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BKD Webinar Series

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Understanding & Implementing Revenue Recognition: Part 2

May 1, 2018

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TO RECEIVE CPE CREDIT

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Answer polls when they are provided

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If all eligibility requirements are met, each participant will be emailed their

CPE certificate within 15 business days of webinar

PRESENTERS Steve SauerDirector

Alissa KleinSenior Manager

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WEBINAR SERIES

Part 1: Introduction & Overview of the 5-Step Model

Part 2: Adoption Methods, Implementation Considerations & Examples

Quick Recap – Scope • All revenue from contracts with customers• Included

• Tuition & fees

• Exchange grants

• Membership dues

• Sponsorship revenue

• Royalty revenue

• Not included• Contributions

• Non-exchange grants

• Leases

• Insurance reimbursements

• Grantee remuneration

• Non-monetary exchanges

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QUICK RECAP – KEY PRINCIPLE

Key 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

Quick Recap – 5-Step Model

Identify the contract with a customer

Identify the performance obligations (promises)

in the contact

Determine the

transaction price

Allocate the transaction price to the

performance obligations

in the contract

Recognize revenue

when (or as) the reporting organization satisfies a

performance obligation

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QUICK RECAP – ANTICIPATED EFFECT

PreponderanceExpected Accounting Change

Disclosures

Tuition & Fees HIGH HIGH HIGH

Membership Dues HIGH MODERATE HIGH

Exchange Grants HIGH LOW HIGH

Sponsorship Revenue HIGH LOW HIGH

Royalty Revenue HIGH LOW HIGH

EFFECTIVEDATES

• Public Entity*: Annual reporting period beginning after December 15, 2017; early adopt after December 15, 2016

• Nonpublic Entity: Annual reporting period beginning after December 15, 2018; early adopt after December 15, 2016

*Includes conduit debt obligors

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ADOPTION METHODS

• Full retrospective

• Retrospective application to all prior periods presented

• Modified retrospective

• Cumulative effect recognized upon adoption, i.e., January 1, 2019, for nonpublic entities

• Certain disclosures required to bridge incomparability b/t reporting periods

Full Retrospective (At a Glance)• Some “practical expedients” in re-casting PY financial

statements• No effect on contracts started & completed in same fiscal

year• Use of hindsight allowed for completed contracts (w/

variable consideration)• Disclosure regarding timing of remaining revenue to be

recognized not required for reporting periods presented before the date of initial application

• Aggregate the effect of all contract modifications occurring before the earliest period presented

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MODIFIED RETROSPECTIVE (AT A GLANCE)

Two options to consider

• Applied to ALL contracts at date of application, or

• Applied to ONLY incomplete contracts at date of application

Practical expedient

• Aggregate the effect of all contract modifications that occur before the earliest period presented

PRACTICAL ADOPTION CONSIDERATIONS

• “Dual” accounting of comparative period

• Changes to financial ratios/metrics (bank, boards, other)

• Emphasis of matter paragraph to opinion

• Change in accounting principle footnote

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Presentation Requirements• Contract asset: Entity’s right to consideration, as a result of

transferred goods or services, while right to payment is conditioned upon additional performance (must be distinguished from receivables)

• Receivable: Unconditional right to payment

• Contract liability: Entity’s obligation to transfer goods or services for which consideration has been received or is due, i.e., deferred revenue

Disclosure Requirements (Conduit Debt Obligor)• Objective - to enable users to understand the nature, amount, timing &

uncertainty of revenue and cash flows from customer contracts

• Contracts with customers• Revenue and any impairment losses• Disaggregation of revenues - depict how the nature, amount, timing &

uncertainty of revenue and cash flows are affected by economic factors• Contract balances - a roll-forward of contract assets/liabilities (w/ corresponding

effects on revenues) & CY revenues recognized from PY satisfactions of performance obligations (changes in transaction price)

• Performance obligations – when satisfied, significant payment terms, nature of goods or services promised to transfer, obligations for returns and refunds

• Transaction price to remaining performance obligations – amount allocated and expected timing of recognition

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DISCLOSURE REQUIREMENTS (CONDUIT DEBT OBLIGOR)• Significant judgements

• Determining timing of satisfaction of performance obligations• Over time – output or input methods used & why method is appropriate• Point in time – judgments made in determining when transfer of control occurs

• Determining transaction price & allocation• Methods, inputs, assumptions in calculating the transaction price• Assessment if variable consideration is constrained• Allocation of transaction price (includes estimates of standalone selling prices & allocation of

discounts & variable consideration)• Measuring obligations for returns, refunds & similar obligations

