implementation tips for revenue recognition...

ImplementationTips for RevenueRecognitionStandardsJune 20, 2017

Adopting the new revenue recognition standard

► Overview

► Journey to implement the new standard

► The challenge ahead

Agenda


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.


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)


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


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


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


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


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).



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).



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.


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


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


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


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


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


The challenge aheadMore than an accounting change

Managementinformation

Employeeincentives

Tax

Controlenvironment

Sales andother

commercialoperations

Projectmanagement

Training andcommunication

Processesand systems

Investorrelations

Sectorissues

Organizationalimpacts


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


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


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


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



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



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


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