AGA Accounting Principles Committee

Transcription

1 AGA Accounting Principles Committee ASU : REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606)

2 Presenter and Agenda Presenter: Lucas Carpenter U.S. Power & Utilities Practice Senior Manager Agenda: Basics of new standard Update on standard setting activities The Five Steps and Industry focus areas Disclosures and SEC reporting matters Implementation 2

3 Basics of the new standard Overview Impacts Standard could significantly change how most entities recognize revenue Standard is intended to be principle based Will remove existing industryspecific guidance Expanded qualitative and quantitative disclosures (annual and interim) Transition Resource Group AICPA industry working groups Achieve a single, comprehensive revenue recognition model Core principle is that revenue recognition depicts transfer of control to customer in an amount that reflects consideration to which entity expects to be entitled 3

4 Basics of the new standard Scope Scope set to improve consistency and comparability within industries, across industries, and across capital markets Scope of the standard Contracts with customers of all entities and industries within scope with only certain transactions excluded Specifically excluded Lease contracts Insurance contracts Financial instruments Guarantees (other than product warranties) Certain nonmonetary exchanges Contracts with other than customers (e.g., collaborations) 4

5 Basics of the new standard Effective dates Effective date Early adoption permitted? Method of adoption U.S. GAAP Public U.S. GAAP Non-public Beginning after Beginning after Beginning on December 15, 2017 December 15, 2018 January 1, calendar year 2019 calendar year 2018 calendar year Yes Yes Yes No earlier than the No earlier than the original effective date for original effective date for public entities public entities 2017 calendar year 2017 calendar year Retrospective (with certain practical expedients allowed) or modified retrospective IFRS 5

6 Basics of the new standard Five-step model 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 satisfies a performance obligation 6

7 Update on standard setting activities 7

8 Revenue from contracts with customers Update on standard setting activities Recent FASB standard setting activities related to the new revenue standard Standard Status Impact on P&U sector Deferral of effective date Identifying performance obligations and licenses Principle versus agent considerations Narrow scope improvements and practical expedients Technical corrections and provide additional relief from certain disclosure requirements Final ASU High (but don t delay implementation efforts!!) Final ASU Performance obligations (moderate) Licenses (low) Final ASU Low Final ASU Collectibility (high) ED issued in Q (comment period ends on July 2, 2016) Non-cash consideration (low) Presentation of sales taxes (moderate) Transition expedients (moderate) Pre-production activities (low) Disclosure of remaining performance obligation (moderate) Loss provisions for onerous contracts (low) 8

9 Standard setting process in the U.S. (AICPA) AICPA P&U Revenue Recognition Task Force AICPA Revenue Recognition Working Group FinRec AICPA Revenue Recognition Guide AICPA Sector Task Forces TRG, SEC and FASB 9

10 The Five Steps and Industry Focus Areas 10

11 Comparison to existing guidance Step 1 1: Identify the contract(s) with a customer Existing guidance Contract is an agreement between parties that creates legally enforceable rights and obligations New guidance Generally consistent with existing practice Little guidance on accounting for contract modifications Explicit guidance provided on accounting for contract modifications 11

12 Step 1 Industry impacts (continued) Accounting for contract modifications 1 New contract: distinct goods or services at stand-alone selling price 2 Continuation of contract: remaining goods or services distinct from existing contract 3 Continuation of contract: goods or services not distinct from existing contract Prospective, impacting new goods or services only Prospective, impacting both remaining and new goods Cumulative catch up 4 If combination of above Apply principles above 12

13 Step 1 Industry impacts Focus areas Industry focus areas include Are sales to regulated customers within the scope of the new standard? Are contributions in aid of construction within the scope of the new standard? Revenue cannot be recognized if collectability is not probable does this impact revenue recognition for certain hardship customers and how should company's consider regulatory recovery mechanisms in place? How to apply the contract modification guidance to blend and extend and other common contractual arrangements? 13

14 Tariff-based sales Are revenues from sales under a regulated utility s tariff (other than alternative revenue program) within the scope of Topic 606? View A In scope Utility service is distinguishable from alternative revenue programs Represent a contract between the utility and its customers View B Out of scope Not distinguishable from alternative revenue programs Tariff sales are not a contract between the utility and its customers Task force consensus that tariff-based sales are in scope Disclosure consideration for alternative revenue programs 14

15 Contributions in aid of construction (CIAC) Key focus issue for the Power & Utilities AICPA Task Force Two views currently being debated: View A CIAC is out of scope View B CIAC is in scope; performance obligation represents stand-ready obligation to serve customer over the life of the asset Potential impact to the balance sheet and income statement Challenges of implementing if in scope Next steps 15