• Entity’s policy election & accounting for costs to obtain/fulfill a contract

• Any practical expedients used & their effect on the financial statements

DISCLOSURE REQUIREMENTS (NON-PUBLIC)• Contracts with customers

• Revenue & any impairment losses• Disaggregation of revenue – point in time vs. over time &

qualitative information• Opening & closing balances of contract assets, receivables &

contract liabilities• Performance obligations – when satisfied, significant payment

terms, nature of goods or services promised to transfer, obligations for returns & refunds

• Significant judgments• Methods used to recognize revenue• Assumptions in identifying whether an estimate of variable

consideration is constrained

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Disaggregation of Revenue

2019 2018

University services transferred over time:Tuition $ - $ -Housing - -Auxiliary - -

- -Auxiliary sales at point in time: - -

$ - $ -

Implementation & Audit Considerations

“Implementing FASB ASC 606 will likely be the most significant and comprehensive change for most entities and their auditors in many years.”

– AICPA A&A Guide – Revenue Recognition

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IMPLEMENTATION & AUDIT

CONSIDERATIONS

• Task force

• Correct revenue streams identified

• Internal control design to prevent or detect/correct material errors

• Policy considerations

• Documented considerations

• Expanded disclosures, particularly in year of adoption/transition

IMPLEMENTATION & AUDIT

CONSIDERATIONS

• Reviewing accounting policies & practical expedients

• Reviewing contracts & related accounting

• Evaluating significant management judgments & estimates

• Correct application of accounting

• Evaluating new disclosures

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Questions?Question Break

EXAMPLE – TUITION & FEES

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TUITION & FEES – STEP 1: IDENTIFY THE CONTRACTFive Required Criteria• Mutual approval of contract: Portfolio method is provided

for contracts with similar characteristics & accounting implications

• Identify rights regarding goods or services to be transferred: A contract does not exist if each party has the unilateral right to terminate without financial penalty

• Identify payment terms for goods or services to be transferred

• Commercial substance• Probable substantial collectability: Evaluate all funding

sources to consider student’s ability/intent to pay consideration when due

Tuition & Fees – Step 2: Identify the Performance Obligations• Performance obligations

• Identify distinct goods or services: potentially, tuition & housing

• Identify series of distinct goods or services that are substantially the same & have the same pattern of transfer to the [customer]: potentially, student & athletic facility fees

• FinREC believes that in most cases, tuition & housing are distinct services & therefore, separate performance obligations

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Tuition & Fees – Step 3: Determine the Transaction Price• Determine the (total) amount (per contract) to which the

entity expects to be entitled, which may include• Fixed amounts (tuition, housing & fees)• Variable amounts (discounts, withdrawal refunds, etc.)• Significant financing (expected payments beyond one

year)• Consideration payable price concession (award-based

scholarships)

TUITION & FEES – STEP 3: DETERMINE THE TRANSACTION PRICE

• Right to Withdraw• If consideration is received from a student & the entity expects to refund

some or all of the consideration, this would be considered variable consideration & the entity would need to recognize a refund liability

• Institutions would generally evaluate at the portfolio level

• Impact of Collectability• Presumption to have a “contract”• Student’s credit risk not considered when determining the transaction

price; rather, credit risk is considered in evaluating the recoverability of related contract assets or receivables

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TUITION & FEES – STEP 4: ALLOCATE THE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS• Allocation based on relative stand-alone selling

prices

• Determine whether financial aid & scholarships apply to tuition, housing or both

Tuition & Fees – Step 5: Recognize Revenue• Amounts recognized when (or as) entity satisfies a performance obligation

through the transfer of a good or service• Over time: tuition & housing, other fees• At a point in time: point-of-sale items (bookstore)

• For a June 30 entity, fall/spring semesters will fall within fiscal year; summer could create some nuances

• Prepayments/deposits would create a contract liability where liability would be reduced/recognized over period of transfer

• Contract assets would be recognized for any uncompensated performance• Receivables would be recognized upon unconditional right to

consideration

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TUITION & FEES – JOURNAL ENTRIES – EXAMPLE 1: PAYMENT AFTER ENTITY PERFORMANCE

1. Student pays nonrefundable enrollment deposit

DR: Cash

CR: Contract Liability (Deferred revenue)

