Revenue Recognition Media Finance Focus 2016 Denver, Colorado

Transcription

1 Revenue Recognition Media Finance Focus 2016 Denver, Colorado 1

2 Panelists Dwight Delapenha, Deladad Advisory Dan Drobac, PwC Sue Tuxill, Salem Media Group Mike Ruggiero, ATV Broadcast 2

3 Revenue Recognition Agenda Overview of New Revenue Standard Recent FASB Amendments Media Company Examples Disclosure Requirements 3

4 Effective Date Effective date is deferred for all entities by one year. Public entities 2018 (annual and interim periods) Nonpublic entities 2019 (annual periods); 2020 (interim periods) Earlier adoption as of original effective date (2017) permitted The effective dates for Topic 606 and IFRS 15 for public entities are aligned. 4

5 Cumulative catch-up Cumulative catch-up Transition Methods Full Retrospective PY2 (2016) PY1 (2017) CY (2018) Rev rec under new standard CY Footnotes Modified Retrospective Rev rec under legacy standard Rev Rec under new standard Disclose legacy standard for CY (2018) 5

6 Overview of Revenue Recognition Model Core Principle: Recognize revenue to depict the transfer of promised 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 Steps to apply the core principle: 1. Identify the contract(s) with the customer 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) a performance obligation is satisfied Criteria for identifying a contract Combinations Modifications Unit of Account Distinct Criteria Variable consideration Significant financing Noncash consideration Consideration payable to customer Relative standalone selling price Discounts and contingent amounts Over time criteria Point in time indicators 6

7 Clarifications to Issued Standard Input from Transition Resource Group led to projects to address implementation challenges: Principal versus Agent Considerations (March 2016) Identifying Performance Obligations and Licensing (April 2016) Narrow-Scope Improvements and Practical Expedients (May 2016) Technical Corrections and Improvements (Exposure Draft) Amendments aimed to clarify Board s intent and reduce cost and complexity of implementing the new guidance 7

8 Identifying the Contract Role of collectibility in the revenue guidance has changed: Current GAAP Recognition constraint Topic 606 Collection must be probable for a contract to exist Clarifications Objective of collectibility assessment is to determine whether there is a substantive transaction Consider ability to mitigate exposure to credit risk (e.g. ability to cease providing goods or services upon nonpayment) Clarify alternate revenue recognition criteria (which is applied when unable to meet Step 1) Introduces ability to recognize revenue prior to contract termination 8

9 Identifying Performance Obligations Distinct Promises = Performance Obligations = Unit of Account Current GAAP standalone value Topic 606 two distinct criteria (1) capable of being distinct (2) separately identifiable Reduce cost and complexity No need to assess immaterial promised goods or services Shipping and handling practical expedient Clarifications Rearticulate separately identifiable principle Is nature of promise to transfer each good or service or combined item? 9

10 Example: Multiple Performance Obligations Media entity A enters an agreement with Programmer P under which Programmer P is provided a one-hour daypart on Saturdays from 1 pm to 2 pm to feature their program. The program will run for 26 weeks starting January 1, To promote the one-hour program, Programmer P will receive 15 spots per week for a total of 26 weeks starting December 1, 2015 and 15 banner advertisements per week on the station website beginning December 1, 2015 for 26 weeks. The 15 spots per week and 15 banner ads per week will air between the hours of 6am and 8pm as determined by the station traffic manager. The programmer may receive up to 100 bonus spots at the discretion of the station. The programmer agrees to a cost of $1,000 per week for the package. 10

11 Example: Multiple Performance Obligations Estimated Stand Alone Selling Prices Current market rate for 1 hour programming on Sat is $500 $ 13,000 :30 on air spots 6-8am and 4-6pm run $35 All other times $20, therefore blended rate $25 $ 9,750 Banners run $10 per :30 $ 3,900 Bonus spots MAY be provided, no obligation to do so/no refund to programmer $ - $ 26,650 Programming Air-Time Promotional Spots On-Air Promotional Banner Ads on station website Allocation $ 12,683 $ 9,512 $ 3,805 Up to 100 bonus spots $ - $ 26,000 11

12 Licensing Current GAAP includes limited, industry-specific guidance on revenue recognition for licenses. New guidance includes a comprehensive model to be applied to all industries. Nature of License: Functional or Symbolic Improve operability of right to use vs. right to access assessment Based on significant standalone functionality Functional: point in time recognition Symbolic: over time recognition Contractual Provisions Clarify that there is a distinction between contractual provisions that: Require transfer of control of additional goods or services to a customer (multiple performance obligations) Define attributes of a single promised license Sales- or Usage- Based Royalties Clarify scope and applicability of exception to variable consideration constraint guidance Applies when royalty completely or predominantly relates to license Royalties should not be split into portions to which exception does and does not apply 12

13 Licensing Example 1 Media Company licenses 4 seasons of a television program to an over the top distributor. Media Company will also add season 5, which is currently in production, as each episode is available. The contract price is $5 million. How should Media Company account for this license? What if the consideration were based on the number of subscribers to the over the top distributor s service? 13

14 Licensing Example 2 Media Entity A enters a licensing agreement with Broadcaster B under which Broadcaster will have the right to broadcast 2 programs produced and distributed by Media Entity A over a 12 month period. The total amount due to Media Entity A under the agreement is $100,000 due in quarterly installments of $25,000. The programs include: weekly news programs - one hour in length delivered via satellite as produced two hour special feature programs to be selected from Media Entity A s current available inventory 14

15 Principal vs. Agent Considerations Current GAAP based on risk and rewards notion New guidance is based on overarching principle of control indicators no longer weighted in guidance Principal (gross revenue) provides specified good or service Agent (net revenue) arranges for specified good or service to be provided Clarifications Unit of account: each specified good or service Control of a service Indicators: Do not override control assessment Relative importance based on facts and circumstances Reframed to indicate when an entity is a principal (vs. an agent) Credit risk was removed as an indicator 15

