ImplementationTips for RevenueRecognitionStandardsJune 20, 2017
Page 1 Adopting the new revenue recognition standard
► Overview
► Journey to implement the new standard
► The challenge ahead
Agenda
Page 2 Adopting the new revenue recognition standard
OverviewWhere 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 AmericanInstitute of Certified Public Accountants (AICPA) industry task forces are discussing issuessubmitted to them.
► Some of the issues discussed by the TRG have resulted in FASB and IASB activity:► The FASB issued ASU 2016-08 covering principal versus agent assessments on 17
March 2016.► The FASB issued ASU 2016-10 covering licenses and performance obligations on 14
April 2016.► The FASB issued ASU 2016-12 covering narrow scope improvements and practical
expedients (including certain transition issues, noncash consideration, sales taxes andcollectability) on 9 May 2016.
► The FASB issued ASU 2016-20 covering certain technical corrections discussed with theTRG and stakeholders on 21 December 2016.
► The IASB issued Clarifications to IFRS 15 (containing all of its amendments to IFRS 15)on 12 April 2016.
► The complexity of implementing the new standard should not be underestimated.
Page 3 Adopting the new revenue recognition standard
Adoption of AccountingStandards Codification (ASC) 606► Requires evaluation of the policies,
processes, systems and controlsby which revenue is recognizedand disclosed
► Utilizes more principles thanprescriptive guidance and mayrequire more estimates and greaterjudgment
► Eliminates industry-specificguidance
► Potential changes:► Change in the number of
performance obligations(e.g., identify, track, allocaterevenue)
► Timing of revenue patterns
► Disconnect between billing andrevenue recognition, in some cases
OverviewWhy is the change significant?
Products(SAB Topic 13)
Construction-type andproduction-type contracts
(ASC 605-35,e.g., completed
contract,POC)
Real estate sales(ASC 360-20)
Software(ASC 985-605)
Industry guides(e.g., government contractors)
Multiple-elementarrangements(ASC 605-25)
Services(ASC 605-20)
General(CON 5)
Page 4 Adopting the new revenue recognition standard
OverviewSummary of the ASC 606 revenue recognition modelCore principle – Recognize revenue to depict the transfer of promised goods orservices to customers in an amount that reflects the consideration to which theentity expects to be entitled in exchange for those goods or services
Step 1:
Step 2:
Step 3:
Step 4:
Step 5:
Identify the contract(s) with the customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations
Recognize revenue when (or as) each performance obligation is satisfied
Page 5 Adopting the new revenue recognition standard
Allocation
Estimating standaloneselling prices
Exceptions forallocating variableconsideration anddiscounts
Recognition timing
Transfer of control:point in time orover time
Measuring progressover time
Consignmentarrangements
Customer acceptance
Repurchase provisions
Performanceobligations
Identifying promisedgoods and services
Determiningperformanceobligations (i.e., distinctgoods and services)
Options granting amaterial right
Transaction price
May not equal“contractual” price
Variable consideration,incl. bonuses, returns,concessions, discounts
Significant financingcomponent
Noncash consideration
Payments to customers
Subsequent changes intransaction price
Constraint on variableconsideration
Contracts
Strict criteria to be acontract
Principal versus agent
Contract modifications
Identify explicit andimplicit contract terms
Assessing collectibility
Identifying thecustomer
Combining contracts
Established businesspractices
Service-type andassurance-typewarranties
OverviewWhat makes this complex?
Licenses
Page 6 Adopting the new revenue recognition standard
OverviewTransition methods(1)
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 7 Adopting the new revenue recognition standard
OverviewSAB Topic 11.M (SAB 74) disclosures SEC expectations
► The SEC staff has said that registrants should consider disclosing theeffect of adopting the new revenue standard (SAB Topic 11.M orSAB 74 disclosures) no later than in their next year-end filing
► Registrants should also consider their internal controls related tothese disclosures
► The disclosures in the table on the following slides should generallybe considered by registrants
► These disclosures should be made as soon as possible, but the tablenotes the SEC’s expectations for the latest the information should bedisclosed
► These disclosures should evolve over time, and progress should bereflected period to period
► SEC staff – investors should expect the level of transition disclosuresto increase as a company progresses in its implementation plans
Page 8 Adopting the new revenue recognition standard
SAB 74 requirement Timing considerationsA brief description of the newstandard, the date that adoption isrequired and the date that theregistrant plans to adopt, if earlier.
If early adopting, consider disclosing the adoptiondate no later than the last quarterly filing before theadoption date (e.g., a calendar-year company thatplans to early adopt should do this in the30 September 2016 quarterly filing).We have seen some early adopters indicate thatearly adoption is dependent on process changesbeing completed in a timely manner.
A discussion of the transitionmethods of adoption allowed by thestandard and the transition methodexpected to be used by theregistrant, if determined.
