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How Are Companies Responding • New Revenue Recognition Standard PwC
How Companies are Responding
© 2013 Leeyo Software, Inc. All Rights Reserved. Confidential Information.
New Revenue Recognition Standard
with Stig Haavardtun, PwC Assurance Partner
How are Companies Responding New Revenue Recognition Standard
Strictly Private and Confidential
January 30, 2015
How Are Companies Responding • New Revenue Recognition Standard PwC
Overview – New Revenue Recognition Standard
Step 1 – Identify the contract
• Generally consistent with existing practice
• Collectibility must be “probable”
• Additional guidance on accounting for contract modifications
Step 2 – Separate performance obligations
• Distinct criteria replaces standalone value for multiple element arrangements
• May result in more items being identified as performance obligations than under current guidance
Step 3 – Determine the transaction price
• Variable consideration must be estimated subject to a constraint
• Exception for sales-based royalty arrangements for licenses of intellectual property
• Consideration of time value of money
Step 4 – Allocate transaction price
• Transaction price allocated based on relative standalone selling prices
Step 5 – Recognize revenue
• Model is now based on transfer of control
• Specific criteria for identifying when a performance obligation is satisfied over time
Other • License (Dynamic vs. Static)
• Disclosure – much more extensive
• Contract costs
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How Are Companies Responding • New Revenue Recognition Standard PwC
Potential areas of difference
Volume Discounts Contingent
revenue “Cash cap” guidance
Service level agreements
Distributor revenue
Allocation of discounts
Units of delivery method
Extended payment terms
Sales commission Funded R&D arrangements
Certain POC methods
Ratable revenue may change
Time value of money
Consignment arrangements
Bill and hold arrangements
Other contract costs
Term licenses Certain
Subscriptions
Customer loyalty programs
Vendor protection clauses
Contract modifications
Extended Warranties
In-transit loss coverage
Discounted goods or services
No VSOE limitation
Roadmaps Implied
Maintenance Residual Approach
Customization implementation
Elimination of software guidance
Disclosures
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How Are Companies Responding • New Revenue Recognition Standard PwC
What’s the change?
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Revenue Recognition Systems
Transaction systems (order, quoting, contract processes)
Invoicing, Billing and Collections Systems
Revenue Calculation Systems
General ledger Reporting Platforms
Revenue Models & Triggers
New data may be needed from: • Ordering systems • Quoting systems • Contracting systems • Billing and invoicing systems • Cash and treasury processes • Licensing operations • CRM
Accounting guidance has changed, requiring new judgments and estimates to be made, new data capture, new calculations and new reporting to meet guidance requirements “If I change $1 of revenue, what are we going to have to change?”
New requirements may be needed in the following organizations or processes: • Revenue calculation systems • Close and accrual processes • General ledger and reporting systems • Forecasting and budgeting processes • Incentive compensation • Investor relations • Tax • Channel partner incentive programs
The new Revenue Recognition standard impacts the allocation methodologies, triggers for, and timing when revenue is recognized for products and services delivered to customers. This change impacts the order-to-cash and close-to-report cycles as shown below.
How Are Companies Responding • New Revenue Recognition Standard PwC
Implementation considerations Process and systems
• May need to update current software (ERP, revenue modules and other databases) to capture new information that was not necessary previously
Technology Involvement of IT is paramount; the new standard provides an opportunity to implement revenue automation replacing Excel and manual processes
• The standard requires companies to make more estimates and disclosures, calling for new controls and processes
Controls processes
• The new revenue standard may provide business opportunities around pricing strategy and/or product offerings and bundles
Business opportunity
• Forecasting will need to reflect the new revenue recognition timing and patterns
• As new patterns from the new standard and potential new strategies emerge, accurate forecasts may be difficult upon implementation
Forecasting
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How Are Companies Responding • New Revenue Recognition Standard PwC
Other considerations Cross functional impacts
• Bonuses are often based off of EBITDA metrics and/or revenue recognized
• The new standard may impact EBITDA and timing of revenue recognized
Compensation and bonus plans Groups outside of accounting that will need to be consulted include: Audit Committee • Investor Relations • Financial Planning &
Analysis • Sales • Legal • HR • Tax • Accounting IT Function
• New contract terms resulting from new go to market strategies should be vetted with Legal
• Existing terms could take on new meaning under the new standard. Companies may consider re-negotiating contracts to maintain the original intent
Contracts
• Timing of cash tax payments could be affected – especially if revenue recognition is accelerated under the new standard
Tax implications
• Stakeholders will want to know how revenue recognition will change and how the new standard will affect the company’s financial results
Investor relations
Investors and analysts will need to be educated on the impact of the new revenue standard
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How Are Companies Responding • New Revenue Recognition Standard PwC
PwC’s Suggested Overall Project Approach
Phased approach entities should consider in implementing the Standard
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How Are Companies Responding • New Revenue Recognition Standard PwC
Establishing the right foundation is critical for a successful project
Governance
• Identify and gain support of an executive sponsor and a business owner to lead and advocate
• Appoint a steering committee that includes affected functional areas who will guide and support
• Align sponsor, business owner, steering committee, and project manager around vision, goals, and objectives; prepare and support them to advocate for the change
Project management
• Select an experienced project manager
• Establish project management principles, processes, and practices based on past successes and lessons learned
• Staff project management and key activities with flexible, experienced staff
• Develop continuous improvement process to adapt based on lessons learned throughout the life of the transformation
Change management
• Evaluate organization’s change management capabilities, practices, structure and tools
• Determine approach to manage change for the transformation
• Enlist change team – both internal and external (if necessary)
• Initiate initial project communications to align leaders and prepare organization
Project / change management on this project will be complex given judgments inherent in adoption of a principles based accounting standard. Project plan will need to be flexible and responsive in the face of this uncertainty
We suggest including project management SMEs who have extensive experience of managing complex projects.
