NARUC: REVENUE RECOGNITION JULIE PETIT AUDIT SENIOR MANAGER BRIAN JONES AUDIT SENIOR MANAGER MONDAY, SEPTEMBER 11 TH, 2017

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1 NARUC: REVENUE RECOGNITION JULIE PETIT AUDIT SENIOR MANAGER BRIAN JONES AUDIT SENIOR MANAGER MONDAY, SEPTEMBER 11 TH, 2017 Mazars USA LLP is an independent member firm of Mazars Group. Mazars USA LLP is an independent member firm of Mazars Group.

2 AGENDA Overview Key consideration under the new model: Five Step Model Other aspects Page 2 AICPA Task Force Update Disclosures considerations Implementations Questions Mazars USA LLP is an independent member firm of Mazars Group.

3 OVERVIEW

4 OVERVIEW GENERAL INFORMATION The new standards were issued in May 2014 and replace nearly all existing US GAAP and IFRS guidance on revenue recognition. Several amendments were issued in 2016 that clarified the new guidance. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) Joint Transition Resource Group for Revenue Recognition (TRG) and the American Institute of Certified Public Accountants (AICPA) industry task forces are actively discussing issues. Page 4 Both Boards amended their standards resulting in some additional differences For a summary of all differences between ASC 606 and IFRS 15

5 OVERVIEW SCOPE AND EXCEPTIONS What is in scope or affected Contracts with customers Sale of some nonfinancial assets that are not an output of the entity s ordinary activities (e.g., property, plant and equipment; real estate; intangible assets) What is not in scope Everything covered by other standards Leasing contracts Insurance and other contracts Financial instruments contracts Certain nonmonetary exchanges Certain put options on sale and repurchase agreements Guarantees Page 5

6 OVERVIEW WHY IS THE CHANGE SIGNIFICANT Services (ASC ) General (CON 5) Multiple-element arrangements (ASC ) Products (SAB Topic 13) Construction-type and production-type contracts (ASC , e.g., completed contract, POC) Real estate sales (ASC ) Adoption of ASC 606 Requires evaluation of the policies, processes, systems and controls by which revenue is recognized and disclosed Utilizes more principles than prescriptive guidance and may require more estimates and greater judgment Eliminates industry-specific guidance Potential changes: Page 6 Industry guides and standards (e.g., government contractors) Software (ASC ) Change in the number of performance obligations (identify, track, allocate revenue) Timing of revenue patterns Disconnect between billing and revenue recognition, in some cases

7 OVERVIEW OBJECTIVE OF THE STANDARD - TRANSFER OF CONTROL To clarify the principles for recognizing revenue and to develop a common revenue standard for US GAAP and IFRS that would: Remove inconsistencies and weaknesses in existing revenue requirements Provide a more robust framework for addressing revenue issues Improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets Provide more useful information to users of financial statements through improved disclosure requirements Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer Page 7 New framework Transfer of control

8 OVERVIEW DRIVERS OF COMPLEXITY Less complex More complex Shorter revenue cycle Single line of business Domestic operations only Highly centralized Well-controlled process currently provides revenue estimates No change to existing performance obligations One global ERP Strong organizational change management Long-term contracts Multiple, diverse businesses Global operations Decentralized Limited estimates required by current revenue recognition process Differences in the number of performance obligations Multiple, disparate IT systems Organization struggles to implement change Page 8

9 OVERVIEW EFFECTIVE DATES Under IFRS Effective for annual periods beginning on or after January 1, Early adoption is permitted. Under US GAAP U.S. Public Companies: Effective for annual reporting periods beginning after December 15, 2017 (December 2018 calendar year end) Page 9 U.S. Nonpublic Companies: Effective for annual reporting periods beginning after December 15, 2018 (December 2019 calendar year end) Early application is permitted, but not before the original effective date (i.e. annual periods beginning after December 15, 2016)

10 OVERVIEW TRANSITION METHODS AVAILABLE Full retrospective Cumulative catch-up adjustment at 1/1/2016 Financial statements New GAAP New GAAP New GAAP Footnotes ASC 250 disclosures Page 10 Modified retrospective Cumulative catch-up adjustment at 1/1/2018 Financial statements Legacy GAAP Legacy GAAP New GAAP Footnotes Legacy GAAP (1) This slide does not reflect early adoption