Consider disclosing the transition method no laterthan the year-end filing issued in the year prior to theadoption date (e.g., a calendar-year companyshould disclose the transition method in the 2016year-end filing).
OverviewSAB Topic 11.M (SAB 74) disclosures SEC expectations
Page 9 Adopting the new revenue recognition standard
SAB 74 requirement Timing considerationsA discussion of the effect thatadoption of the standard isexpected to have on the financialstatements of the registrant, unlessnot known or reasonably estimable.In that case, a statement to thateffect may be made.
Consider disclosing the quantitative effect (or areasonably estimable range) no later than the lastyear-end filing immediately prior to the adoption date(e.g., a calendar-year company should disclose thequantitative effect in its 2017 year-end filing).If the effect cannot be reasonably estimatedquantitatively, consider making a qualitativedisclosure on the significance of the effect, includingthe effect on accounting policies and a comparison tocurrent policies. In addition, consider discussing theimplementation process status and the significance ofany matters yet to be addressed (e.g., a calendar-year company should consider disclosing thequalitative effect in its 2016 year-end filing).
OverviewSAB Topic 11.M (SAB 74) disclosures SEC expectations
Page 10 Adopting the new revenue recognition standard
Journey to implement the new standardDetermining the appropriate approach for your organization
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 historicalresults
► Access to required contracts, data and newaccounting estimates support
► Entity’s overall ability to manage potentiallysignificant change across the organization
Key project milestones cannot be established until youdetermine your transition method.
Page 11 Adopting the new revenue recognition standard
Journey to implement the new standardRole of business requirements
Define the objective
Develop the solutions
Implement the solutions
Achieve the objective
Develop the businessrequirements
Ope
ratio
nali
mpl
emen
tatio
njo
urne
y
Accurately reporting revenue under thenew revenue recognition standard
Requirements defining the ability toaccurately report revenue under the new
revenue recognition standard
Determining necessary system, process,control and other organizational changes
Implementing and testing updatedsystems, processes, controls and other
changes
Accurately reporting revenue under thenew revenue recognition standard
Steps in the operationalimplementation journey
Applying each step to the newrevenue recognition standard
Page 12 Adopting the new revenue recognition standard
Journey to implement the new standardTimeline of key implementation activities
The timeline below outlines the recommended latest dates by which calendar-year public entities should complete certain keyactivities to implement the new revenue recognition standard on time. This is illustrative in nature and will depend on specific clientfacts and circumstances, including consideration that the starting point may not be representative of the efforts completed to date.
Prior to March2017 March 2017 April 2017 May 2017 June 2017 July 2017 August 2017 September 2017
October 2017 November 2017 December 2017 January 2018 February 2018 March 2018 After March 2018
Auditorconcurrence withdiagnostic work
Project plan andrevenue stream
scoping
Contract reviews
Accountingwhitepapers onspecific issues
Accounting policyconclusions
Transition methoddecision
Auditor agreementwith policy
conclusions
Completedisclosure gap
analysis
Development of business requirements
Draft initialdisclosures
Develop and test approach to transition calculation*
Identification of data for accounting and disclosures
System** and process design
Finalize transitioncalculationapproach
Identification of tax impact
Auditor agreementwith calculation
approach
Implementation of, training for and testing ofupdated systems**, processes, controls,
disclosures and data requirements;socialization with investor relations
Perform finalcalculation, net of
tax
Finalization ofupdated systems**,processes, controls,
disclosures anddata requirements
(includingworkarounds)
Process transactions andreport under ASC 606
Finalize SAB 74disclosure for 2017
10-K
Design sustainable ongoing system**,process, control, disclosure and datasolutions to replace any temporary
workarounds
Report externally under ASC 606 atinterim and annual periods beginning
with Q1 2018
Finalization of taximpact
Calendar-yearpublic entityeffective date
First quarterlyfiling under
ASC 606
Internal control design
* Will be dependent on the transition method selected
** Depending on the system solution, this may take substantially more time
Page 13 Adopting the new revenue recognition standard
Journey to implement the new standardImplementation process – transition from diagnostic
DiagnosticDesign and implement
Design andplanning
Solutiondevelopment Implementation
Where do we need toidentify impacts?
Accounting
Data
How do we identify these impacts?
