הכנס השנתי לכללי חשבונאות בינלאומיים ואמריקאים

Transcription

1 הכנס השנתי לכללי חשבונאות בינלאומיים ואמריקאים סוגיות נבחרות בישום התקן החדש בנושא הכרה בהכנסה לרבות הוראות מעבר ודרישות גילוי איתי גוטליב, שותף, מחלקה מקצועית, EY ישראל 12 בדצמבר 2017

2 Agenda Transition Transition methods Transition requirements Disclosures Implementation issues SEC Comment Letters Appendix examples of SEC comment letters Page 2

3 Transition Page 3

4 Overview Transition methods Full retrospective Cumulative catch-up adjustment at 1/1/2016 * Financial statements New GAAP New GAAP New GAAP Note disclosures New GAAP New GAAP ASC 250 disclosures + New GAAP Modified retrospective Cumulative catch-up adjustment at 1/1/2018 * Financial statements Legacy GAAP Legacy GAAP New GAAP Note disclosures Legacy GAAP Legacy GAAP Legacy GAAP + New GAAP *Based on an effective date of 1 January 2018 for a calendar-year end public company (assumes no early adoption) Page 4

5 Transition methods Overview The standard requires retrospective application Full retrospective- applying the new guidance to each prior reporting period presented With an election to apply certain practical expedients Modified retrospective- applying the new guidance only to contracts that are not completed at the adoption date No restatement of prior reporting periods With an election to apply certain practical expedients Option not to include a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application Page 5

6 Full retrospective adoption Disclosures Not required to disclose the effect of the changes on the current period (e.g., 2018 for a calendar year-end public entity that does not early adopt), as would otherwise be required by ASC (b)(2) Still will be required to disclose the effect of the changes on any prior periods that have been retrospectively adjusted (e.g., 2016 and 2017 for a calendar year-end public entity that does not early adopt) in accordance with ASC (b)(2) Page 6

7 Modified retrospective application Apply the standard retrospectively only to the most current period presented in the financial statements recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application (e.g., January 1, 2018) May elect to apply to either all contracts as of the date of initial application (i.e., 1 January 2018 for a public entity with a calendar year end that does not early adopt the standard) or only to contracts that are not completed as of this date May also elect to use the contract modification practical expedient (i.e., practical expedient no. 4) Provide relevant disclosures Page 7

8 Modified retrospective application Disclosures Under the modified retrospective method, an entity will: Present comparative periods under legacy GAAP Apply the new revenue standard to new and existing contracts (either all existing contracts or only to contracts that are not completed contracts) as of the date of initial application Recognize a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for all contracts or only contracts that are not completed In the year of adoption, disclose the amount by which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes Page 8

9 Modified retrospective application Disclosures (cont.) In accordance with ASC 205, an entity shall disclose: The nature of and reason for the change in accounting principle in reporting periods that include the date of initial application The amount by which each financial statement line item is affected in the current period as a result of applying ASC 606; and An explanation of the significant changes between the reported results under ASC 606 and those that would have been reported under legacy US GAAP Required to maintain dual reporting for the year of initial application of ASC 606 to be able to disclose the effect of adoption on line items in the balance sheet statement of comprehensive income and statement of cash flows (although cash flows from operations will likely be consistent, individual line items are likely to change) Page 9

10 Interim period Disclosures in the year of adoption Section 1500 of the SEC staff s FRM SEC registrants are expected to provide both the annual and interim period disclosures prescribed by any new accounting standard (if not duplicative) These disclosures should be included in each quarterly report in the year of adoption Calendar year-end SEC registrants will be required to follow the annual disclosure requirements, not just the interim requirements, in their first three quarterly filings after adopting ASC 606 beginning in the first quarter of 2018 Page 10

11 SAB Topic 11.M (SAB 74) Disclosure One of the objectives is to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted The following disclosures should be considered: Brief description of the new standard, date that adoption is required and date that the registrant plans to adopt, if earlier Discussion of the methods of adoption allowed and the method the registrant expects to use Discussion of the effect the standard is expected to have on the financial statements or, if the effect is not known or reasonably estimable, a statement to that effect Disclosure of other significant matters that might result from adoption The SEC staff expects that company s SAB 74 disclosures will increase as it progresses in its implementation plans Page 11