11 KEY CONSIDERATIONS UNDER THE NEW MODEL

12 KEY CONSIDERATIONS UNDER THE NEW MODEL SUMMARY OF THE NEW 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 Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Page 12 Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

13 KEY CONSIDERATIONS UNDER THE NEW MODEL WHAT MAKES THIS COMPLEX? Contracts Performance obligations Transaction price Allocation Recognition timing Strict criteria to be a contract Identifying the customer Contract modifications Identify explicit and implicit contract terms Established business practices Assessing collectibility Combining contracts Identifying promised goods and services Determining performance obligations (i.e., distinct goods and services) Options granting a material right Service-type and assurance-type warranties Principal versus agent May not equal contractual price Variable consideration, including bonuses, returns, concessions, discounts Constraint on variable consideration Significant financing component Noncash consideration Payments to customers Estimating standalone selling prices Exceptions for allocating variable consideration and discounts Transfer of control: point in time or over time Measuring progress over time Consignment arrangements Customer acceptance Repurchase provisions Licenses Page 13 Subsequent changes in transaction price

14 STEP 1: IDENTIFY THE CONTRACT

15 STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER DEFINITION OF A CONTRACT A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. Can be written, oral or implied, but must meet specific criteria Does not exist if both parties can cancel a wholly unperformed contract without penalty A contract exists only if all of the following criteria are met: Parties have approved the contract and are committed to perform Each party s rights regarding the goods and services are identifiable The payment terms for the goods and services are identifiable Contract has commercial substance It is probable that the entity will collect substantially all of the consideration it s entitled to in exchange for the transfer of goods/services to the customer These criteria are assessed at the inception of the arrangement. Page 15 If the criteria are met at inception, reassessment only occurs if there is a significant change in facts and circumstances If the criteria are not met at inception, continue to assess

16 STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER WHAT HAPPENS WHEN THE 5 CRITERIA ARE NOT MET? (1/2) Does the contract meet the criteria listed in ASC 606/IFRS 15 at inception? No Continue to assess the contract to determine whether the criteria are subsequently met Yes The contract is accounted for in accordance with ASC 606/IFRS 15 i.e. revenue may be recognised See next slide for the accounting consequence in case cash is received Page 16 No reassessment of those criteria unless there is an indication of a significant change in facts and circumstances (e.g. a change in customer s credit risk)

17 STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER WHAT HAPPENS WHEN THE 5 CRITERIA ARE NOT MET? (2/2) Did the entity received consideration from the customer (and the criteria for identifying a contract are not met)? Yes No Nothing to do Does the entity have no remaining obligations to transfer goods or services to the customer and all, or substantially all, of the consideration promised by the customer has been received by the entity and is non-refundable? No Yes Yes Recognise the consideration received as revenue Page 17 Has the contract been terminated and the consideration received from the customer is non-refundable? No Recognize the consideration received as a liability until one of the above events occurs or until the criteria in ASC 606/IFRS 15 are subsequently met

18 STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER COMBINING CONTRACTS Two or more contracts entered into at or near the same time with the same customer (or related parties) are combined if any of the following conditions are met: Contracts are negotiated as a package with a single commercial objective Consideration in one contract depends on the price or performance of the other contract Some or all of the goods and services promised in the contracts are a single performance obligation Multiple contracts may be combined into a portfolio of contracts with similar characteristics if the entity reasonably expects the effects on the financial statements would not materially differ Criteria are generally consistent with underlying principles in current guidance on combining contracts Page 18

19 STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER CONTRACT MODIFICATIONS A contract modification is any approved change in the scope or price (or both) of a contract that creates new, or changes existing enforceable rights and obligations of the parties to the contract. Modifications are accounted for differently, depending on the attributes of the remaining goods and/or services Is the contract modification for additional goods and services that are distinct and at their standalone selling price? Yes No The new goods and services should be treated as a separate contract. Page 19 Are the remaining goods and services distinct from those already provided? Yes No Both yes and no Retrospective: Update the transaction price and measure of progress for the single performance obligation (recognize change as a cumulative catch-up to revenue) Blend of two Prospective: Allocate the remaining transaction price to the remaining goods and services (transaction price for performance obligations already satisfied is not adjusted)

