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ASC 606 - New Revenue Recognition Standard
29 March 2017
Page 2
Agenda
► Refresher on the new standard► 5 step process► Disclosure requirements► Practical expedients
► Recent developments► Recently issued ASUs
► Implementation challenges► Transition disclosures► What are we seeing?
► Next steps► Q&A
Page 3
OverviewWhat’s the change?
“Transfer of control”► Single, global revenue
standard for all transactions► More “principles” than
prescriptive, anti-abuse-oriented rules
► Potential changes:► More performance
obligations (identify, track, allocate revenue)
► Disconnect between billing and revenue recognition
► More estimates included in revenue
► Change in revenue patterns► “Lost” revenue upon
transition
Product Revenue(SAB Topic 13)
Construction(ASC 605-35,
e.g., Completed Contract,
POC)
Leasing(ASC 840)
Software Revenue(ASC 985-605)
Industry Guides(e.g., Government Contractors)
Multiple Element Arrangements
(ASC 605-25)
Service Revenue(ASC 605-20)
General(CON 5)
ASC 606
Page 4
OverviewEffective date
► The FASB issued a one-year deferral of the original effective date for ASC 606 Revenue from Contracts with Customers► Standard will be effective for public entities for annual periods beginning
after 15 December 2017 (2018 for calendar year-end companies)► Nonpublic entities will still have the option of an additional year (effective
for annual periods beginning after 15 December 2018)► Early adoption will be allowed for both public and nonpublic entities –
using the original effective date (2017 for calendar year-end companies)► The deferral was issued through ASU 2015-14 on 13 August 2015► The IASB also issued a one-year deferral as an amendment to IFRS
15 on 11 September 2015
Page 5
OverviewEffective date
► Dates shown are for calendar year-end entitiesMandatory adoption
Public
Nonpublic
Early adoption
Nonpublic
► 1 January 2019
► 1 January 2017
► 1 January 2018
► 31 December 2017 annual F/S
Fiscal Year Effective date First presentation
► 31 March 2018 10-Q
► 31 December 2019 annual F/S
Public ► 1 January 2017 ► 31 March 2017 10-Q
► 31 March 2017 interim F/S
► 1 January 2018► 31 December 2018 annual F/S
► 31 March 2018 interim F/S
► 1 January 2019 ► 31 March 2019 interim F/S
Page 6
OverviewEffective date – cont’d
► Entities should carefully evaluate the expanded definition of a public entity used in the standard► Determination may be complex for certain entities
► New standard defines a public entity as one of the following:► Public business entity (as defined under ASU 2013-12)► Not-for-profit entity that has issued, or is a conduit bond obligor for,
securities traded, listed or quoted on an exchange or OTC market► Employee benefit plan that files or furnishes financial statements with
the SEC► If none of the criteria are met, an entity is considered a nonpublic
entity under the standard
Page 7
OverviewTransition methods
Full retrospective
Modified retrospective
Financial statements
Financial statements
Footnotes
Footnotes
New GAAP New GAAP New GAAP
New GAAPLegacy GAAP Legacy GAAP
Legacy GAAP
ASC 250 disclosures
Cumulative catch-up adjustment at 1/1/2016
20182016 2017
Cumulative catch-up adjustment at 1/1/2018
(1) This slide does not reflect early adoption
Page 8
OverviewTransition method summary
Key considerationsFull retrospective approach(excludes practical expedients) Modified retrospective approach
Apply to which periods presented?
All periods presented Only the most current period presented
Apply to which contracts?
All contracts that would have existed during all periods presented if the new standard had been applied from contract inception
Any contracts existing as of effective date (as if new standard had been applied since inception of contract), as well as any new contracts from that date forward (FASB allows entities to apply this method to all contracts)
Recognition of the effect of adoption in the financial statements?
Follow requirements of ASC 250, cumulative effect of changes to periods prior to periods presented is reflected in opening balance of retained earnings
Reflect cumulative effect of changes in the opening balance of retained earnings in the most current period presented
Adoption disclosure requirements?
Follow requirements of ASC 250, including disclosure of the reason for the change and the method of applying the change
In the year of adoption, disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes (effectively requires two sets of books during the year of adoption)
Page 9
OverviewScope and exceptions
► Contracts with customers► Sale of some nonfinancial assets that are not an output of
the company’s ordinary activities (e.g., property, plant and equipment, real estate, intangibles)
► Capitalization of certain costs
► Leasing contracts► Insurance contracts► Financial instruments contracts► Certain nonmonetary exchanges► Certain put options on sale and repurchase agreements► Guarantees within the scope of ASC 460
What is in scope
What is not in scope
Page 10
OverviewDrivers of complexity
► Shorter revenue cycle► Single line of business► Domestic operations only► Highly centralized► Well-controlled process currently
provides revenue estimates► No change to existing performance
obligations► One global ERP► Strong organizational change
management
► Long-term contracts► Multiple, diverse businesses► Global operations► Decentralized► Limited estimates required by current
revenue recognition process► Differences in the number of performance
obligations► Multiple, disparate IT systems► Organization struggles to implement
change
Less complex More complex
Page 11
Core principle – Recognize revenue to depict the transfer of 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
5 step processSummary of the model
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Identify the contract(s) with the customer
Identify the separate performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the separate performance obligations
Recognize revenue when each performance obligation is satisfied
Page 12
Disclosure requirements
Disclosures
ObjectiveTo enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers
Disclosure categories
New core disclosures
Other disclosures
Qualitative and quantitative information about:► Contracts with customers► Significant judgments► Assets from capitalized costs
Other sources of new disclosures:► Use of practical expedients► Transition disclosures (e.g., ASC 250)► SEC requirements (e.g., SAB Topic 11.M (SAB 74),
MD&A)
Page 13
Disclosure requirements – cont’d
► A public entity is required to disclose information about remaining performance obligations, including:► The amount of the transaction price allocated to performance obligations
that are unsatisfied (or partially unsatisfied) as of the end of the reporting period
► When it expects to recognize the amount(s) in its interim and annual financial statements
► FASB provided optional exemptions that allow an entity to elect not to make quantitative disclosures about remaining performance obligations in certain situations, including when:► An estimate of the transaction price would be made solely for disclosure purposes► Contracts have an original expected duration of less than one year
When the optional exemption is applied, additional qualitative disclosures are required.
