Understanding & Implementing Revenue Recognition: Part 2 · 2018. 8. 3. · CR: Contract Liability...
Transcript of Understanding & Implementing Revenue Recognition: Part 2 · 2018. 8. 3. · CR: Contract Liability...
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BKD Webinar Series
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Understanding & Implementing Revenue Recognition: Part 2
May 1, 2018
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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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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.
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• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected]
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Thank You!Steve Sauer | [email protected] Klein | [email protected]
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