The New Revenue Standard State of the Industry and Prevailing Approaches for Adoption Where are we today and what s to come?

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Ernest Holt
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1 The New Revenue Standard Where are we today and what s to come? June 26, 2017

Speaking with you today Grant Casner Grant has been with Deloitte for over 14 years and advises companies on complex accounting and financial reporting challenges.

2 Speaking with you today Grant Casner Grant has been with Deloitte for over 14 years and advises companies on complex accounting and financial reporting challenges. These services include assisting companies with transactional accounting needs (e.g., IPO readiness, carve outs, purchase accounting, etc.), implementing new or modified accounting standards (e.g., ASC 606, Revenue from Contracts with Customers and ASC 842, Leases), converting from one set of accepted accounting standards to another (e.g., US GAAP to IFRS) and addressing the operational challenges that result from changes to accounting processes, technology platforms and internal/ external information needs. He has been advising clients through the adoption of the new revenue standard since late Partner Deloitte & Touche LLP Grant primarily serves companies in the Technology, Media & Telecommunications (TMT) industry, with an emphasis on technology and internet companies. He has extensive experience serving both SEC registrants and non-public institutions and understands the complex financial reporting, internal control and regulatory requirements that accompany the matters mentioned above. Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 2

3 Agenda Benchmarking survey results professional update on project implementation schedules Transition approaches full retrospective vs. modified retrospective approaches Implementation and business considerations Specific application issues: Hot topics Contract modifications Contract costs Disclosures Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 3

Revenue recognition Implementation considerations Transition method The following chart illustrates the percentage of SEC registrants that have disclosed

public filings made by nearly 1,000 SEC registrants as of May 31, 2017, of which 15 have early adopted (8 companies applied the full retrospective transition

5 Revenue recognition Implementation considerations Transition method The following chart illustrates the percentage of SEC registrants that have disclosed their anticipated transition method in their most recent SEC filings: 9% 51% 40% Full Retrospective Modified Retrospective Undecided/Other Note: Based on public filings made by nearly 1,000 SEC registrants as of May 31, 2017, of which 15 have early adopted (8 companies applied the full retrospective transition method and 7 companies applied the modified retrospective transition method). Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 5

6 Revenue recognition Implementation considerations Transition method (continued) Of those SEC registrants that stated their anticipated transition method (i.e., excluding undecided or undisclosed registrants), the following summarizes the anticipated transition method by industry sector: Automotive Chemical & Specialty Materials Consumer Products Financial Services Health Care Providers & Plans Industrial Products & Services Life Sciences Media & Entertainment Oil & Gas Power & Utilities Real Estate Retail and Distribution Technology Telecom Travel and Hospitality Full Retrospective Modified Retrospective Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 6

Revenue recognition SAB 74 disclosures Over one-third of our sample population believes that the impact of adopting the standard

Almost all of our sample companies have disclosed that their implementation efforts are ongoing.

40 Quantitative Considerations Significant Matters to Address 35 100 30 25 90 80 70 20 15 10 60 50 40 30 5 0 Belief that impact is

7 Revenue recognition SAB 74 disclosures Over one-third of our sample population believes that the impact of adopting the standard will be immaterial, and significantly fewer companies disclosed the quantitative impact of adoption. Almost all of our sample companies have disclosed that their implementation efforts are ongoing. However, only slightly more than half have provided specifics about unresolved matters relate to their implementation analysis. 40 Quantitative Considerations Significant Matters to Address Belief that impact is immaterial Quantification of impact Still assessing effects Elaborated on open matters YE Q1 YE Q1 Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 7

9 Allowable transition methods Full retrospective approach Restate prior periods in compliance with ASC 250 Optional practical expedients Modified retrospective approach Apply revenue standard to contracts not completed as of effective date and record cumulative catch-up Required disclosures: Amount of each F/S line item affected in current period Explanation of significant changes Cumulative catch-up January 1, 2018 Initial application year 2018 Current year 2017 Prior year Prior year 2 New contracts New ASU Existing contracts New ASU + cumulative catch-up Legacy GAAP Legacy GAAP Completed contracts Legacy GAAP Legacy GAAP UPDATE: Practical expedient for contract modifications (FASB & IASB) Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 9

10 Key considerations Significance of accounting changes IT implementation and system considerations Number, length and terms of contracts Disclosure requirements Availability of historical information, comparability, and dual reporting Transition options choices Stakeholder perception Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 10

12 Implementing ASC 606 Common implementation considerations Companies implementing new revenue standard are focusing on: Assessment of impacts Availability of data Scenario development, business requirements development, functional requirements development Design, development, and testing of needed systems adjustments Stakeholder specific concerns i.e., Controls, Tax, Investor Relations Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 12