20 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS

21 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS A performance obligation is a promise (explicit or implicit) to transfer to a customer: A distinct good or service or A series of distinct goods or services that are substantially the same and have the same pattern of transfer Performance obligations are identified at contract inception and determined based on: Contractual terms Customary business practices Incidental obligations or marketing incentives may be performance obligations (e.g., free maintenance provided by automotive manufacturers, loyalty points provided by a hotel) Page 21 Does not include activities that an entity must undertake to fulfill a contract (e.g., setup activities) unless a good or service is transferred

22 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS Two-step model to identify which performance obligations are distinct Step 1 Focus on whether the good or service is capable of being distinct Step 2 Focus on whether the good or service is distinct in the context of the contract Customer can benefit from the individual good or service on its own Or Customer can use good or service with other readily available resources Evaluate whether multiple promised goods or services work together to deliver a combined output(s) Assess whether the good or service is integrated with, highly interdependent on, highly interrelated with, or significantly modifying or customizing other promised goods or services in the contract Page 22

23 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS IDENTIFY PERFORMANCE OBLIGATIONS EXAMPLE Entity enters into a contract to manufacture and install customized equipment and provide maintenance services for a five-year period Installation services include the integration of multiple pieces of equipment at the customer s facility in order for the equipment to operate as a single unit Equipment cannot operate without installation Entity sells equipment and installation services together and does not sell installation separately Other vendors can provide the installation services The maintenance services are sold separately Page 23

24 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS IDENTIFY PERFORMANCE OBLIGATIONS EXAMPLE Step 1 Capable of being distinct Step 2 Distinct within the context of the contract Equipment Good cannot be used without installation, but customer can obtain installation from another source. Good is distinct. Move to Step 2. Equipment and installation are highly interrelated. Significant customization is required during installation. Good isn t distinct on its own, because it must be combined with installation. Installation Installation can be provided by multiple vendors, so service is distinct. Move to Step 2. See discussion above. Equipment and installation are not distinct from one another. Page 24 Maintenance Services have a distinct function, because they are sold separately. Move to Step 2. Services are not highly interrelated. No integration, modification or customization required. Services are distinct. In this example, there would be two performance obligations: (1) the equipment and installation, because they are not individually distinct; (2) maintenance services, because they are distinct services in the contract.

25 STEP 2: IDENTIFY PERFORMANCE OBLIGATIONS SERIES OVERVIEW If a good or service is part of a series of distinct goods or services that are substantially the same and have the same pattern of transfer, the series must be treated as one performance obligation if: Each distinct good or service in the series would be satisfied over time The same method of progress is used to measure the transfer of each distinct good or service in the series to the customer The FASB has confirmed that the series guidance is not an optional practical expedient rather than a requirement Page 25 Distinct & substantially the same Satisfied over time Same measure of progress One performance obligation b to 32

26 STEP 3: DETERMINE THE TRANSACTION PRICE

27 STEP 3: DETERMINE THE TRANSACTION PRICE Transaction price is the amount of consideration to which an entity expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Transaction price may vary because of variable consideration (e.g., bonuses, discounts, rebates, refunds, credits, price concessions, incentives, market-based fees). Identifying variable consideration is an important step in the new model because the constraint has to be considered for each type of variable consideration. An entity shall estimate the amount of consideration using the technique that will best predict the amount to which the entity will be entitled. Page 27 Expected value Sum of the probability-weighted amounts in a range of possible outcomes Most predictive when the transaction has a large number of possible outcomes Can be based on a limited number of discrete outcomes and probabilities Most likely amount Single most likely amount in a range of possible outcomes Most predictive when transaction will produce few outcomes

28 STEP 3: DETERMINE THE TRANSACTION PRICE CONSTRAINT ON VARIABLE CONSIDERATION An entity should include an amount of variable consideration in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Probable threshold for US GAAP Highly probable threshold for IFRS Significant is relative to the cumulative revenue recognized. At each reporting date, an entity should update its estimate of a transaction price that includes variable consideration. Page 28 Consider both the likelihood and magnitude of a revenue reversal. Common types and events that cause consideration to be variable Bonuses Incentive payments Penalties Refunds Market-based fees Discounts Returns Money-back guarantees Price concessions Volume rebates Service level agreements Liquidating damages

