmingham CPE Seminar 25

26 Questions 51 DHG Birmingham CPE Seminar 26