Revenue Recognition New Standard: Key Areas and Examples was presented by Brandon A. Campbell Jr. on June 3, 2016. Brandon Campbell Jr. is a Director in PwC’s Transaction Services accounting advisory practice and regularly addresses various complex accounting matters with clients including revenue recognition, leasing and income tax accounting. Brandon’s most recent experience has been advising companies in regarding the application of the new leasing and revenue recognition standards under both IFRS & US GAAP. Since the issuance of the new leasing and revenue recognition standard, Brandon has been assisting clients with the implementation of the new Standards. Prior to Brandon’s time in Transaction Services, Brandon was in the audit practice of another international accounting firm. Brandon has over 10 years of accounting and auditing experience and has served clients ranging from early stage companies to large multinationals.
Brandon has been focusing on SEC engagements for his entire
professional career. His experience includes accounting advisory, debt
offerings, and quarterly and annual filings with the SEC.
Campbell began his presentation with a five step model of a comparison to existing guidance. He identified step number one as identifying the contracts with a customer. The focus areas of this step include
-may be written, verbal or implied by customary business practices
-Master supply agreements and separate purchase orders for individual orders
His analysis of identifying contracts include
-Some contracts include components that are in the scope of the revenue
standard and other components that are in the scope of other standards. An entity should first apply the separation or measurement guidance in other applicable
standards (if any) and then apply the guidance in the revenue standard.
- To account for a contract to provide leased equipment and product sales, an entity first
applies the separation and/or measurement guidance in the leasing standard to
separate and/or measure the contract price that relates to the equipment lease,
including the related executory costs and profits thereon.
- The guidance in the revenue standard is then applied to the sale of product component
of the contract.
Campbell identified step two as identifying the performance obligations in the contract. The focus areas of this step include
-Implied performance obligations
-Loyalty point programs
-Renewal options and upfront fees (material right)
-Minimum purchase orders- stand ready obligation
-Free goods and other marketing incentives
-Shipping and handling- risk of loss service
-Options to acquire additional goods and services
Warranties and other post -delivery obligations
The speaker identified step three of the comparison to existing guidance as determining the transaction price. The focus areas of step three include
-Time value of money
-Tiered pricing and volume discounts
-Rights of return
-Significant financing component -extended payment terms
-Profit Margin Guarantees
Campbell identified step four as allocating the transaction price to the performance obligations. He presented the key focus areas of this step which include
-Allocate based on relative standalone (actual or estimated) selling price
-No contingent revenue/cash cap
Campbell identified the final step as recognizing revenue when the entity satisfies a performance obligation. The key focus areas of step five include
-Determination of over time versus at a point in time
-Contract Manufacturing –no alternative use
-FOB synthetic Destination -shipping terms, change of control
Campbell continued the presentation with a discussion on the 3rd criteria of recognizing revenue which is no alternative use and right to payment. He discussed a deeper look into the 3rd criteria which includes
-The assessment of alternative use should be made at inception and not reassessed.
-The right to payment should include consideration of the contract terms and any legal precedent.
The speaker concluded the presentation with a discussion on implementation challenges by displaying data predicting the GAAP changes as a result of the new standards from 2016 to 2019.
Revenue Recognition: Tax Impact of the New Standard was presented by Mary Duffy of Andersen Tax in Washington DC and Jessica Hawn of Andersen Tax in Chicago. In this presentation, the speakers summarized the tax impact of the new revenue recognition standard with a discussion on tax principles for revenue recognition, revenue recognition examples, and key tax implications of the new standard.
The presentation began with an opening question, “Why does tax matter?” as well as several answers such as
-Tax rules generally do not follow the GAAP rules.
– Changes to the accounting for book purposes may identify or generate a need to make a change in method of accounting for tax purposes or impact the computation of the Schedule M (book/tax difference) or impact deferred tax assets/liabilities
The speakers discussed tax principles for revenue recognition including
- Sale of goods -Revenue is generally earned when the benefits and burdens of ownership pass to the customer
- Services –Revenue is generally considered recognized when the performance of services is complete
- Licenses –Over the period the licensee has the right to use the property
- Long term contracts –As costs are incurred
They continued by discussing advanced payments which are generally taxable upon receipt and have limited deferral allowed. They also provided information on long-term contracts and tax treatment of contract inducement costs which are generally capitalizable for tax purposes only to the extent all of the below are met:
- External costs (not internal labor/overhead)
- Contract term exceeds 12 months
- Contract is not terminable at will
- Amount is not de Minimis ($5,000 Or less)
The presentation provided examples of revenue recognition such as separate performance obligations and advanced payments, contingent consideration and long term contracts.
The speakers continued presenting with a discussion on key tax implications of the new standard.