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How Are Companies Responding • New Revenue Recognition Standard PwC
How do I respond?
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PwC has developed a program framework encompassing every aspect of a company’s operations impacted by the Revenue Recognition standard. This forms a template for a company’s response.
• Ensure accounting policy alignment across the organization
• Understand tax implications • Collaborate with
IT team to ensure accounting inputs into system design, testing, and training
• Review business requirements and functional design specifications
• Facilitate the future state process and enable capabilities working with Finance and Accounting
• Lead the overall implementation of the solution and provide inputs to IT
• Work with Program Management to utilize a standardized implementation approach and to track program progress
• Understand the data landscape and elements required for revenue calculation and recognition and develop use cases
• Develop the data migration strategy to meet use cases
• Integrate with Accounting Oversight and Systems Implementation to enrich and convert data as per policy and system requirements
• Determine the organizational impacts, training strategy, and post-go live support model
• Collaborate with Program Management and Systems Implementation to lead employee mobilization, training, and knowledge transfer
• Understand the program plan activities and milestones to develop and execute against a communication strategy
• Understand the Accounting policy touch points along the Order to Cash and Close to Report cycle continuum
• Document Accounting impacts to any touch points along the Order to Cash and Close to Report cycle
• Develop a process oriented Use Case Template that identifies impacts across the entire program – This is for use with the other elements of this program structure
Program Management
Accounting oversight
Process & Controls Management
Systems Implementation
Organizational change
management
Data Management
How Are Companies Responding • New Revenue Recognition Standard PwC
Understanding the process flow
Understanding the process and controls management implications starts with building a comprehensive understanding of the client’s new accounting policy and the related use-cases.
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Accounting Policy Use Cases Technology Data Elements
Determine and document the technical revenue recognition accounting policy applicable for the company
Create use cases to address the accounting policy Identify and document:
• Business process • Stakeholders, owners and
actors • Systems and software • Key information
Inventory technology solutions (systems, software and stores) Identify and document:
• Functionality • Integration • Security • Controls
Inventory key data elements Identify and document data element:
• Existence • Quality • Life-cycle • Controls
How Are Companies Responding • New Revenue Recognition Standard PwC
Use case details
For each variation in business model, product type and order channel, management should consider documenting a use case based on the following framework elements:
• Revenue processing rules, as driven by GAAP requirements
• Reporting rules, as driven by GAAP and internal requirements
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Expected Processing Rules:
• Identify Contracts
• Identify Performance Obligations
• Identify Transaction Price
• Allocate Transaction Price
• Recognize Revenue
Expected Reporting Rules:
• GAAP/SEC
• Sales and Compensation
• Business Unit/Geography
• Product
How Are Companies Responding • New Revenue Recognition Standard PwC
Linking system capabilities to processes
Revenue automation scope includes 3 key processes – Assess Contract, Allocate Revenue, & Release Revenue
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Identify
Contract Assess Contract
Transact Contract
Report Revenue
Release Revenue
Elements/SKU/ Item Master
Customer Contracts
Delivery Fulfillment
GAAP Reporting Distinct Performance Obligations
Allocate Revenue
Establish Fair Value
Bundled SKUs
Marketing Programs /Promotions
Terms and Conditions
Standard and Discount Pricing
Delivery Obligations
Customer Master
Deferred Revenue Elements
Pre-defined Product/Service Bundle
Revenue Deferral/hold
Simple “Accounting MEA”
Complex “Accounting MEA”
Sales Orders
Invoices
Adjustments/ Cancellations
Pricing
Consumption-based Billing
Establish Revenue Allocation Rules
Compare Sell Price vs Fair Value
Revenue Allocation
Build Deferred Revenue Schedule
Amortize Service Revenue
Record Revenue/Deferred Revenue
Provision Services
Apply Revenue Release Triggers
Calculate Deferred Revenue/Reserves
Manage revenue waterfall