29 STEP 3: DETERMINE THE TRANSACTION PRICE VARIABLE CONSIDERATION Potential impact The most current GAAP limits the amount of revenue allocable to the amount not contingent on the future satisfaction of performance obligations. The new model would allow variable consideration to be allocated to performance obligations, provided that the amount is not subject to significant reversals. Because the fixed or determinable criterion goes away, treatment of variable consideration under the model may result in sell-through arrangements being treated as sell-in, leading to revenue being recognized sooner. While clients may currently estimate the impact of volume discounts and other incentives, the requirement to look forward instead of at history and the variable consideration constraint rules will create differences, particularly when entering new markets or rolling out new products to customers. Page 29

30 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATION

31 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS Transaction price is allocated to each separate performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. Determine the stand-alone selling price of each performance obligation Yes Existence of an observable selling price? No Best indication of the standalone selling price Stand-alone selling price to be estimated Page 31 Transaction price generally allocated based on relative stand-alone selling prices When stand-alone selling price is not observable, entity is required to estimate it Maximize the use of observable inputs Apply estimation methods consistently in similar circumstances Use of residual technique is allowed in limited situations Standalone selling prices used to perform the initial allocation are not updated after contract inception

32 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS Standalone selling price Observable price Best evidence If not available Adjusted market assessment approach Page 32 Estimated price Possible estimation methods Expected cost plus margin approach Residual approach

33 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS When stand-alone selling price is not observable, entity is required to estimate it. The following methods can be used: Adjusted Market Assessment Approach Estimated price in relevant markets that a customer would be willing to pay for the good or service. 33 Expected Cost Plus Margin Approach Forecasted total costs plus an appropriate margin for the good or service. Residual Approach (approach of last resort) Subtract the sum of observable stand-alone selling prices of other goods or services from the total contact price. Mazars USA LLP is an independent member firm of Mazars Group.

34 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PO EXAMPLE 1 Entity A enters into an agreement to sell hardware, professional services and maintenance services for $200,000 Entity A determines that each of the promised goods or services represents a separate performance obligation Because Entity A frequently sells professional services and maintenance on a standalone basis, it uses those transactions to determine standalone selling prices of $25,000 and $15,000, respectively Entity A rarely sells the hardware on a standalone basis, so it estimates the standalone selling price at $185,000 based on the hardware s underlying cost, Entity A s targeted margin and the amount of margin that Entity A believes the market will bear (i.e., the expected cost plus margin approach) Page 34 Performance obligation Estimated standalone selling price % of relative selling price Allocated discount Allocation of transaction price Hardware $185, $(20,600) $164,400 Professional services 25, (2,800) 22,200 Maintenance services 15, (1,600) 13,400 Total $225, $(25,000) $200,000

35 STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PO EXAMPLE 2 Assume the same facts as Example 1, except the arrangement also includes software for a total fee of $250,000 Entity A determines the software deliverable is also a separate performance obligation Entity A never sells the software on a standalone basis Entity A has bundled the software into a number of different arrangements, with the pricing for that element ranging from $15,000 to $125,000 Calculation of the standalone selling price of the software using the residual technique: Page 35 Arrangement consideration $250,000 Less estimated standalone selling prices: Hardware (185,000) Professional services (25,000) Maintenance services (15,000) Standalone selling price of software $25,000

36 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATION IS SATISFIED

37 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATIONS IS SATISFIED Model is based on transfer of control Control is the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset The benefits of an asset are the potential cash flows that can be obtained directly or indirectly in many ways, such as by: Page 37 Using the asset to produce goods or provide services Using the asset to enhance the value of other assets Using the asset to settle liabilities or reduce expenses Selling or exchanging the asset Pledging the asset to secure a loan Holding the asset

38 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATIONS IS SATISFIED Revenue is recognized upon satisfaction of a performance obligation by transferring the promised good or service to a customer Performance obligations are either satisfied over time or at a point in time To help make this determination, the standard includes criteria for determining when control transfers over time If a performance obligation does not meet any of those criteria, control transfers at a point in time Page 38