This included the impact on cash taxes such as the potential acceleration of taxable income
-Advanced Payments under Rev. Proc. 2004 -34 or Treas. Reg. sec. 451 -5
- Deferral in the year of receipt limited to the extent of deferral for financial reporting purposes
- Generally, tax deferral CANNOT exceed deferral for financial reporting purposes
- Book income change forces tax income change
This also included the changes in tax accounting methods such as
-Generate a need to change tax accounting methods
-Analysis of new revenue recognition standard may highlight a need to change tax accounting methods
-Cumulative catch -up adjustments (section 481 (a) adjustments)
-Voluntary change from Proper accounting methods -Automatic
The speakers spoke on creating or changing existing temporary differences and changes in accounting for income taxes such as the cumulative effect adjustment on adoption.
Duffy and Hawn concluded the presentation by discussing tax impacts: get plugged in now. The speakers encourage the audience to
Get plugged in as soon as possible to ensure input into:
- Potential changes to systems needed to capture data for tax
- Potential changes in book accounting that may
- Create book/tax differences
- Inadvertently result in a change in accounting method (without IRS consent)
- Require obtaining IRS consent to change from prior book -driven method to an alternative method
You can see all upcoming CPE training events – including other revenue recognition conferences: Upcoming Events
This Revenue Recognition Overview was presented by Shauna Watson on June 2, 2016 in Philadelphia, PA.
Shauna Watson is the Global Managing Director of Finance & Accounting at RGP.
The speaker discusses the effects of the new Revenue Recognition Standards such as
-It eliminates all industry-specific guidance,replacing it with one Standard,
– specific accounting may have the most difficulty with implementation
– All companies that enter into contracts with customers to transfer goods, services or Nonfinancial Assets.
Watson presented key provisions such as
-The Objective is to converge standards and provide a single, high
quality standard to recognize revenue consistently across entities and jurisdictions
-It Replaces existing revenue guidance in US GAAP and IFRS
-If the criteria are not met, the contract is not accounted for using the five step method in the new standard and any consideration received from the customer is generally recognized as a liability
The speaker continued to speak on collectability which refers to a customer’s intent and ability to pay the amount of promised consideration when it is due. She argued the criteria of cash basis collectability.
For consideration received prior to existence of a contract (i.e. meeting all Step 1 criteria), recognize as a liability until:
- The contract been terminated and the consideration received is nonrefundable.
- b) There is no remaining performance obligations and all, or substantially all, of the consideration been received and is nonrefundable.
- c) The entity has transferred control of the goods or services and stopped transferring additional good or services (with no obligation to transfer additional goods or services), AND the consideration received is nonrefundable.
Watson spoke about identifying separate performance obligations in contracts which includes a good or service’s benefit on its own and a good or service’s readily availability, customer options for additional goods and services, and warranties.
She also discussed allocating transaction prices to separate performance obligations such as estimating standalone selling prices by considering the expected cost plus a margin approach.
Watson closed her presentation with a discussion on recognizing revenue as performance obligations are satisfied. This includes
-Recognizing revenue overtime has an objective to select an appropriate method to measure progress toward completion of the performance obligation in a manner that best depicts the transfer of goods or services to the customer.
– Recognizing revenue at a certain point in time allows the customer to have an unconditional or present obligation to pay, have a legal title, and have the physical possession.
You can see all upcoming similar training events here – including other Revenue Recognition Accounting Conferences: Upcoming Training Conferences
Discussion Leader Info:
Pavel Katsiak presented Transition Issues: Systems and Processes on June 2, 2016 at the Revenue Recognition Accounting Conference in Philadelphia
. Pavel Katsiak is a Director at PWC and located in Washington DC.
-Pavel has served PwC audit and non audit clients for over 10 years.
-Pavel specializes in helping clients evaluate the accounting and reporting implications of the new revenue recognition standard.
-His combination of audit background and understanding of technical requirements of the new standard brings a practical perspective to the new revenue recognition implementation.
-Pavel’s clients include companies in industrial products, retail and consumer, technology, entertainment and media and services industries.
Katsiak began his presentation with an explanation that the effects of transition issues extend beyond accounting and continued by discussing an approach to implementation in three phases as listed below.
- Impact Assessment: Assess impact and determine strategy.
- Conversion: Establish policy and prepare initial financial results.
- Embedding: Embed as the primary revenue standard.
The speaker displayed implementation challenges including
- Centralized or dispersed business units
- Cross-functional communication and education
- Diversity of terms and conditions
- Tax implications
The speaker provided data supporting that in the Revenue Recognition Survey of 2015, 30% of respondents said their systems are centralized in one location; 21% said systems are somewhat centralized in a few locations. Of respondents who answered the question, 77% said they expect to make some to significant changes to IT or ERP systems. Furthermore, 84% believe implementing a parallel reporting system will take at least 6 months 59% expect they need a parallel reporting system and 87% of respondents anticipate some change in their internal controls 55% do not expect to make significant changes to their business models.