16 Contributions in aid of construction (CIAC) (continued) Simplified example: Customer contributes $100 to extend an electric line to their home Current model Utility collects cash and records a CIAC Liability for $100 Utility constructs asset and records as PP&E; cash is spent on construction For financial statement purposes: 1. PP&E and the CIAC Liability are presented net on the balance sheet (net balance sheet impact is $0) 2. Amortization of the PP&E and CIAC Liability are presented net on the income statement 3. Net income impact is $0 ASC 606 model (View B) Utility collects cash and records Deferred Revenue (a liability) for $100 Utility constructs asset and records as PP&E; cash is spent on construction For financial statement purposes: 1. PP&E and the Deferred Revenue are presented gross on the balance sheet (i.e., impact is a $100 balance sheet gross-up) 2. Amortization of the PP&E is reflected within Depreciation Expense; amortization of Deferred Revenue is shown as Revenue from Contracts with Customers (i.e., impact is an income statement gross-up of $100) 3. Net income impact is $0 16

17 Collectibility Step 1 (Identify the Contract) of ASU 606 ( ) stipulates that an entity will only apply the revenue guidance to contracts when it is probable that the entity will collect substantially all of the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Key considerations Application of the portfolio approach Constraint on recognition if required to provide additional goods / services 17

18 Collectibility (continued) Utility bills customer $100 and assumes 20 percent chance of collection ($80 reserve requirement). Assume there is no bad debt tracker and ignore recoveries embedded in current rates. (Current model) Dr. AR $100 Cr. Revenue $100 Dr. Bad Debt Expense $80 Cr. Allowance for Bad Debts $80 (Under ASC 606 not in scope) Dr. AR $0 Cr. Revenue $0 Dr. Bad Debt Expense $0 Cr. Allowance for Bad Debts $0 18

19 Blend-and-extend contract modifications Two views under discussion View A A blend-and-extend contract modification should be accounted for as a separate contract Additional deliveries are distinct Price of the contract increases by an amount of consideration that reflects the entity s standalone selling price for the additional deliveries View B A blend-and-extend contract modification should be accounted for as if it were the termination of the existing contract and the creation of a new contract - Additional deliveries are distinct - Price of the contract does not increase by an amount of consideration that reflects the entity s standalone selling price for the additional deliveries 19

20 Blend-and-extend contract modifications Example Background On January 1, 2012, Ivy Power Producers executed a 5-year power sales contract with Rosemary Electric & Gas at a fixed price of $50/MWh for a contract term through 2016 (assume no financing component) On January 1, 2015, Ivy Power Producers and Rosemary Electric & Gas agreed to (1) extend the contract for another 2 years (through 2018) and (2) amend the contract pricing as follows: Current existing contract price: $50/MWh Forward market price at modification date ( ): $40/MWh Modified price to be billed ( ): $45/MWh 20

21 Blend-and-extend contract modifications (continued) Example View A (Separate contract) Year 4 & 5 Dr. AR $45 Dr. Contract Asset $5 Cr. Revenue $50 Year 6 & 7 Dr. AR $45 Cr. Revenue $40 Cr. Contract Asset $5 View B (Termination of existing contract) Dr. AR $45 Cr. Revenue $45 21

22 Comparison to existing guidance Step 2 2: Identify the performance obligations in the contract Existing guidance Deliverables must have standalone value to be accounted for separately New guidance Performance obligations and distinct replace deliverable and standalone value in assessing multiple element arrangements 22

23 Bundled arrangements (e.g. PPAs) In April 2016, FASB updated revenue standard on performance obligations Clarification of distinct Is the objective to transfer individual goods or a combined item? Immaterial promises Is the promised good or service immaterial in the context of the contract? Shipping and handling activities Do shipping and handling activities occur after control of the goods is transferred to the customer? Industry Focus Areas: Level of integration of products / services Separate analysis of RECs and capacity Elements on a customer s bill (e.g., transmission, distribution, basic service) Next steps 23

24 Comparison to existing guidance Step 3 3: Determine the transaction price Existing guidance Arrangement s fee must be fixed or determinable for revenue to be recognized New guidance Variable consideration must be estimated subject to a constraint (exception for licenses of intellectual property involving sales- or usage- based royalties) Discounting of revenues required in limited circumstances Entities must assess whether a significant financing component exists 24

25 Variable consideration vs. Optional purchases Key focus issue for the Power & Utilities AICPA Task Force (in the context of requirements contracts ) Optional purchases Customer has a right to choose to purchase additional goods or services Each is a separate purchase decision Prior to customer s exercise of the option, the vendor is not obligated to provide those goods or services and the customer is not obligated to pay for those goods or services Variable consideration The contract obligates the vendor to transfer promised goods or services The ultimate quantity of good or services is not known and is outside the control of the vendor and customer Customer is obligated to pay for each good or service transferred Determining the nature of the promise (including pricing) is key Next steps 25

