webinar slides: implementing revenue recognition
TRANSCRIPT
#cbizmhmwebinar 1
CBIZ & MHM Executive Education Series™
Revenue Recognition Implementation Brad Hale & Mark Winiarski Nov. 7 & 22, 2016
#cbizmhmwebinar 2
About Us
• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide
A member of Kreston International A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
#cbizmhmwebinar 3
Before We Get Started…
• To view this webinar in full screen mode, click on view options in the upper right hand corner.
• Click the Support tab for technical assistance.
• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
#cbizmhmwebinar 4
CPE Credit
This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
#cbizmhmwebinar 5
Disclaimer
The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
#cbizmhmwebinar 6
Presenters
Brad began his career in public accounting with Deloitte and most recently
served as the Director of Accounting and Risk Management for Bloomin’ Brands
Inc., where he was an integral part of completing their IPO. He focuses on
building MHM’s attest footprint through relationships with companies facing
complex technical accounting matters and growing the Accounting Advisory
practice, particularly through Topic 606 advisory engagements.
Brad is a member of MHM’s Professional Standards Group where he performs
internal consultations on complex private or public company engagements, as
well as focuses on the firm’s SEC audit methodology. He serves the PSG as a
subject matter expert in revenue recognition, leasing, business combinations,
share-based compensation, debt vs. equity treatment, complex financial
instruments, goodwill, and consolidations & VIEs.
727.572.1400 • [email protected]
BRAD HALE, CPA MHM’s Professional Standards Group
#cbizmhmwebinar 7
Presenters
Located in our Kansas City office, Mark is a member of MHM’s
Professional Standards Group (PSG). Mark's role includes instructing in
our national training program, presenting as a subject matter expert at
webinars and conferences, and preparing MHM publications on
accounting and auditing issues.
As a PSG member, Mark consults with clients and engagement teams
across the country in many areas of accounting and auditing. Mark has
served clients as an auditor, consultant and advisor in numerous
industries including manufacturing, distribution, mining, retail sales,
services and software.
816.945.5614 • [email protected] • @KCWini
MARK WINIARSKI, CPA MHM Shareholder
#cbizmhmwebinar 8
Agenda
02
01
03
04
Challenges and Lessons Learned
Topic 606Example
Implementation Strategy
Questions
#cbizmhmwebinar 9
IMPLEMENTATION STRATEGY
9
#cbizmhmwebinar 10
2019 1
2
3
January 1, 2017 – Entities can elect to early adopt
January 1, 2018 – Public Business Entities* must adopt
December 31, 2019 – All other entities must adopt
2017
* Includes NFP that has issued, or is conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or over the counter market, and EBPs that files/furnishes financial statements with the SEC
Topic 606 Calendar Year-End Timeline
#cbizmhmwebinar 11
#cbizmhmwebinar 12
Stages of Implementation
• Brainstorm with cross functional team to identify all revenue streams and areas in which revenue has an impact (i.e. debt or compensation arrangements)
• Scope the project and develop a project plan
• Deliver a high-level power point summary of areas most subject to change for client to share with constituents
1 Planning
#cbizmhmwebinar 13
Stages of Implementation
• Begin with preparation of an example evaluation tool for each revenue stream or a representative contract
• Gain consensus with client’s audit firm
• Complete the evaluation tool for the remainder of the client’s revenue streams or contracts
2 Contract
Deep-dive
#cbizmhmwebinar 14
Stages of Implementation
• Timing should occur closer to implementation date
• Assist client with quantifying impact of adoption and preparation/review of disclosures
3 Disclosure
and Quantification
#cbizmhmwebinar 15
TOPIC 606 PRACTICE AID AND EXAMPLE
#cbizmhmwebinar 16
5-Step Process
1 • Identify the contract(s) with a customer
2 • Identify the performance obligations in the contract
3 • Determine the transaction price
4 • Allocate the transaction price to the performance
obligations in the contract
5 • Recognize revenue when (or as) the entity satisfied
