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ASC 606 - New Revenue Recognition Standard 29 March 2017

ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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Page 1: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

ASC 606 - New Revenue Recognition Standard

29 March 2017

Page 2: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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: ASC 606 - New Revenue Recognition Standardinfo.fortworthcpa.org/2017_CPE/CFO_White-Smitham.pdf · (ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840) Software Revenue (ASC

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Q&A