39 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATIONS IS SATISFIED Control of goods and services is transferred over time if one of the following three criteria is met: Customer is receiving and consuming benefits of the entity s performance as the entity performs Entity creates or enhances an asset that the customer controls as it is created or enhanced Entity s performance does not create an asset with alternative use, and entity has an enforceable right to payment for performance completed to date Page 39 Services Contracts Construction Contracts Consultants Services, Custom Products If no criteria are met, control transfers at point in time

40 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATIONS IS SATISFIED TRANSFER OF CONTROL How to determine that the created asset has no alternative use to the entity? Assessment is made at contract inception Both aspects in the context of 35(c)! Is the entity restricted contractually from directing the asset for another use during the creation or enhancement of that asset? (contractual restriction must be substantive) OR Is the entity limited practically from directing the asset in its completed state for another use? (e.g. design specifications that are unique to a customer or asset located in remote areas) Consider the asset that is ultimately transferred Page 40 How to determine that the entity has an enforceable right to payment for performance completed to date? Right to payment need not be a present unconditional right Consider the terms of the contract as well as any laws that apply to the contract that could supplement those contractual terms AND At all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for the performance completed to date (if the contract is terminated by the customer or another party for reasons other than the entity s failure to perform as promised)

41 STEP 5: RECOGNIZE REVENUE WHEN (OR AS) EACH PERFORMANCE OBLIGATIONS IS SATISFIED EXAMPLE 1 Issue: An entity enters into a contract with a customer to build an equipment. Payment schedule in the contract is as follows: 10% of the contract price at contract inception (advance payment) 50% of the contract price regularly throughout the construction period 40% of the contract price after construction completed and the equipment has passed the performance tests. Payments are non-refundable unless the entity fails to perform a promise. If the customer terminates the contract, the entity is only entitled to retain any progress payments received from the customer. The entity has no further rights to compensation. Analysis: The entity accounts for the construction of the equipment as a performance obligation satisfied at a point in time because it has no enforceable right to payment for performance completed to date : Even if payments made by the customer are non-refundable, those payments, at all times throughout the contract, do not at least correspond to the amount that would be necessary to compensate the entity for performance completed to date. At various time during construction, the cumulative amount of consideration received might be less than the selling price of the partially completed performance obligation to date. Page 41

42 OTHER ASPECTS OF THE MODEL

43 OTHER ASPECTS: INCREMENTAL COSTS OF OBTAINING A CONTRACT Incremental costs of obtaining a contract will be capitalized if they are expected to be recovered. Incremental costs are costs that would not have been incurred if the contract had not been obtained. The practical expedient allows immediate expense recognition if the contract is one year or less in duration. It is amortized consistently with the pattern of transfer of the related good or service and is subject to impairment. Page 43 If costs are determined to relate to more than one contract (e.g., expected contract renewals), amortization can consider both current and anticipated contracts. Potential impact Current US GAAP provides an option to either immediately expense or capitalize the costs of obtaining a contract.

44 AICPA TASK FORCE UPDATE

45 AICPA TASK FORCE UPDATE POWER & UTILITY ENTITIES The AICPA Revenue Recognition Task Forces are charged with developing revenue recognition implementation issues that will provide helpful hints and illustrative examples for how to apply the new Revenue Recognition Standard. The Power & Utility entities task force was put together to complete this objective for entities within this industry because there are unique considerations needed in order to apply the new revenue recognition standard correctly and consistently. Overall, the work being completed by the task force is not completed however progress has been made in The task force is composed of various industry specialists. The group meets to discuss key issues and topics related to the new revenue recognition implementation and then submits documentation of their analysis and issues to FinREC for approval and collation into the revenue guidebook. Page 45