a performance obligation
#cbizmhmwebinar 17
Customer contracts with Consultant Co. on a cost recovery project that includes consulting on the design of A/P controls. The terms are as follows: • For every dollar of cost recovery (i.e. duplicate expenses, etc.) Consultant
Co. receives $0.10 • If Consultant Co. recovers more than $100,000 for the customer, a
$10,000 bonus is received • Consultant Co. receives a $5,000 fixed fee for the A/P internal control
consulting recommendations, which is determined to be representative of standalone selling price
• Management determines the standalone selling price of the cost recovery project as $20,000
• Consultant has completed 10 similar projects for companies this size in this industry
• The threshold of $100,000 has been eclipsed in 8 of 10 of those similar projects
Example: Cost Recovery
#cbizmhmwebinar 18
Executive Summary
#cbizmhmwebinar 19
Scope
#cbizmhmwebinar 20
Step 1: Identify the contract(s) with a customer
#cbizmhmwebinar 21
Step 2: Identify the performance obligations in the contract
#cbizmhmwebinar 22
Step 2: Identify the performance obligations in the contract
#cbizmhmwebinar 23
Step 2: Identify the performance obligations in the contract
#cbizmhmwebinar 24
Step 3: Determine the transaction price
#cbizmhmwebinar 25
Estimating Variable Consideration
$ Recovered
Variable consideration +
Incentive Probability Expected
Value $60,000 $6,000 1% $ 60
70,000 7,000 2% 140 80,000 8,000 4% 320 90,000 9,000 6% 540 100,000 20,000 24% 4,800 110,000 21,000 20% 4,200 120,000 22,000 16% 3,520 130,000 23,000 10% 2,300 140,000 24,000 8% 1,920 150,000 25,000 6% 1,500 160,000 26,000 3% 780
$20,080
#cbizmhmwebinar 26
Step 3: Determine the transaction price
Variable consideration is constrained to the amount for which it is probable that a significant reversal or revenue will not occur.
#cbizmhmwebinar 27
Evaluating the Constraint on Variable Consideration
$ Recovered
Variable consideration +
Incentive Probability Expected
Value $60,000 $6,000 1% $ 60
70,000 7,000 2% 140 80,000 8,000 4% 320 90,000 9,000 6% 540 100,000 20,000 24% 4,800 110,000 21,000 20% 4,200 120,000 22,000 16% 3,520 130,000 23,000 10% 2,300 140,000 24,000 8% 1,920 150,000 25,000 6% 1,500 160,000 26,000 3% 780
87% $20,080
#cbizmhmwebinar 28
Step 4: Allocate the transaction price
#cbizmhmwebinar 29
Methods of Determining Stand-alone Value
Adjusted Market
Assessment
Expected Cost plus a Margin
Residual Approach
#cbizmhmwebinar 30
Step 5: Recognize revenue
Cost Recovery: The transfer of control is occurring as savings are being identified, the most appropriate measure is (Savings to date/Expected savings over the life of the contract). Controls Consulting: Customer is receiving the benefit and we are transferring control of the findings as hours are devoted to the project, the most appropriate measure of progress is hours completed in relation to expected total hours.
#cbizmhmwebinar 31
Recognizing performance obligations
Selecting a method to calculate variable
consideration
Considering qualitative
information
Key Takeaways
Evaluating the
constraint on variable
consideration
Reassessing assumptions
each reporting
period
#cbizmhmwebinar 32
CHALLENGES AND LESSONS LEARNED
32
#cbizmhmwebinar 33
Would Anyone Early Adopt?
• Anticipate early adoption to be rare
• Entities that have accelerated revenue recognition may consider early adoption • Software entities • Matchmaking services
(insurance brokers) • Specialized manufacturing
#cbizmhmwebinar 34
Choosing a Transition Approach
• Retrospective:
• Modified Retrospective:
*Disclosure of difference from Topic 605 is required 1 Adjust opening retained earnings
*Disclosure of changes under Topic 606 is required 1 Adjust opening retained earnings
Financial Statements Year ended December 31, 2018, 2017 and 2016
2018 2017 2016 Reported based on: Topic 606 Topic 606* Topic 606*1
Financial Statements Year ended December 31, 2018, 2017 and 2016
2018 2017 2016 Reported based on: Topic 606*1 Topic 605 Topic 605
#cbizmhmwebinar 35
Transition Considerations
• Retrospective • Re-audit of prior period amounts
• Timing • Cost
• Modified Retrospective • Audit Topic 605 disclosure
in year of adoption • Resource availability • Cost
• “Lost Revenue” • “Double Expenses”
Is there a change in accounting method
for income tax reporting?