16 Principal vs. Agent Example Media Company B owns and operates a website. Media Company B enters an exclusive agreement under which Entity C will sell all web-based advertisements on Media Company B's website. Entity C guarantees minimum annual revenue of $100,000. If Entity C does not meet minimum revenue of $100,000, it will pay Media Company B an amount equal to 70% of the difference between the minimum gross revenue and the actual gross revenue. Entity C is responsible for all creative services with the advertiser and is responsible for servicing, maintenance, display and reporting to the advertiser. Entity C is responsible for all billing, invoicing and collections. Entity C will remit all payments to Media Company B, less applicable commissions of 30% Entity C enters an advertising agreement with Advertiser D under which Advertiser D is featured on Media Company B's website for 3 months for a total of $10,000. How should Entity C report revenue generated from sales of web-based advertisements on Media Entity B's website? Copyright 2014 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational /academic purposes only. 16

17 Determining the Transaction Price Presentation of Sales Taxes Reduce cost and complexity Accounting policy election: exclude all sales (and other similar) taxes collected from transaction price Note: if election not applied, then principal vs. agent guidance should be applied for each tax and jurisdiction Current GAAP allows net or gross presentation through policy election Noncash Consideration Clarifications Define measurement date as contract inception Changes in fair value due to form are not included in transaction price If fair value not estimable: Current GAAP use fair value of assets received or relinquished Topic 606 use estimated selling price of promised goods or services 17

18 Variable Consideration Include estimate of variable consideration in the transaction price only if it is probable that a significant revenue reversal will not occur when the uncertainty is resolved For licenses of intellectual property, include sales-based or usage-based royalties in transaction price when sales or usage occurs Update the transaction price at each reporting date 18

19 Variable Consideration Example Media Entity A enters an agreement with Philanthropic Entity B under which Entity B will be featured on-air for a three month period from January through March. Air-time is provided during the AM Drive between 7 am and 9 am with a minimum of 2 spots aired per week. Entity B will seek donations from listeners that listeners send directly to Entity B. Entity B pays Media Entity A 10% of all donations collected as consideration for air-time. Media Entity A places entity B on-air in two markets. The first market is a mid-size market that has aired similar campaigns in the past. The second market, also a mid-size market, has never aired a campaign of this nature. 19

20 Retransmission Revenue In 1993, Congress passed the Cable Act which forced TV broadcasters to sit down every three years and elect either must carry or retransmission consent rights with the carriers of their signal. Must carry is where the MVDP will carry the TV signals in 99% of the cases. RTC election means the two parties hammer out a carriage deal or go dark on the MVDPs systems. At first all carriage agreements were cash less and then that evolved into cash deals around These cash deals were once a nominal effect to a station s cash flow, however, when the fees became material, that is when the networks caught on, and they wanted their share. This could set up an issue on how to properly account for this revenue stream when ASC 606 is effective. One of the key considerations is accounting for estimates and the impact of variable consideration. 20

21 Example: Retransmission revenue Broadcaster enters into a retransmission agreement with Cable Company to carry its programming for five years. The consideration is based on the number of Cable Company subscribers. The rate per subscriber is $1 in year one and increases ratably to $2 in year five. How should the contract be accounted for under the new revenue standard? License or service Application of series guidance Reporting on lag or estimating variable consideration Allocating consideration? Disclosure or remaining performance obligation 21

22 Changes to Industry-Specific Guidance Industry-specific guidance has been eliminated by Topic 606: Topic , Broadcasters Revenue Recognition Topic , Broadcasters Nonmonetary Transactions Topic , Films Revenue Recognition Topic , Films Nonmonetary Transactions Guidance on barter transactions has been superseded. Companies will need to look to Revenue guidance in Topic 606, Topic 610 Other Income, or Topic Nonmonetary Transactions. 22

23 Amendments to Transition Guidance Reduce cost and complexity Contract modifications practical expedient aggregate effect of all contract modifications as of date of initial application Full retrospective approach not required to disclose effect of accounting change in period of adoption Modified retrospective approach may be applied to all contracts or completed contracts only Clarifications Completed contract = substantially all revenue recognized under legacy GAAP 23

24 Disclosure Requirements Disaggregation of revenue Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors Explain the relationship with segment disclosures 24 Information about contract balances Opening and closing balances Amount of revenue recognized from contract liabilities Explanation of significant changes in contract balances Performance obligations When the entity typically satisfies POs Significant payment terms Obligations for returns; types of warranties * Disclosure requirements in gray are not required for nonpublic entities 24

25 Disclosure Requirements 25 Remaining performance obligations Transaction price allocated to remaining performance obligations Quantitative or qualitative explanation of when amounts will be recognized as revenue Practical expedient for contracts less than one year and certain types of variable consideration Significant judgments Method used to recognize performance obligation over time Judgments to determine the point in time that revenue is recognized Methods and inputs to determine the transaction price Interim requirements Quantitative disclosures * Disclosure requirements in gray are not required for nonpublic entities 21

26 Revenue Recognition 2015 Survey PwC & Financial Executives Research Foundation Key Takeaways: A majority of respondents (75%) had not completed an initial impact assessment Areas of highest accounting impact include licensing, variable consideration and disclosure Challenging business aspects include customer contracts, billing systems and business processes Considerable systems changes are anticipated, 53% expect some change and 25% are not sure Only 5% of respondents have started to implement system, process and control changes No consensus on the method of adoption -- 83% are undecided and more companies are considering full retrospective

27 Questions or Comments? 27