Revenue Forecasting
Segment/Channel Reporting
Management Reporting/WWIC
Statutory Reporting
Revenue Compliance Monitoring
In-scope processes for revenue automation solution
Automated via transaction system
Automated outside of revenue automation solution (could be based on reports from revenue automation solution)
*In scope and automated processes are dependent on specific system capabilities
How Are Companies Responding • New Revenue Recognition Standard PwC
What can be automated
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Manual
Automated
• Straight-forward single element revenue recognition
• Overtime (Ratable) revenue recognition for service/maintenance
• Point in Time - Revenue recognition on an systematic pattern
• Performance Obligation breakout with bundled SKUs
• Standalone Selling Price calculation and allocation
• Fair Value establishment (i.e. standalone selling price)
• Simple deal/contract deferral (e.g., FOB, partial shipment)
• Linking deals/contracts into multiple elements arrangement
• Complex deal/contract deferrals
• Deal/contract review
• Variable considerations
• Simple cost deferral
• Complex cost deferrals
How Are Companies Responding • New Revenue Recognition Standard PwC
Data management implications
The following are a list of expected master and transaction data sets that will be impacted and/or required for the New Standard
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• Product/Service • Pricing & Discounts • Customer • Volume Licensing Offer
Master Data
• Contract (MPSA, PAR Agreement) • Sales Order • Benefits
Sales Transaction Data
• Billing Document • Credit/Debit Memo • AR/Collection • GL posting for Revenue Adjustments
Billing & Collection Data
• Fulfillment (physical or digital delivery) • Provisioning (services) • Entitlement
Revenue Trigger Data
How Are Companies Responding • New Revenue Recognition Standard PwC
C2C process implications – Revenue processing
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Calculate Standalone Selling Price
Variable Consideration Management
Options for Future Goods Combine Contracts
Contract Reviews
Revenue Processing
Revenue processing now follows a five step process with allocation and recognition based on performance obligations
Contracts entered into at or near the same time and are negotiated as a package, payment is interdependent, and reflects a single performance obligation must be combined
Free or discounted future products and services can give rise to performance obligations
Contract review process needs to be updated and provide inputs into first three steps of the revenue recognition process
Recognize Revenue Identify Contracts with Customers
Identify Separate Performance Obligations
Determine Transaction Price
Allocate Revenue
Contract Modifications
Disclosures and Reporting
Contracts create enforceable rights and obligations and collectability is probable at contract inception
Unique promises in a contract to transfer goods or services to a customer need to be identified
Establish the expected or most likely transaction price, considering both variable and non-cash considerations
Transaction price allocated to separate performance obligations based on relative standalone selling prices
Standard allows for the recognition of revenue when control is transferred to the customer
Constrained to the amount for which it is probable [US GAAP] or highly probable [IFRS] that a subsequent change in the estimate would not result in a significant revenue reversal
A modification is a change in the scope or price or both of a contract and it creates new, or change existing, rights and obligations under the contract
Disclosures are enhanced compared to current requirements and data gaps/system requirements may need to be addressed to populate disclosures
VSOE, TPE, BESP hierarchy goes away and only the selling price of an item provides the strongest evidence
Cost Capitalization
Requirement to capitalize incremental contracts costs if amortization period is greater than a year
How Are Companies Responding • New Revenue Recognition Standard PwC
PwC Revenue Recognition Toolkit
PwC has developed a suite of flexible, project-enabling tools and templates to support our clients to quickly mobilize and help facilitate an efficient and effective conversion project
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How Are Companies Responding • New Revenue Recognition Standard PwC
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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Thank You !
How Are Companies Responding • New Revenue Recognition Standard PwC
Stig: stig.haavardtun@us.pwc.com
Leeyo.com
© 2013 Leeyo Software, Inc. All Rights Reserved. Confidential Information.
Leeyo: sales@leeyo.com