46 AICPA TASK FORCE UPDATE POWER & UTILITY ENTITIES To date, the task force has discussed and submitted various issues to FinREC or for informal comment. Below is a listing of the progress of the P&U task force: Issue Description of Implementation Issue Summary of Implementation Issue # 1 Scope Clarification Regarding Tariff This implementation issue discusses whether revenues from sales under a Sales to Regulated Customers regulated utility s tariff (other than revenues from alternative revenue programs specifically excluded from the scope of Topic 606) are within the scope of Topic Accounting for Contracts with Price and/or Volume Variability This implementation issue discusses applying Topic 606 to variable-volume power & utilities contracts, and whether such contracts constitute variable consideration or whether optional volumes under such contracts represent a marketing offer for optional purchases. Status Finalized to be included in a future edition of the AICPA Guide Revenue Recognition Out for exposure until October 2, Strip vs. Step Price Arrangements This implementation issue will addresses strip (constant fixed price per unit delivered) and step (increasing fixed price per unit delivered) pricing conventions applied to the same seller performance (delivery of a fixed quantity of commodity units consecutively over a multi-year term). Out for exposure until November 1, Application of Series Guidance to Storable Commodities This implementation issue will discuss considerations for applying the series guidance described in ASC and to sales involving commodities other than electricity. This implementation issue discusses blend-and-extend modifications (whether they include a financing element), as well as treatment of partial terminations. 5 Accounting for contract modifications 6 Partial terminations This implementation issue discusses how to apply the guidance in Topic 606A to P&U contracts with a customer for a performance obligation satisfied over time, that is later terminated for only a discrete unsatisfied portion of that contract. 7 Accounting for Bundled Arrangements This implementation issue discusses the requirement to assess multiple element arrangements under ASC 606, and the appropriate timing of revenue recognition for electricity and capacity sales. 8 Revenue timing for RECs This implementation issue discusses the requirement to assess multiple element arrangements under ASC 606, and the appropriate timing of revenue recognition for RECs. 9 Contributions in Aid of Construction This implementation issue discusses the application of Topic 606 to regulated utility accounts for Contributions in Aid of Construction (CIAC). 11 Collectibility This implementation issue discusses how to assess whether regulated utility tariff sales meet the collectilibity criterion in Topic Income Statement Display of Alternative Revenue Programs This implementation issue discusses income statement presentation of alternative revenue programs. Submitted to FinREC - September 2017 Submitted to FinREC - September 2017 Submitted to FinREC - September 2017 Submitted to FinREC - July 2017 Submitted to FinREC - July 2017 Submitted to FinREC - September 2017 Submitted to AICPA RRWG Submitted to FinREC - September 2017 Page 46

47 AICPA TASK FORCE UPDATE POWER & UTILITY ENTITIES Draft revenue recognition implementation issues included for informal comment are listed below: Issue # Comment Due Date Accounting for Tariff Sales to Regulated Customers 5/1/ Requirements and Similar Contracts with Variable Volumes 10/2/ Revenue Recognition for Fixed Price Contracts Consideration of Different Pricing Conventions 11/1/2017 We would like to discuss issue 13-1 as this issue to the farthest along and has broad reaching topics for the industry This implementation issue discussed various issues and we have highlighted a few below which were presented within the working draft of the issue: Identifying the customer - FinREC believes that the individuals, businesses, and other entities receiving utility service meet the definition of a customer, as defined in FASB ASC 606, because they obtain goods or services that are the output of the utility s ordinary activities in exchange for consideration. The individual or entity requests, and the utility provides, some or all of its regulated products and services to the customer, including a. A service to stand ready to deliver the commodity, b. The delivery of the commodity and, in many cases, c. The sale of the commodity itself Page 47

48 AICPA TASK FORCE UPDATE POWER & UTILITY ENTITIES Identifying the contract - FinREC believes that an arrangement between a utility to provide service to customer under a tariff should be accounted for as a contract with a customer that is within the scope of ASC 606 if it possesses certain criteria including an agreement with customer, an obligation by utility, utility is entitled to consideration, etc. FinREC believes that the tariff provisions for sales of utility service (i.e., provisions other than those governing alternative revenue programs) represent terms and conditions incorporated by reference into the contract for utility service with the underlying customer. Although the request for utility service is often oral or written only to the extent of submitting an application for service, when service is provided, it results in a contract that is governed by the relevant tariff provisions. For non-regulated entities, such terms and conditions are generally set by the supplier and are limited by competition, typical business practices, and relevant laws and regulations. The terms and conditions for regulated sales differ only in that more aspects of the transaction price, payment provisions, and other aspects of the goods and services to be provided are specified by a third party regulator since the utility is a regulated entity. Scope - FASB ASC 606 specifically excludes alternative revenue programs from its scope. Revenue from transactions or events that does not arise from a contract with a customer is not within the scope of Topic 606, and, therefore, those transactions or events will continue to be recognized in accordance with other Topics, for example: dividends, non-exchange transactions, changes in regulated assets and liabilities. FinREC believes that revenue from sales of utility service to customers under a tariff is separately identifiable and distinguishable from revenue under alternative revenue programs. FinREC believes that tariff-based revenue from the provision of regulated utility service to a utility s customers ( utility service ) is within the scope of FASB ASC 606 Page 48