Processes
Systems
Controls
Disclosures
Current state Future state
Identifyrevenuestreams
Performcontractanalyses
Analyze issuesin whitepapers
Finalize accountingpolicy decisions
Understand thecurrent state
Perform gapanalysis fordata, process,system, controland disclosure
Develop vision forfuture state
Incorporate updatedaccounting policydecisions into futurestate vision
Develop businessrequirements thatdefine the futurestate
Design, test and implementsolutions for data, processes,systems, controls anddisclosures
Developtraining plan
Performiterativetesting
Maintain internal control over the implementation process
Entity-level evaluation Transaction-level execution
Page 14 Adopting the new revenue recognition standard
Journey to implement the new standardSolution development activities
Finalize new accounting policy and determine data requirements for enhanceddisclosure requirements
Transition method selection
► 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
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
Develop and design policy changes design system and process enhancements
Individualcontracts or
revenuestreams
Quantify potentialfinancial impacts forindividual contractsor revenue streams
Training on company-specificpolicies and procedures
Identify tax method changes and other considerations; I/C prices, transfer pricing andindirect taxes, and finalize tax policy
Extrapolatepotential financial
impacts topopulation for
predictive impact
Ongoing project management
Definebusiness
rules
Page 15 Adopting the new revenue recognition standard
Journey to implement the new standardImplementation activities
Train and implement new policy (including business processes, internalcontrols and IT systems)
► 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
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 UATtesting
► Detailed production cut-over plan► Business readiness checklist► Planned revisions to global tax
return► Form 3115s and statements► Tax memorandums
Test and remediate I/C changes Sustain I/C environment
File method changes and adjust transfer pricing
Document, train and execute new tax policies and procedures
Go live in future state environment
Ongoing project management
Page 16 Adopting the new revenue recognition standard
The challenge aheadMore than an accounting change
Managementinformation
Employeeincentives
Tax
Controlenvironment
Sales andother
commercialoperations
Projectmanagement
Training andcommunication
Processesand systems
Investorrelations
Sectorissues
Organizationalimpacts
Page 17 Adopting the new revenue recognition standard
The challenge aheadDrivers of complexityLess complex
► 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 enterprise resource planning
(ERP) system► Strong organizational change
management
More complex
► Long-term contracts► Multiple, diverse businesses► Global operations► Decentralized► More and more complex estimates and
judgments required by new revenuerecognition standard
► Additional performance obligations undernew model
► Multiple, disparate IT systems► Organization struggles to implement
change
Page 18 Adopting the new revenue recognition standard
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?
The challenge aheadKey questions
Page 19 Adopting the new revenue recognition standard
Projectmanagement
► Develop a comprehensive project management function that is appropriately staffed and includes meaningfulexecutive sponsorship
► Enable a governance structure with appropriate organizational representation and appropriate authority to quicklyrespond 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 trackingit
► 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 anaccelerated and predictable manner
► Execute a fact-based point-in-time “health check” analysis at specific phases of a program, using as input to stagegate decisions and to inform management on major risks prior to making key go/no-go decisions
► Develop mechanism to monitor standard-setting changes
Investorrelations
► 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
Employeeincentives
► Identify employee compensation plans that are based on the entity’s reported revenue; determine the impact to theamount 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 andterms of share-based payment arrangements
► Develop appropriate and timely communication plans around any changes
The challenge aheadEnterprise considerations for companies facing significant changes
Page 20 Adopting the new revenue recognition standard
Tax accountingand methods
► Consider new temporary differences that may arise and/or existing temporary differences that may be computeddifferently; 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 mayaffect judgments regarding the realizability of deferred tax assets
► Consider any impact on statutory reporting (where statutory reporting follows or is based on International FinancialReporting Standards (IFRS)) and the related tax implications
► Evaluate the current and deferred tax consequences of the cumulative effect adjustment reported in the period ofadoption
► Consider taxpayers applying a deferral method for advance payments and understand the potential impact given theamounts deferred for tax purposes are determined by reference to the amounts deferred for financial statementpurposes
► Consider whether a change in revenue recognition for financial statement purposes is also a permissible method fortax purposes
► Evaluate intercompany prices and transfer pricing policies where adoption changes revenue, profits or third-partycomparables 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
The challenge aheadEnterprise considerations for companies facing significant changes
Page 21 Adopting the new revenue recognition standard
Processes andsystems
► Update key processes and controls for any changes in how transactions, including in-scope costs, are accounted forunder the new standard
► Develop processes and enhance IT systems for incremental data requirements and transaction processing logic forthe 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 expandcapability 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
Commercialoperations
► Identify key revenue streams across products and services, geographies, quantitative metrics, enabling systems andprocesses, key contract attributes, current internal control over financial reporting (ICFR) risk assessment andcompliance 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
Training andcommunication
► 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
The challenge aheadEnterprise considerations for companies facing significant changes
Page 22 Adopting the new revenue recognition standard
Controlenvironment
► Update enterprise risk management activities to encompass added risks in addressing new revenue recognitionstandard
► Evaluate need for additional processes and controls required to support increased judgments and estimates inrevenue 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 onautomated system controls and monitoring
► Update internal control monitoring plans (e.g., internal audit plan, Sarbanes-Oxley testing scope) to encompasschanges 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 tomanage revenue recognition risks
► Apprise audit committee on impact of new revenue recognition standard to risk and control environment andmanagement’s plan to address the impact
Managementinformation
► 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 fornon-accounting management
The challenge aheadEnterprise considerations for companies facing significant changes