12 SAB Topic 11.M (SAB 74) Disclosure (cont.) These disclosures should reflect the state of companies implementation efforts. As SAB 74 intended, we expect companies to be transparent in their disclosure as to where the company is in its implementation progress. The SAB 74 disclosures are intended to inform a reader where the company is in its implementation progress. As the effective date nears, and for companies that have not made sufficient progress, this fact will become clear in the SAB 74 disclosures. This will allow relevant stakeholders such as audit committee members, auditors and investors to hold management accountable for determining how the company is going to implement the new standards timely. SEC Deputy Chief Accountant, Sagar Teotia Increasingly through the third and fourth quarter reporting, I anticipate companies to be in a position to disclose in their SAB 74 disclosures the anticipated impact, at least qualitatively and directionally, of adoption of the new standard. SEC Chief Accountant, Wesley Bricker Page 12

13 Transition disclosure Early adopters Modified retrospective Alphabet Inc. (Aka Google Inc.) Ford Motor Co. Unitedhealth Group Analog Devices Inc. (Q1 fiscal year 2019) Full Retrospective Microsoft Corporation General Dynamics Corp. Raytheon Co. CBOE Holdings, Inc. Workday, Inc. First Solar, Inc. Apple Co. (Q1 fiscal year 2019) Page 13

14 Implementation issues Page 14

15 Licenses of IP Determine whether a contract includes a promise of a license of IP For hosted arrangements assess the same criteria as were made under legacy GAAP (ASC 985, Software) The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software Page 15

16 Licenses of IP Hosting- SaaS contracts Determining whether software IP is distinct The specific facts and circumstances of each contract have to be carefully considered Whether the software license and SaaS are distinct within the context of the contract or Whether the software license and SaaS are not distinct within the context of the contract Page 16

17 Licenses of IP Distinct software contracts Assess whether the software updates and technical support are necessary for the software to maintain a high level of utility to the customer during the license period For example, where an entity grants a customer a license to antivirus software and promises to provide the customer with when-and-if available updates If NOT necessary, might be a separate performance obligation Page 17

18 Licenses of IP VSOE of fair value is no longer required May lead to the identification of additional performance obligations and earlier recognition of revenue than under legacy software guidance under legacy software guidance, an entity can separately account for elements in a software licensing contract only if it has established VSOE of fair value of the undelivered element(s) Page 18

19 Licenses of IP Term-based licenses are likely to be affected by this change Under the new standard, a software vendor that provides a termbased software license bundled with coterminous PCS will determine that there are two POBs if it determines that each promise is distinct Are required to be split into two separate POBs: license and maintenance The license - considered as functional (i.e. delivery of the license) The maintenance - will be recognized over time Under legacy guidance, revenue for the combined element was generally recognized as delivery of the last element took place (i.e., the delivery of the PCS over the license period) Page 19

20 Licenses of IP Sales- or usage-based royalties Revenue recognized at the later of when (1) the sale or usage occurs or (2) the performance obligation to which some or all of the sales- or usage-based royalty has been allocated is satisfied (in whole or in part) Recognizes the royalties as revenue when (or as) the customer s sales or usage occurs And NOT accelerating revenue recognition ahead of the entity s satisfaction of the performance obligation to which the royalty relates When the sole or predominant item to which the royalty relates is not a license of IP, the general variable consideration guidance applies Page 20

21 Licenses of IP Sales- or usage-based royalties (cont.) Page 21 Estimating sales- or usage-based royalty received on a lag The Chief Accountant of the Securities and Exchange Commission (SEC) noted in a speech that because the FASB did not provide a lagged reporting exception in the standard, the reporting of sales- and usage-based royalties may require estimation in some circumstances Requires significant judgment Minimum guarantee A fixed fee in exchange for a license that is a functional IP is recognized at the point in time control of the license transfers Royalties in excess of the minimum would be recognized in the period the sales occur A fixed fee in exchange for a license that is a symbolic IP is recognized over time

22 Variable consideration Options for additional goods and services Distinguish between contracts that contain an option to purchase additional goods or services and contracts that include variable consideration may require significant judgment The determination affects the accounting for the contract at inception and throughout the life of the contract and the disclosures an entity has to make Page 22