49 SEC DISCLOSURES 2017 American Water Works Company, Inc. included the following within their 10-Q filing with the SEC as of June 30, 2017: Page 49 The Company has completed its review and does not expect any change in measurement or timing of revenue recognized.

50 SEC DISCLOSURES 2017 Aqua America Inc. included the following excerpt within their 10-Q filing with the SEC as of June 30, 2017: Page 50 The Aqua disclosure is not as conclusive as American Water disclosure however it also indicates that Aqua does not believe there will be material change in their measurement of revenue and timing of recognition. Aqua discusses the recognition of contributions in aid of construction ( CIAC assets received from customer deferred on the balance sheet to a future period in order to offset with depreciation) in their disclosure indicating that these revenues would be impacted if under the scope of the new guidance. However they indicate that the AICPA task force has preliminarily concluded that CIAC is not within the scope of the new guidance which is pending final approval.

51 DISCLOSURE CONSIDERATIONS

52 DISCLOSURE CONSIDERATIONS Disclosures Objective To enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers Disclosure categories New core disclosures Other disclosures Qualitative and quantitative information about: Contracts with customers Significant judgments Assets from capitalized costs Other sources of new disclosures: Use of practical expedients Transition disclosures (e.g., ASC 250) SEC requirements (e.g., SAB Topic 11.M [SAB 74], management s discussion and analysis) Page 52

53 DISCLOSURE CONSIDERATIONS Category Subcategory Information type Frequency Contracts with customers 1. Disaggregation of revenue 2.Contract balances 3.Performance obligations Quantitative Quantitative Qualitative Quantitative Qualitative Interim and annual Interim and annual Annual Interim and annual Annual Significant judgments 4.Significant judgments Qualitative Annual Contract costs 5.Costs to obtain or fulfil a contract Quantitative Qualitative Annual

54 DISCLOSURE CONSIDERATIONS Contracts with customers Examples of categories of disaggregated revenue Type of good or service (e.g., major product lines) Geographic region (e.g., country or region) Market or type of customer (e.g., government and nongovernment customers) Type of contract (e.g., fixed-price and time-and-materials contracts) Contract duration (e.g., short-term and long-term contracts) Timing of transfer of goods or services (e.g., revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time) Sales channels (e.g., goods sold directly to consumers and goods sold through intermediaries) Page 54

55 DISCLOSURE CONSIDERATIONS Significant changes For any incremental disclosures: Make certain systems capture newly required information Is revenue appropriately tagged to allow for additional disaggregation? Do systems capture the different changes in contract balances? Do systems capture amounts allocated to performance obligations not yet satisfied? Can systems report amounts of capitalized costs? Design internal controls to make certain of the completeness and accuracy of newly disclosed information Make certain that newly required qualitative disclosures are consistent with accounting policies Page 55

56 IMPLEMENTATION CHALLENGES

57 SUMMARY OF IMPLEMENTATION CHALLENGES Analysis of existing contracts Contract modifications Increase in judgment Accounting manuals Chart of accounts Retrospective application Contract review Adapting accounting policies Page 57 Impact on KPI Implementation strategy Communication Project management Revision of systems and controls Data collection Identification of PO Determination of stand alone selling price

58 Page 58 QUESTIONS? Mazars USA LLP is an independent member firm of Mazars Group.

59 CONTACT Julie Petit Audit Senior Manager (P) (E) Brian Jones Audit Senior Manager (P) (E) Visit us: Visit us at: Follow us: Follow us: Mazars USA LLP is an independent member firm of Mazars Group.