The New Revenue Standard is Here: What to Do Now
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The document discusses the new revenue recognition standard jointly issued by the FASB and IASB, intended to harmonize accounting practices worldwide and provide a comprehensive approach for revenue recognition from customer contracts, effective January 2017. It outlines the core principles and five-step process for revenue recognition, emphasizing the importance of identifying contracts, performance obligations, and the transaction price. Additionally, it highlights the necessary changes for technology companies, including potential impacts on their accounting systems and reporting practices.
The New Revenue Standard is Here: What to Do Now
- 1. ConfidentialThe New Revenue Standard is Here: What to Do NowJeffrey Werner, Werner Consulting GroupJuly 30, 2014 © 2014 Tensoft All Rights Reserved. 1
- 2. Confidential Welcome to Today’s Event Caprice Murray, Tensoft © 2014 Tensoft All Rights Reserved. 2
- 3. 3 Confidential •Submit questions any time using the “Question and Answer”pane. •CPE certificates will be emailed to everyone who is eligible by end of business on Monday 8/4. •Submit questions after the webcast to Jeffrey Werner, wernerj@sbcglobal.net, or to Caprice Murray, caprice@tensoft.com. Webcast Briefing © 2014 Tensoft All Rights Reserved.
- 4. 4 Confidential Tensoft, Inc. ●Business software solutions provider ●Focus on technology companies ●Software for revenue management (RCM) Tensoft RCM Product Line ●Complete revenue management suite ●Billing management for contracts ●Business model transaction flow support ●Visibility, Productivity, Compliance About Tensoft © 2014 Tensoft All Rights Reserved.
- 5. Confidential Tensoft RCM Revenue Management Sales Transaction •Generated based on Go-To-Market Model Revenue Agreement •Workflow / policy for document type •Revenue fair value allocation •Revenue Rules Revenue Recognition and Analysis Processes Sponsored by Tensoft, Inc. www.tensoft.com
- 6. Confidential Tensoft RDM Process Flow © 2014 Tensoft All Rights Reserved. RevenueEngine Reporting and Analytics Revenue Rules Determined Valuation Sales Transaction Document Flow Revenue Sub-Ledger RCM Contract ERP Document Website or CRM To ERP
- 7. ConfidentialToday’s Presenter: Jeffrey Werner, Werner Consulting Group © 2014 Tensoft All Rights Reserved. 7
- 8. New Revenue Recognition StandardRevenue From Contracts with CustomersJuly 30, 2014 8
- 9. 9 Agenda •Overview –Who, What, When, Where, Why •Process and Scope •Exposure Draft Outline •Five New Principles of Revenue Recognition •Differences from Current US GAAP •Implementation Guidance •Effect of Changes on Technology Companies
- 10. 10 FASB IASB Revenue Recognition Project Who Is Issuing the Exposure Draft? –Jointly issued by the FASB (US) and IASB (Worldwide) –Will be part of US GAAP when final –Will be part of IFRS when final
- 11. 11 FASB IASB Revenue Recognition Project What Is the Exposure Draft? –A 217 page set of proposed accounting standards for revenue recognition –Project Update July 24, 2013, 24 pages –Currently in finalization by FASB & IASB –Copies at FASB.org •webcast, podcast, roundtable schedule
- 12. 12 FASB IASB Revenue Recognition Project When Is the Exposure Draft Final and Effective? –Final pronouncement to be final in Q2 2014 –Expected Effective date is 2017
- 13. 13 FASB IASB Revenue Recognition Project Where Will The Proposal Be Effective? –The new standard when adopted will be required accounting: –In the US under US GAAP issued by the FASB –In Countries following IFRS •(more than 113 countries Worldwide)
- 14. 14 FASB IASB Revenue Recognition Project Why Is This Happening? –Part of ongoing process to align or “harmonize” accounting worldwide –To establish one comprehensive revenue recognition approach for all customer contracts –Remove current inconsistencies –Improve comparisons between companies –Provide more information and disclosures –Simplify accounting and guidance
- 15. 15 FASB IASB Revenue Recognition Project •Process –Years of discussions –Exposure Draft # 1 June 2010 –Comment period closed October 2010 –Exposure Draft # 2 November 2011 –Second Comment period closed March 13, 2012 –Project Update July 24, 2013 –Issue final standard in Q2 2014 –Expected Effective Date January 2017 –Transition Resource Group -TRG
- 16. 16 FASB IASB Revenue Recognition Project •Scope All Contracts with customers (except those covered by another rule Leases, Insurance and Financial Instruments) Year of adoption methods and disclosure No early adoption
- 17. 17 FASB IASB Revenue Recognition Project Retrospective adoption Requires comparable presentation 2017 with 2015 and 2016 restated Simplified Transition Method Apply to all active contracts at transition date Cumulative effect of change in balance sheet Disclose amount of change each line item Explain difference between new and old in year of adoption (and quarters)