He discussed some changes that would need to be made as a result of the Revenue Recognition System such as
-New data may be needed from:
Ordering systems, Quoting systems, Contracting systems, Billing and invoicing systems, Cash and treasury processes, Licensing operations, and CRM.
Katsiak’s presentation displayed a list of expected master and transition data sets that will be impacted by topic 606 such as
- Volume licensing offer
- Contract (MPSA, PAR agreement)
- GL posting for revenue adjustments
The speaker spoke on the expected functionality of revenue automation capabilities for Topic 606. The expected functionalities include
- Analysis of historical sales data to determine SSP (stand alone selling price)
- Link related transactions into single contract
- Break out of performance obligations
- Booking of contract asset
- Relative allocation method
- Accounting for contract modifications
- Ability to “turn off” contingent revenue limitation
- Dual reporting
- Reporting based on adjusted revenue
Katsiak concluded his presentation with Build vs. Buy considerations of the Revenue System as listed below.
-In house experience on systems, data, revenue
Transactions and expected results
-Requires in-house specialized revenue accounting
and technical expertise and skillsets to build a
scalable system and continually update to adapt to
changes in a timely manner
-Consider time required to build.
-Solution providers will need to learn client’s systems,
data and requirements, and may not gain full knowledge
-Experienced solution providers are subject matter
experts in technical revenue accounting and
related systems. They are expected to continue
investing in their solutions to improve.
-Consider availability and long term viability of
vendor solutions and their resources to implement
From Revenue Recognition Conference held in December 2015
Led by Ernst & Young’s Narayanan Balakrishnan, Partner from San Jose, CA
Here is a link to our 2016 events including Software Revenue Recognition Conference: 2016 Events
Narayanan covered five topics in his presentation:
Overview of cloud services
SAAS revenue recognition
ASU 2015-05: Customers accounting for fees paid in a cloud computing arrangement
SEC Hot Buttons
SAAS – under the new rev rec standard
Mr. Balakrishnan explained the difference between accounting for software delivered on premise vs. via the cloud with revenue generally being recognized on a ratable basis for SAAS and upfront for on premise.
On premise software has definitive guidance. SAAS revenue recognition accounting is based on:
SAB 104 – general SEC guidance
ASC 605-25 general guidance on multiple element arrangements
Other interpretive guidance
The presentation went into depth into the practical considerations to determine if the arrangement is software or a service including if the arrangement has a software element, delivered through a third party vendor, does the customer take possession of the software, hosting fees or cancellation penalties relating to contract hosting.
Revenue Recognition can commence when these four elements are satisfied:
evidence of an arrangement
fees are fixed/determinable
collection is reasonable assured
delivery has occurred
The next step is determining whether separate contracts are a single arrangement.
What is the correct accounting for SAAS arrangements wit an obligation to preform implementation services.
What is the appropriate accounting for non-refundable upfront fees and the related initial direct costs.
Executive summary from Rich Stuart from RSM – Partner National Professional Standard Group
Presentation given at December 2015 Financial Accounting & Reporting Update
Link to upcoming 2016 events including Revenue Recognition Conferences: 2016 List of Events
In the executive summary, Rich covered the background, effective date and transition points. He followed with a detailed description of the five steps, other pending guidance and changes and related disclosure issues.
Entities can choose to apply one of two transition methods:
-Full retrospective application of the guidance (pros: provides for best comparability cons: more time consuming particularly when one or comp periods are presented or there is a large number of multiyear contracts)
-Modified retrospective application as of the date of initial application of the new guidance (pros: less time consuming cons: require you to disclose revenue info based on what revenue would have been in year of adoption under legacy rev rec guidance)
Rich explained that there is quite a bit of complexity baked into these steps depending on your particular facts and circumstances.
- Contracts must be enforceable – can also be oral or implied, evaluate collectibility
- Identify all the promises to provide/transfer goods or services in the agreement – consider implicit arrangements here too like upgrades
- In determining the contract price, considerations include price concessions, discounts, rebates, incentives, bonuses, penalties etc. as well as variable consideration
- In allocating the transaction price, you are required to use a relative stand-alone selling price allocation model
- In recognizing revenue, you wait until the customer obtains control over the good or service, consider licenses?
Other pending changes include gross vs net presentation of sales tax collected from customers, principals vs, agent and various issue by the Transition Resource Group (TRG).
Link to upcoming 2016 events including Revenue Recognition Conferences: 2016 List of Events