Page 14
Disclosure requirements – cont’d
Category Subcategory Information type Frequency
Contracts with customers
Disaggregation of revenue Quantitative Interim/annual
Contract balancesQuantitative Interim/annual
Qualitative Annual
Performance obligationsQuantitative Interim/annual
Qualitative Annual
Significant judgments N/A Qualitative Annual
Contract costs N/AQuantitative
AnnualQualitative
Other
Practical expedients Qualitative Annual
TransitionQuantitative
Interim/annualQualitative
SEC requirementsQuantitative
Interim/annualQualitative
Page 15
Disclosure requirementsChanges
Current disclosures Potential changes Future
requirements
Potential MD&A discussion of
significant WIP and deferred
revenue
Contract balances
Revenue by segment
Disaggregated revenue
► Further disaggregation within segments► Disaggregation by multiple categories
► More prescriptive requirements for narrative discussion
► Applies to all contract balances► Required to be audited
Page 16
Disclosure requirementsChanges
Current disclosures Potential changes Future
requirements
No current requirements
Significant judgments and contract cost
assets
Backlog Performance obligations
► Required for all unsatisfied performance obligations
► Only includes amounts allocated to performance obligations
► Required to be audited
► New narrative and quantitative disclosures► Required to be audited
Page 17
Practical expedients
Paragraph Description Disclose?
340-40-25-4 Immediately expense costs of obtaining a contract if they would be amortized within a year Yes
606-10-10-4 Use of a portfolio approach No606-10-25-16A Not assessing immaterial promises No
606-10-25-18B Treating shipping and handling activities as fulfillment activities Yes
606-10-32-2A Excluding sales taxes from the transaction price Yes
606-10-32-18 Not adjusting for significant financing component if payment and transfer within a year Yes
Page 18
Practical expedients – cont’d
Paragraph Description Disclose?
606-10-50-14
Not providing disclosures about transaction price allocated to unsatisfied performance obligations if contract duration under one year or if not required to estimate the transaction price (below)
Yes
606-10-55-18 Can recognize revenue as invoiced, if invoiced amount corresponds directly to value of performance No
606-10-65-1 Full retrospective transition method practical expedients relating to completed contracts and certain disclosures Yes
606-10-65-1 Treatment of contract modifications upon transition Yes
Page 19
Updates to ASU 2014-09
ASU Summary2014-09 New revenue standard (ASC 606) introduced 2015-14 Deferred the effective dates of new revenue standard by 1 year2016-08 Final amendments to clarify principal versus agent guidance2016-10 Amended guidance on accounting for licenses of intellectual property (IP)
2016-12 Amended guidance on transition, collectability, noncash consideration and presentation of sales and other similar taxes
2016-20
Issued guidance that allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and requires entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures
Makes 12 other technical corrections and improvements to the new revenue standard
Page 20
Impact disclosed? ExamplesNot expected to have a material impact on overall revenue recognition practices/policies or certain financial statements (may still be evaluating)
Pfizer, Allstate, Schlumberger, Target, Public Storage, FedEx, Bank of America, Whirlpool, Texas Instruments, Walmart, Oracle, Archer-Daniels-Midland, HCA Holdings, AIG, Raytheon and UnitedHealth
Expected to have a material impact Microsoft and Sprint
Possible and/or specific impact disclosed
Verizon, AT&T, Southwest, United,Blackstone, Exxon, Chevron, Marriott,GE, Fluor and Microsoft
Transition disclosures
Page 21
Impact disclosed? ExamplesTransition approach Modified retrospective: IBM, Wells
Fargo, Fluor, Archer-Daniels-Midland and Cisco
Full Retrospective: Microsoft, Raytheon and Oracle
Early adoption Microsoft, Raytheon, Ford, and General Dynamics
Transition disclosures
Page 22
Implementation challengesWhat companies are facing
► Identifying performance obligations► Material rights
► Loyalty awards, spare parts, store displays► Free services/goods► Immaterial within the context of a contract vs immaterial
► Determining the transaction price► Estimating contingencies
► Contingent fees, coupons, discounts, rebates► Amounts expected to be collected
► Cash basis
Page 23
Implementation challengesWhat we are seeing
► Allocating the transaction price► Stand alone sales price► Variable consideration
► Recognizing revenue► Expected benefit period► Change in timing of revenue
► Contract Costs► Aligning costs with the related revenue► Commissions/incentives
Page 24
► Prepare a roadmap, both high-level and detailed► Understand the magnitude of the changes and how they
will affect the following:► Accounting policies and practices► Accounting systems► Internal control over financial reporting► Regulatory requirements
► Monitor the FASB-IASB transition resource group (TRG)► Monitor the AICPA task forces► Perform a rapid diagnostic and begin designing a solution
Next stepsWhat could you be doing now?
Page 25
Q&A