#cbizmhmwebinar 36
Contract Issues
• Do current sales contracts complicate accounting? • Financing features • Extended or implied warranties • Bill and hold arrangements • Options, coupons, discounts • Modifications
#cbizmhmwebinar 37
• Does adoption impact non-sales contracts? • Loan covenants
• EBITDA, Net Income based covenants • Working capital changes
Accrue contract costs Distinguishing accounts receivable and contract assets Significant Financing
• Employment • Sales commissions • Bonus plans • Stock based compensation
#cbizmhmwebinar 38
Control Environment & Risk Assessment
38
• Control Environment • Demonstrates tone at the top • Exercises oversight responsibility • Establishes structure, authority,
and responsibility • Maintains an effective internal
audit function • Demonstrates commitment to
competence
• Risk Assessment • Identifies and mitigates
risk • Considers the potential
for fraud • Assesses the risk of
meeting the company’s objectives
#cbizmhmwebinar 39
Information and Communication & Monitoring
39
Information and communication • Gathers the appropriate information to make judgments and satisfy disclosure requirements
•Retains data for reliable restatement
Monitoring • Selects, develops, and
performs ongoing evaluations of internal control
• Evaluates and communicates deficiencies in internal control in a timely manner
#cbizmhmwebinar 40
Internal Control Areas of Concern
Variable consideration •Identification •Estimation Utilizing a portfolio
Combining contracts
Contract costs
Industry specific issues •Right of return process •Warranty evaluation •Stand-alone value
#cbizmhmwebinar 41
Control Activities: Step #1
41
Identifying contracts that meet the criteria under Topic 606
Reassessing arrangements not initially meeting the criteria
Assessing management’s and the customer’s ability to perform
Ensuring payments terms are properly considered
Assessing the collectability criterion
Evaluating whether to combine contracts
Evaluating contract modifications
#cbizmhmwebinar 42
Control Activities: Step #2
42
Identifying both explicit and implicit performance obligations
Evaluating whether a promised good or service is distinct
Evaluating whether a series of promised goods or services should be treated as a single performance obligation
#cbizmhmwebinar 43
Control Activities: Step #3
43
Estimating the transaction price, particularly any form of variable consideration
If valuation experts are utilized, assessing their competence and objectivity
Evaluating whether any portion of variable consideration should be constrained
Determining the fair value of noncash consideration
Identifying and measuring whether there is a significant financing component in the contract
Determining the accounting for consideration payable to a customer
#cbizmhmwebinar 44
Control Activities: Steps #4 and #5
44
• Estimating standalone selling price, including maximizing observable inputs
• Determining the appropriate transaction price allocation, including variable consideration and discounts
Step #4
•Determining whether performance obligations are satisfied at a point in time or over time
•Measuring progress toward satisfaction of a performance obligation measured over time
•Recognizing revenue only when or as control is transferred to a customer
Step #5
#cbizmhmwebinar 45
Increased Presentation and Disclosure Requirements - Examples
The disclosure requirements are significantly in excess of what is currently required under U.S. GAAP.
Delineation between contract assets, contract liabilities and receivables
Quantitative disclosures showing over-time and point-in-time revenues
Qualitative discussion about economic factors impacting revenues and
cash flows • Customer types
• Geographical locations • Types of contracts
#cbizmhmwebinar 46
? QUESTIONS
#cbizmhmwebinar 47
If You Enjoyed This Webcast…
Upcoming Courses: • 11/15 & 12/1: Individual Year-End Tax Planning Tips for 2016 and Beyond
• 11/29 & 12/13: The Combined Benefits of Cost Segregation and Tangible Property, Part 3 – Compliance Considerations and Partial Asset Dispositions
• 11/30: Accounting for Impairment under the Credit Loss Impairment Rules
• 12/6: Understanding Complex Debt and Equity Transactions
Recent Publications: • Revenue Recognition Serial: Part 7 – Revenue Recognition and Licensing Arrangements
• Understanding the Leasing Standard: Sale and Leaseback and Other Types of Lease Transactions
• Tax Rates and Inflation-Adjusted Figures Released for 2017
• Expanding Disclosure for New Accounting Standards and Other Updates from the EITF
#cbizmhmwebinar 48
Connect with Us
linkedin.com/company/ mayer-hoffman-mccann-p.c.
@mhm_pc
youtube.com/ mayerhoffmanmccann
slideshare.net/mhmpc
linkedin.com/company/ cbiz-mhm-llc
@cbizmhm
youtube.com/ BizTipsVideos
slideshare.net/CBIZInc
MHM CBIZ
#cbizmhmwebinar 49
THANK YOU CBIZ & Mayer Hoffman McCann P.C. [email protected]