Revenue Recognition: Considerations for Technology & Software Companies

Transcription

1 Revenue Recognition: Considerations for Technology & Software Companies JULY 25, 2018 To Receive CPE Credit Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar 1

2 INTRODUCTIONS Mike Van Booven Director OUR GOALS FOR TODAY 1 2 The Five-Step Model Contract Costs 3 Transition Methods 4 Disclosure Requirements 2

3 FIVE-STEP REVENUE MODEL Step 1 Step 2 Step 3 Step 4 Step 5 Identify Contracts with Customers Identify Performance Obligations Determine Transaction Price Allocate Transaction Price Recognize Revenue Step 1 Identify the Contract Approval by all parties All parties are committed to perform their obligations Each party s rights can be identified Payment terms are identified Commercial substance Transaction price likely to be substantially collected 3

4 Step 2 Identify the Performance Obligations Identify each promised good or service Determine if each obligation is distinct & distinct within the context of the contract Disregard immaterial obligations Immaterial in the context of the contract Costs associated must be accrued when revenue recognized Step 2 Identify the Performance Obligations Types of performance obligations Software as a Service (SaaS) cloud computing or hosted software On-premises software licenses of software that are run on the customer s premises Hardware & networking equipment Post-contract support (PCS) Professional services 4

5 Step 2 Identify the Performance Obligations Does contract contain promise of a license? Promise of license exists when Customer can take possession of the software at any time & Customer can run the software on its own (or easily contract with another unrelated party) SaaS arrangements generally do NOT contain a promise of a license Recognized over time per Step 2 Identify the Performance Obligations Are the promised goods/services (license, installation services, support, updates) distinct? Capable of being distinct & Customer can benefit from the good/service either on its own or with readily available resources Distinct within the context of the contract Consider the nature of the promise of the contract If distinct, then considered separate performance obligations 5

6 Step 2 Identify the Performance Obligations Post-contract support/maintenance considerations Are these promises distinct? What is the nature of the promise? Stand-ready to provide services to the customer TRG agrees straight-line is generally acceptable method to recognize (but must support) Unspecified upgrades When-and-if-available Could be considered a stand-ready obligation provided over time (but must evaluate) Step 2 Identify the Performance Obligations Material rights Future discounted pricing offered Considered a separate performance obligation if material Must consider if other customers would be offered similar pricing independent of the contract If a separate performance obligation, allocate a portion of the transaction price based on its relative standalone selling price 6

7 Step 3 Determine the Transaction Price Collectibility Consideration must be substantially collectible Variable consideration Implied price concessions Options for additional goods & services Volume discounts could be option or variable consideration Step 3 Determine the Transaction Price Significant financing component Does the contract include extended payment terms? e.g., subscription-based license paid over time Must evaluate to determine if actually a price concession Consider the purpose of the extended terms Excluded: Contracts with payment terms less than 1 year Subject to constraint 7

8 Step 4 Allocate the Transaction Price Standalone Selling Price Observable standalone selling prices (preference) PCS, e.g., renewal rates Services, e.g., standard hourly rates Bundles of goods/services frequently sold at discounts Residual approach only appropriate if good/service is sold at highly variable amounts (or price is not established) Licenses Step 4 Allocate the Transaction Price Vendor-specific objective evidence No longer required Cloud-based term license example Three-year term license with coterminous related support License & support both deemed to be distinct Legacy License & support combined as cannot establish VSOE for support New guidance License & support are distinct promises License recognized upon transfer of control Support recognized over three-year term 8

9 Step 4 Allocate the Transaction Price Term licenses Allocating between performance obligations (license & PCS) Any reasonable method used but must use observable prices when available May be able to demonstrate relationship with perpetual license Step 5 Recognize Revenue Recognition cannot occur until License is made available to the customer & The beginning of the period during which the customer is able to use & benefit from the license The customer must have the contractual right to use the license even if they are provided access to the license Functional IP point in time Symbolic IP over time 9

10 Principal v. Agent: Hardware Sales Nature of promise to customer Provide good (hardware) to customer entity is a principal Arrange for good (hardware) to be provided to customer entity is agent Is the good provided (hardware) controlled by the entity before it is transferred to the customer? If yes entity is a principal, recognize gross If not entity is an agent, recognize net Termination Clauses Is the termination clause substantive? If not substantive, enforceable rights & obligations may be affected e.g., contract length may be impacted Entity must use judgment & consideration of all facts to determine if termination clause is substantive 10

11 Contract Costs Costs to obtain a contract Must be incremental Not incurred without obtaining the contract If still incurred without contact, they are not incremental to the contract e.g., sales commissions Required to be capitalized If entity expects to recover the costs Does not require costs to be direct in order to be capitalized Need to evaluate all compensation plans Bonus payments Amortization Over the contract term Contract terms of one year or less can be expensed Transition Methods Determine transition method Full retrospective adjust each prior reporting period Change everything all prior periods reported Practical expedients Contracts that begin & end in same period no adjustment Completed contracts & variable consideration use actual transaction price instead of estimating Comparative periods before date of application do not disclose transaction price allocated to remaining performance obligations No retrospective restatement of contracts modified before beginning of earliest reporting period 11

12 Transition Methods Modified retrospective Only change current year Cumulative effect in beginning retained earnings of the period of adoption Additional disclosures Amount each current year (year of adoption) financial statement line item is affected, had revenue been recognized under ASC 605 Reasons for significant changes to each line item affected Can choose to apply to all contracts or only to contracts yet to be completed as of the date of adoption Disclosure Requirements New disclosures Disaggregation of revenue Point in time vs. over time Qualitative information Information about performance obligations Significant payment terms Nature of goods & services 12

13 Effective Dates Nonpublic Entities Annual reporting periods beginning after December 15, 2018 Calendar year January 1, 2019 December 31, 2019 Implementation Considerations Start early! Remember, even if nothing changes, this has to be proved through documentation Decide transition method Determine revenue streams Determine contracts in revenue streams & if they can be grouped together (portfolio method) Analyze contracts to determine recognition under new standard Gather information for disclosures Documentation is key to effective & efficient adoption BKD has tools to help 13

14 Questions? Continuing Professional Education (CPE) Credit 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: 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. 14

15 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at Thank You! Mike Van Booven 15