- 18. 18 FASB IASB Revenue Recognition Project Current Revenue Model •Four Principles of Revenue Recognition –Evidence of Arrangement –Fixed and Determinable Fee –Delivery –Collectability
- 19. 19 FASB IASB Revenue Recognition Project New Revenue Model 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” -Five Steps to Apply Core Principle
- 20. 20 FASB IASB Revenue Recognition Project Five Steps to Revenue Recognition •Identify the Contract with Customer •Identify the Separate Performance Obligations •Determine Transaction Price •Allocate Transaction Price to Obligations •Recognize Revenue on Satisfaction of Performance Obligation
- 21. 21 FASB IASB Revenue Recognition Project Identify the Contract with Customer –Commercial Substance –Parties have approved –Identifiable rights and obligations on goods or services –Identifiable payments terms Combination of Contracts Contract Modifications
- 22. 22 FASB IASB Revenue Recognition Project Identify the Separate Performance Obligations –Identify distinct goods and services –Distinct if sold separately –Distinct if customer can benefit independently of other elements or customer can combine with other resources –Treat as one obligation if performed together or at same time
- 23. 23 FASB IASB Revenue Recognition Project Determine Transaction Price –Amount the vendor expects to be entitled to in transaction –Variable consideration –Time value of money –Non cash consideration –Consideration payable to customer
- 24. 24 FASB IASB Revenue Recognition Project Allocate Transaction Price to Obligations –Determine stand alone selling price of each performance obligation at contract inception –Estimate stand alone selling price if not readily available •Adjusted market assessment approach •Expected cost plus margin •Residual approach (if highly variable or uncertain)
- 25. 25 FASB IASB Revenue Recognition Project Allocate Transaction Price to Obligations –Allocate revenue based on the relative value –Discounts and contingent revenue may relate to a specific contract obligation and therefore may be applied to that contract obligation –Adjust for changes in contract price after inception on same basis as original allocation
- 26. 26 FASB IASB Revenue Recognition Project Recognize Revenue on Satisfaction of Performance Obligation –Recognize each performance obligation as it is satisfied –Over a period of time or a point in time –Obligations are satisfied when the vendor transfers control of the good or service to the customer
- 27. 27 FASB IASB Revenue Recognition Project –Control is transferred to the customer over time when: •An asset is created or enhanced and the customer controls the asset or enhancement •No asset is created but –Customer receives and consumes the benefit as the vendor performs the service –Another entity would not need to re-perform the work completed if another entity fulfilled the remaining portion of the obligation –Vendor has the right to payment for performance completed to date and expects to get payment
- 28. 28 FASB IASB Revenue Recognition Project –Control is transferred to the customer at a point in time when: •Vendor has right to payment for asset •Customer has legal title to asset •Vendor transferred physical possession to customer •Customer has the significant risks and rewards of ownership of the asset •Customer has accepted the asset
- 29. FASB IASB Revenue Recognition Project Current Revenue Model Delivery •Substantive performance •Risks and Rewards pass to customer •Acceptance •Point in time / over time •Multiple Element Rules New Revenue Model Performance •Goods or services transferred to customer •Transfer of control: –Right to payment –Passage of legal title –Physical possession –Risks and rewards –Customer acceptance 29
- 30. FASB IASB Revenue Recognition Project Current Revenue Model Collectibility •Must be collectible to recognize •Defer if uncollectible or not reasonably assured •Cash basis if collectibilitya concern New Revenue Model Credit Risk •Collection “Probable” •Treat as Contingent •Recognize amount expected to receive •If significantly in doubt, the contract may not exist 30
- 31. FASB IASB Revenue Recognition Project Current Revenue Model Fixed and Determinable •Recognize only fixed and determinable amounts •Contingent revenue deferred for potential reductions •Potential increases when occur New Revenue Model Expected Amount •Recognize estimated amount •Expected value or •Most likely amount •Estimate variable revenue •Future period adjustments 31