14 Revenue recognition Hot topics Topic Applicable guidance Key issues Contract modifications Changes in transaction price If additional distinct goods or services are added and the price increase reflects the stand-alone selling price ( SSP ), then account for the modification as a separate contract If not, the accounting depends on whether the remaining goods or services are distinct from those already transferred: If yes, prospective treatment ( new contract ) If no, cumulative catch-up adjustment An entity should allocate changes in the transaction price on the same basis as at contract inception Application of this guidance may result in a cumulative catch-up adjustment to revenue for amounts allocated to satisfied performance obligations When does the modification guidance apply (e.g., early renewals, trade ins, contract negotiations, concessions, etc.) Determining when goods are added at SSP Differentiating a change in transaction price from a modification Accounting for both a change in transaction price and a modification Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 14

15 Revenue recognition Hot topics (continued) Topic Applicable guidance Key issues Termination provisions (contract term) Essential software Contracts with customers may have no fixed durations and can be modified or terminated without penalty; other contracts may automatically renew An entity shall apply the new revenue standard to the duration of the contract in which the parties to the contract have present enforceable rights and obligations Examples of licenses that are not distinct from other goods or services promised in the contract include a license that forms a component of a tangible good and that is integral to the functionality of that good How do early termination provisions that result in refunding amounts impact the accounting for licensing arrangements Differentiating essential software that is embedded in a device versus software that is separate from the device (e.g., networking software) Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 15

16 Revenue recognition Hot topics (continued) Topic Applicable guidance Key issues Term license renewals Material rights Revenue cannot be recognized from a license of intellectual property before both: a. An entity provides (or otherwise makes available) a copy of the intellectual property to the customer b. The beginning of the period during which the customer is able to use and benefit from the license (even if they already have a copy of the license) If an entity grants a customer the option to acquire additional goods or services at a discount that is incremental to discounts typically given, then the option may represent a material right If an option represents a material right, then it should be accounted for as a separate performance obligation, which will result in a deferral of revenue Timing of recognition for early renewals of term licenses changes under 606. Modifications that are a termination of a contract and creation of a new contract Determining SSP for early renewals Identifying implied material rights in a contract Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 16

17 Revenue recognition Hot topics (continued) Topic Applicable guidance Key issues SaaS Revenue Recognition Contract costs The objective when measuring progress of over time recognition of revenue is to depict an entity s performance in transferring control of goods or services promised to a customer Providing a service of standing ready to make a good or service available to a customer when called upon may be the promise in a contract Capitalize the incremental costs to obtain a contract with a customer if the costs are expected to be recovered Additional fulfillment cost guidance Capitalized contract costs should be amortized on a systematic basis consistent with the pattern of transfer of related goods or services Identifying a single measure of progress in SaaS arrangements Differentiating usage that is used to determining pricing versus usage that is used to measure performance Contracts with both fixed and variable consideration Identifying incremental costs incurred to obtain a contract (e.g., commissions) and when to capitalize Amortization period of capitalized contract costs (e.g., contract term versus customer life) How to identify and account for impairment Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 17

18 Revenue recognition Hot topics (continued) Topic Applicable guidance Key issues Determining standalone selling price Noncash consideration An entity should determining the SSP of each distinct good or service at contract inception The objective when allocating the transaction price is to allocate to each performance obligation an amount for which the entity expects to be entitled in exchange for transferring the goods or services to the customer Use of residual approach may be appropriate when the price of a good or service is highly variable An entity should include consideration that is in a form of other than cash in the transaction price based on its fair value at contract inception If a customer contributes goods or services to facilitate fulfillment, it is considered noncash consideration if the entity obtains control of the goods or services Use of constant renewal percentage to determine SSP Is it appropriate to use a contract specific SSP When should the residual approach be used How does class of customer impact the assessment (inconsistent discounting) Customer furnished materials Valuation of ad inventory as part of noncash consideration Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 18

19 Revenue recognition Hot topics (continued) Topic Applicable guidance Key issues Disclosures Enhanced qualitative and quantitative disclosures: a. Disaggregation of revenue b. Information about contract balances c. Remaining performance obligations d. Information about performance obligations e. Description of significant judgments Availability of data to support additional requirements Applying practical expedients Principal-Agent Considerations If the nature of an entity s promise is to transfer goods or services to the customer itself, it s acting as principal If the nature of an entity s promise is to arrange for goods or services to be provided by another party, it s acting as an agent Fewer indicators of whether an entity is acting as principal than under ASC 605 and no indicators of whether an entity is acting as an agent Copyright 2017 Deloitte Development LLC. All rights reserved. The New Revenue Standard, 19

This document contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or

21 This document contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decisions or actions that may affect your business or to provide assurance that any decision or action will be supported by your auditors and regulators. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this document. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms.. Copyright 2017 Deloitte Development LLC. All rights reserved. 36 USC

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