2. Student enrolls; bill is sent

No entry

3. Bill is due (Two weeks prior to class)

No entry

4. First day of class – through end of reporting period

DR: Contract Liability

CR: Revenue

5. Student withdraws from one class

No entry, but balance “due” in system is adjusted

6. Withdrawal period ends

DR: Receivable

CR: Contract Liability

7. Throughout remainder of semester

DR: Contract Liability

CR: Revenue

8. Student pays

DR: Cash

CR: Receivable

TUITION & FEES – JOURNAL ENTRIES – EXAMPLE 1: PAYMENT BEFORE ENTITY PERFORMANCE1. Student pays nonrefundable enrollment deposit

DR: Cash

CR: Contract Liability (Deferred revenue)

2. Student enrolls; bill is sent

No entry

3. Student pays bill

DR: Cash

CR: Contract Liability

CR: Refund Liability

4. First day of class – through end of reporting period

DR: Contract Liability

CR: Revenue

5. Student withdraws from one class

DR: Refund Liability

CR: Cash

6. Withdrawal period ends

No entry

7. Throughout remainder of semester

DR: Contract Liability

CR: Revenue

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EXAMPLE – MEMBERSHIP DUES

MEMBERSHIP DUES – STEP 1: IDENTIFY THE CONTRACTFive Required Criteria• Mutual approval of contract: Portfolio method is provided for

contracts with similar characteristics & accounting implications• Identify rights regarding goods or services to be transferred: A

contract does not exist if each party has the unilateral right to terminate without financial penalty

• Identify payment terms for goods or services to be transferred• Commercial substance• Probable substantial collectability: Evaluate member’s ability/intent

to pay consideration when dueFinREC believes that contract existence is generally met following the “order” for membership services

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Membership Dues – Step 2: Identify the Performance Obligations• Performance obligations

• Identify distinct goods or services: potentially, software/IP access, periodicals, member discounts

• Identify series of distinct goods or services that are substantially the same & have the same pattern of transfer to the member: potentially, on-demand services

• P/Os exist regardless of the member’s use of the benefits• Entities to determine if the good or service is “distinct” &

“material” within the context of the contract

Membership Dues – Step 3: Determine the Transaction Price• Determine the (total) amount (per contract) to which the

entity expects to be entitled, which may include• Fixed amounts (dues)• Variable amounts (discounts, rebates, incentives, etc.)• Significant financing (expected payments beyond one

year)• Consideration payable (refunds)

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MEMBERSHIP DUES – STEP 3: DETERMINE THE TRANSACTION PRICE

• Impact of Collectability• Presumption to have a “contract”• Member’s credit risk not considered when determining the

transaction price; rather, credit risk is considered in evaluating the recoverability of related contract assets or receivables

MEMBERSHIP DUES – STEP 4: ALLOCATE THE TRANSACTION PRICE TO PERFORMANCE OBLIGATIONS

MEMBERSHIP DUES: $100

QUARTERLY NEWSLETTER: ($25) (FMV = $6.25 per)

MEMBER BENEFITS: $75 (FMV)

CONTRIBUTION: $0

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Membership Dues – Step 5: Recognize Revenue

• Amounts recognized when (or as) entity satisfies a performance obligation through the transfer of a good or service

• Over time: member services• At a point in time: periodicals, events

EXAMPLE – EXCHANGE GRANT

• Special considerations• Grants accounted for under Topic 606 would only include

transactions where commensurate value (a good or service) is provided to the grantor in exchange for the funding, i.e., health or other studies/projects, research ownership rights

• Performance obligations would need to be ID’ed

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Example – Sponsorship Revenue• Special consideration

• Is this a contribution or does the sponsor receive tangible benefits, i.e., rights to intangible assets

• Bifurcation

Intellectual Property – Licenses & Royalties

• License of intellectual property – follow guidance 606-10-55-3-65B• Functional IP

• Satisfied at a point in time• Substantial portion of its utility from its stand-alone functionality• Examples – software, biological compounds or drug formulas, media content (films,

television shows, music)• Symbolic IP

• Satisfied over time• Substantially all of its utility derived from its association with the licensor’s past or

ongoing activities• Examples – brands, team names, logos, franchise rights

• WARNING – EXCEPTION TO THE EXCEPTION: Sales or Usage-based Royalties –recognize revenue at the later of when sales or usage occurs or the satisfaction of the performance obligation

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EXAMPLE – NON-EXCHANGE GRANT

• Currently, an Exposure Draft on an updated decision tree

Questions?

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Continuing Professional Education (CPE) Credits

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

CPE Credit

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

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Thank You!Steve Sauer | ssauer@bkd.comAlissa Klein | aklein@bkd.com

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