- 32. FASB IASB Revenue Recognition Project Current Revenue Model Revenue over time •Straight line, unless different pattern •Proportional performance •Percentage of completion –Reasonable dependable estimates –Enforceable right to payment New Revenue Model Revenue over time •Control transferred to customer •Customer asset has no alternative use and –Customer benefits –Another entity not have to re-perform to finish project •Otherwise recognize at a point in time 32
- 33. FASB IASB Revenue Recognition Project Current Revenue Model Revenue at point in time •Delivery is complete •Customer acceptance •Rights and Risks transferred •Impact of undelivered elements –Lack of standalone value –Lack of VSOE New Revenue Model Revenue at point in time •Vendor right to payment •Customer has legal title •Customer has physical possession •Customer has significant risk and rewards •Customer acceptance 33
- 34. FASB IASB Revenue Recognition Project Current Revenue Model Contract modifications •Account on a go forward basis •Concessions if additional goods or services without consideration •Estimates and contingent amounts recognized when occur New Revenue Model Contract modifications •Change in price after inception, adjust price in same as original allocation ( + & -) •New contract if –New goods and services are distinct –Consistent with stand alone selling price 34
- 35. FASB IASB Revenue Recognition Project Current Revenue Model Determining value of elements •Multiple Elements –VSOE –TPE –ESP •Software –VSOE New Revenue Model Determining value of elements •Adjusted market assessment •Expected cost plus margin •Residual (if highly variable or uncertain) 35
- 36. FASB IASB Revenue Recognition Project Current Revenue Model Allocation of Revenue •Relative Selling Price Method •Residual Method •Other Industry specific New Revenue Model Allocation of Revenue •Relative stand alone selling price 36
- 37. FASB IASB Revenue Recognition Project Current Revenue Model IP Licenses, Software •Revenue when license term begins •Different recognition for different industries •Over time •Point in time New Revenue Model License and Right to Use •Revenue when license period begins •“Dynamic” Licenses –Over license period •“Static” Licenses –Point in Time 37
- 38. FASB IASB Revenue Recognition Project Current Revenue Model Time value of money •Generally not an element of revenue recognition New Revenue Model Time value of money •Consider whether there is a significant financing component •Time value of money calculation unless period between delivery or transfer and payment is one year or less 38
- 39. FASB IASB Revenue Recognition Project Current Revenue Model Disclosures •General requirements •Specific requirements –Multiple elements –Non monetary –Bill and hold •Industry requirements New Revenue Model Disclosure •Contracts with customers •Significant judgments and changes in judgments •Assets recognized from costs •Reconciliation of revenue balances 39
- 40. 40 FASB IASB Revenue Recognition Project •Effect of Changes On Companies –Adoption –retrospective or simplified transition –One Method for All Contracts –ERP and Accounting Systems –Revenue Recognition Policies and Processes –Development of best practices –Acceleration of Revenue –More flexibility on estimates –Estimates vsObjective values –Estimates for all elements –Transfer of control issues
- 41. 41 FASB IASB Revenue Recognition Project •Effect of Changes On Companies –Collectibility–expectation vsprobable (all or none) –Software companies adopt relative selling price –Residual method for only one item –Compensation Plan Changes –Evolution of auditor and regulatory agencies views –Disclosures •Estimates •Stand alone value / Distinct Obligations •Revenue Reconciliation
- 42. 42 FASB IASB Revenue Recognition Project •What you need to consider –New Rules Independent of Adoption of IFRS –When issued by FASB will be US GAAP –Simplified Transition or Retrospective Adoption •Lots of changes and disclosure year of adoption –Accounting System Changes •Both ways in transition years –Current Systems may not be able to address new methods –Plan Ahead
- 43. 43 FASB IASB Revenue Recognition Project •What you need to do –Understand the New Revenue Rules –Assess how this will effect your company –Form Implementation Team –Assemble Resources and Budget –Determine Adoption Method –Determine Accounting System Changes –Educate Everyone –Management, Sales, HR, Finance, Board, Shareholders, Investor Community
- 44. 44 Conclusion Revenue Recognition Resources •Auditor Revenue Recognition Guides and Updates •Auditor Revenue Recognition Whitepapers •AICPA •Journal of Accountancy July Issue •FASB website •SEC Filings •Webcasts •Web Searches
- 45. 45 Conclusion •Questions after class by email wernerj@sbcglobal.net
- 46. New Revenue Recognition StandardThanks for Joining Us today 46