26 Comparison to existing guidance Step 4 4: Allocate the transaction price to the performance obligations in the contract Existing guidance Allocate transaction price to multiple deliverables based on relative selling price New guidance Generally consistent with existing practice 26

27 Step 4 Industry impacts Focus areas Industry focus areas include How should you allocate the transaction price to each performance obligation (e.g., PPA with energy, capacity, and RECs) - How should you allocate variable consideration? - How should you allocate a discount that a customer receives for purchasing a bundle of goods or services (e.g., PPA with energy, capacity, and RECs) How should you determine standalone selling price? 27

28 Comparison to existing guidance Step 5 5: Recognize revenue when (or as) the entity satisfies a performance obligation Existing guidance Recognition based on transfer of the risks and rewards of ownership New guidance Revenue recognized when or as control of good or service transfers to the customer Criteria identified for assessing whether performance obligation is satisfied at a point in time or over time 28

29 Step 5 Industry impacts Focus areas Industry focus areas include When does control of a commodity transfer to the customer over time or at a point in time? If control transfers over time, how should progress toward complete satisfaction be measured? - When is it appropriate to use the practical expedient (i.e., recognize revenue in the amount to which the entity has a right to invoice) to measure progress? - What does the concept of value to customer mean in the standard? 29

30 Application of series guidance Series of goods and services Separately account for performance obligations if a series of goods or services are homogenous and meet both of the following criteria: Each distinct good or service in the series would be a performance obligation satisfied over time, and A single method used to measure the entity s progress toward satisfaction of the performance obligation A performance obligation is satisfied over time if any of the following criteria are met The customer receives and consumes the benefits of the entity s performance as the entity performs, or Entity s performance creates or enhances an asset (work in process) that the customer controls, or Entity s performance does not create an asset with an alternative use to the entity and the customer does not have control over the asset created, but the entity has a right to payment for performance completed to date 30

31 Application of series guidance to storable commodities and capacity Key considerations Consideration of immediate consumption criterion Capacity Would stand ready = service? Next steps 31

32 Step vs. Strip pricing Step pricing Stated, but changing, prices per unit for a fixed quantity Judgment in selecting method of measurement of progress Significant financing component May apply the invoice practical expedient Strip pricing Constant fixed price (i.e. the price per unit is identical for all units) Straight line over the contract period May apply the invoice practical expedient Potential to lead to different revenue profiles for contracts that deliver the same goods Next steps 32

33 Disclosures & Other SEC Reporting Matters 33

34 Annual disclosure requirements Disclosure type Disaggregated revenue Reconciliation of contract balances Performance obligations Significant judgments Practical expedients Required information Disaggregation of revenue into categories that show how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows Opening and closing balances and revenue recognized during the period from changes in contract balances Qualitative and quantitative information about significant changes in contract balances Descriptive information about an entity s performance obligations Method used to recognize revenue for performance obligations satisfied over time and why the method is appropriate Significant judgments related to transfer of control for performance obligations satisfied at a point in time Information about the methods, inputs, and assumptions used to determine and allocate transaction price Existence of a significant financing component Expensing certain costs of obtaining contract 34

35 Other SEC matters Reporting issues related to adoption of new Revenue Recognition Standard - Selected financial data - Ratio of earnings to fixed charges 35

36 Registration statements Prior-period annual audited financial statements that are incorporated by reference in registration statements must be revised if: - The interim financial statements that are incorporated in the registration statements reflect an accounting change that requires retrospective application, and - The change is considered material SEC FRM OCA is available for consultation if a registrant believes that, based on its facts and circumstances, a retrospective application of the new revenue recognition standard to all periods required to be presented in a Form S-3 is impracticable. Wesley R. Bricker Deputy Chief Accountant May

37 Impact of registration statement filing on revenue adoption Example Company adopts the new revenue standard under the full-retrospective transition approach in Q Company files its 10Q with the SEC on April 16, 2018 On May 2, 2018, the Company files Form S-3 registration statement with the SEC The Form S-3 incorporates by reference the Company s K and 2018 Q1 10Q Impact Company must revise prior-period annual audited financial statements that are incorporated by reference in registration statements to reflect accounting change for the revenue standard Company will be required to restate an additional year in its Form S-3 to show the effect of the new revenue standard 37

38 Implementation 38

39 Implementation survey results 39

40 Implementation survey - results 40

41 Implementation survey - results 41

42 Implementation Top 5 recommendations 42

43 Save the Date Revenue Seminar Power & Utilities EEI/AGA Revenue Seminar When: November 9 th & November 10 th 2016 Where: Hilton Chicago O Hare Airport What: In depth case studies and more visibility to open issues 43

44 Q&A 44

45 Thank you Contact me to discuss further: Lucas Carpenter U.S. Power & Utilities Practice Senior Manager 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. refers to the United States member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. United States helps organizations and individuals create the value they re looking for. We re a member of the network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at