23 Variable consideration Options for additional goods and services A customer option- the entity is not obligated to provide additional goods and services until the customer makes a separate purchasing decision (i.e., exercises the option) e.g., the entity is not obligated to provide access for the additional users until the customer makes a purchasing decision Evaluate whether the option to purchase in the future at a discount represents a material right and therefore should be accounted for as a performance obligation Variable consideration- the entity is obligated to transfer the goods and services and the customer is obligated to pay for those promised goods and services even if the consideration owed to the entity is not known at contract inception Page 23

24 Residual approach May be used only if one of the following criteria is met: The entity sells the same good or service to different customers (at or near the same time) for a broad range of amounts (that is, the selling price is highly variable because a representative standalone selling price is not discernible from past transactions or other observable evidence). The entity has not yet established a price for that good or service, and the good or service has not previously been sold on a standalone basis (that is, the selling price is uncertain) If applying the residual approach results in zero or very little consideration being allocated to a good or service, or to a bundle of goods or services then this outcome may not be reasonable Estimate the standalone selling price using another suitable method Page 24

25 Measure of progress Under the new standard, output methods such as "units delivered" or "milestones met" may not faithfully depict an entity s performance If at the end of the reporting period, the value of work-in-progress or finished goods controlled by the customer is material or If the contract provides both design and production services An input method must exclude the effects of any inputs that do not depict an entity s performance in transferring control unexpected amounts of wasted materials, labor, or other resources (these costs are expensed as they are incurred and are not used in a cost-to-cost measure of progress) uninstalled materials when the costs are not proportionate to the entity s progress in satisfying the performance obligation Page 25

26 Measure of progress The new standard prohibits the use of the completedcontract method If a performance obligation meets the over-time criteria, it is not acceptable to defer all revenue and expense items until the contract is completed Page 26

27 Contract modifications Legacy GAAP, generally focuses on how interrelated the contract modification is with the existing contract and the overall economics of the arrangement The new standard has eliminated the requirement to consider the economics of the arrangement and rather focuses on whether the modification adds distinct goods or services at standalone selling price the indicators used to determine whether a good or service is distinct includes consideration of the value provided to the customer from all of the goods or services identified in the contract Page 27

28 Distributor and reseller arrangements Under the new standard, it is no longer acceptable for entities that sell their products through distributors or resellers to wait until the product is sold to the end consumer to recognize any revenue (i.e., the sellthrough method) if the only uncertainty is the variability in the pricing In estimating the transaction price, entities should take into consideration the amounts of returns and other variable components of pricing (e.g., chargebacks) Page 28

29 Costs to obtain a contract Determining whether different types of commissions qualify for capitalization requires judgment Commissions paid for renewals, commissions paid to supervisors and commissions not directly linked to any single or specific contract (e.g., commissions based on reaching an aggregate value of contracts booked during the year, meeting individual sales targets or accelerators) require careful consideration ASC does not require costs to be direct in order to be capitalized an employee s title or level in the organization, or how directly involved the employee is in the sales process, should not affect the determination of whether a sales commission is incremental Full retrospective applicator need to calculate the effect of the new accounting guidance for costs to obtain a contract on the financial statements for all periods presented Page 29

30 Costs to obtain a contract Amortization of capitalized costs to obtain a contract Basis for Conclusions of ASU ; amortizing the asset over a longer period than the initial contract would not be appropriate if an entity pays a commission on a contract renewal that is commensurate with the commission paid on the initial contract An entity should evaluate its history with renewals to conclude that such an estimate is supportable Page 30

31 SEC Comment Letters Page 31

32 SEC Comment Letters Early Adopter Comment Letters The SEC focused its comments on the following areas: Accounting for sources of variable consideration, including refund liabilities and reassessment of variable consideration Accounting for rebates paid to customers Disclosing the nature of changes in contract balances, including how the timing of payments and satisfaction of performance obligations impact contract assets and liabilities Substantiating the method used to recognize revenue on overtime performance obligations Determining that costs obtaining a contract are incremental and thus eligible to be capitalized Determining of the appropriate amortization period for commissions costs, with consideration to contract renewals Disclosing remaining unsatisfied performance obligations Page 32

33 SEC Comment Letters SAB 74 Disclosures Comments The SEC focused its comments on the following areas: Qualitative disclosures of the potential impact ASC 606 will have on their financial statements Description of the expected effects of the accounting policies Comparison to the current revenue recognition policies Description of the status of the implementation process Description of any significant implementation matters yet to be addressed Disclosure of the quantitative impact that adoption of ASC 606 is expected to have, if determinable Page 33

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35 SEC comment letters Topic Cost to obtain a contract (EY FRD 9.3.1) SEC Comment: Comments We note that prior to the adoption of ASC 606, you capitalized direct sales commissions when they could be associated specifically with noncancelable subscription contracts, and now, you capitalize all incremental sales commissions. Please describe the additional commission fees that you are now capitalizing, and tell us how you determined that these are incremental costs of obtaining a contract. Refer to ASC Considerations: Whether costs to obtain a contract are "incremental as defined in ASC Whether other factors impact the commission payout Service conditions Payment of the commission is discretionary Payment is based on other qualitative or quantitative metrics Level of involvement of the employee is not determinative (e.g., commissions paid to sales executives) Page 35

36 SEC comment letters (cont.) Topic Amortization of capitalized costs (EY FRD 9.3.3) SEC Comment: Comments We note you amortize your commission costs over a period of benefit that you have determined to be five years while your subscription contracts are generally three years or longer. Please help us understand how you determined that five years was the appropriate period of benefit. In this regard, tell us how you considered renewals. Please clarify whether additional sales commissions are paid upon contract renewal and, if so, whether such amounts are commensurate with the initial commissions. Please also reconcile your considerations to your disclosure on page 46 that your ability to predict renewals is limited. Refer to ASC Considerations: Capitalized costs should be amortized over a period that is consistent with the transfer to the customer of the goods or services to which the asset relates If an entity s past experience indicates that a renewal is likely, the amortization period would be longer than the initial contract term if the renewal commission is not commensurate with the initial commission Page 36

37 SEC comment letters (cont.) Topic Disclosure - practical expedients (EY FRD ) SEC Comment: Comments We note on page 28 that sales and marketing expenses include commissions to sales representatives. As applicable and if material, include the disclosure required by ASC in future filings. Considerations: As a practical expedient, the standard permits an entity to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less If an entity elects to use the practical expedient on the incremental costs of obtaining a contract, it is required to disclose that fact While not explicitly stated in ASC , we believe entities should apply the practical expedient consistently to all short-term acquisition costs Page 37

38 SEC comment letters (cont.) Topic Disclosure contracts with customers (EY FRD ) SEC Comment: Comments Tell us your significant payment terms and how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contract asset and liability balances. Disclose the information required by ASC and 50-12(b) in future filings. Considerations: Entities are permitted to disclose information about contract balances and changes therein as they deem to be most appropriate Intended to provide users of the financials information on when contract assets are typically transferred to AR or collected as cash and when contract liabilities are recognized as revenue Entities are required to provide disclosures about its performance obligations including significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained) Page 38

39 SEC comment letters (cont.) Topic Disclosure contracts with customers (EY FRD ) SEC Comment: Comments We note your disclosure that you recognize revenue for certain services over time. Please tell us how you considered the requirements in ASC to to disclose information about remaining performance obligation or application of optional exemptions. Considerations: Disclosure of information about remaining performance obligations and the amount of the transaction price allocated to such obligations, including an explanation of when it expects to recognize the amount is required Can be provided on either a quantitative basis or by disclosing a mix of quantitative and qualitative information Should only include amounts related to performance obligations in the current contract and consideration attributable to material rights for options that have not yet been exercised Optional exemptions exist to eliminate the need for entities to estimate the total transaction price solely for disclosure purposes Page 39

40 SEC comment letters (cont.) Topic Disclosure significant judgment (EY FRD ) Comments SEC Comment: Revise future filings to disclose why for performance obligations that you satisfy over time the method used provides a faithful depiction of the transfer of goods or services. Refer to ASC Considerations: When an entity has determined that a performance obligation is satisfied over time, the standard requires an entity to disclose: Method used to of recognize revenue (e.g., a description of the output methods or input methods used and how those methods are applied) Why the method selected provides a faithful depiction of the transfer of goods or services Page 40