ASC 606 - New Revenue Recognition .(ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840)

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Transcript of ASC 606 - New Revenue Recognition .(ASC 605-35, e.g., Completed Contract, POC) Leasing (ASC 840)

  • ASC 606 - New Revenue Recognition Standard

    29 March 2017

  • Page 2

    Agenda

    Refresher on the new standard 5 step process Disclosure requirements Practical expedients

    Recent developments Recently issued ASUs

    Implementation challenges Transition disclosures What are we seeing?

    Next steps Q&A

  • Page 3

    OverviewWhats the change?

    Transfer of control Single, global revenue

    standard for all transactions More principles than

    prescriptive, anti-abuse-oriented rules

    Potential changes: More performance

    obligations (identify, track, allocate revenue)

    Disconnect between billing and revenue recognition

    More estimates included in revenue

    Change in revenue patterns Lost revenue upon

    transition

    Product Revenue(SAB Topic 13)

    Construction(ASC 605-35,

    e.g., Completed Contract,

    POC)

    Leasing(ASC 840)

    Software Revenue(ASC 985-605)

    Industry Guides(e.g., Government Contractors)

    Multiple Element Arrangements

    (ASC 605-25)

    Service Revenue(ASC 605-20)

    General(CON 5)

    ASC 606

  • Page 4

    OverviewEffective date

    The FASB issued a one-year deferral of the original effective date for ASC 606 Revenue from Contracts with Customers Standard will be effective for public entities for annual periods beginning

    after 15 December 2017 (2018 for calendar year-end companies) Nonpublic entities will still have the option of an additional year (effective

    for annual periods beginning after 15 December 2018) Early adoption will be allowed for both public and nonpublic entities

    using the original effective date (2017 for calendar year-end companies) The deferral was issued through ASU 2015-14 on 13 August 2015 The IASB also issued a one-year deferral as an amendment to IFRS

    15 on 11 September 2015

  • Page 5

    OverviewEffective date

    Dates shown are for calendar year-end entitiesMandatory adoption

    Public

    Nonpublic

    Early adoption

    Nonpublic

    1 January 2019

    1 January 2017

    1 January 2018

    31 December 2017 annual F/S

    Fiscal Year Effective date First presentation

    31 March 2018 10-Q

    31 December 2019 annual F/S

    Public 1 January 2017 31 March 2017 10-Q

    31 March 2017 interim F/S

    1 January 2018 31 December 2018 annual F/S

    31 March 2018 interim F/S

    1 January 2019 31 March 2019 interim F/S

  • Page 6

    OverviewEffective date contd

    Entities should carefully evaluate the expanded definition of a public entity used in the standard Determination may be complex for certain entities

    New standard defines a public entity as one of the following: Public business entity (as defined under ASU 2013-12) Not-for-profit entity that has issued, or is a conduit bond obligor for,

    securities traded, listed or quoted on an exchange or OTC market Employee benefit plan that files or furnishes financial statements with

    the SEC If none of the criteria are met, an entity is considered a nonpublic

    entity under the standard

  • Page 7

    OverviewTransition methods

    Full retrospective

    Modified retrospective

    Financial statements

    Financial statements

    Footnotes

    Footnotes

    New GAAP New GAAP New GAAP

    New GAAPLegacy GAAP Legacy GAAP

    Legacy GAAP

    ASC 250 disclosures

    Cumulative catch-up adjustment at 1/1/2016

    20182016 2017

    Cumulative catch-up adjustment at 1/1/2018

    (1) This slide does not reflect early adoption

  • Page 8

    OverviewTransition method summary

    Key considerationsFull retrospective approach(excludes practical expedients) Modified retrospective approach

    Apply to which periods presented?

    All periods presented Only the most current period presented

    Apply to which contracts?

    All contracts that would have existed during all periods presented if the new standard had been applied from contract inception

    Any contracts existing as of effective date (as if new standard had been applied since inception of contract), as well as any new contracts from that date forward (FASB allows entities to apply this method to all contracts)

    Recognition of the effect of adoption in the financial statements?

    Follow requirements of ASC 250, cumulative effect of changes to periods prior to periods presented is reflected in opening balance of retained earnings

    Reflect cumulative effect of changes in the opening balance of retained earnings in the most current period presented

    Adoption disclosure requirements?

    Follow requirements of ASC 250, including disclosure of the reason for the change and the method of applying the change

    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 (effectively requires two sets of books during the year of adoption)

  • Page 9

    OverviewScope and exceptions

    Contracts with customers Sale of some nonfinancial assets that are not an output of

    the companys ordinary activities (e.g., property, plant and equipment, real estate, intangibles)

    Capitalization of certain costs

    Leasing contracts Insurance contracts Financial instruments contracts Certain nonmonetary exchanges Certain put options on sale and repurchase agreements Guarantees within the scope of ASC 460

    What is in scope

    What is not in scope

  • Page 10

    OverviewDrivers of complexity

    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

    Less complex More complex

  • Page 11

    Core principle Recognize revenue to depict the transfer of 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

    5 step processSummary of the model

    Step 1:

    Step 2:

    Step 3:

    Step 4:

    Step 5:

    Identify the contract(s) with the customer

    Identify the separate performance obligations in the contract

    Determine the transaction price

    Allocate the transaction price to the separate performance obligations

    Recognize revenue when each performance obligation is satisfied

  • Page 12

    Disclosure requirements

    Disclosures

    ObjectiveTo 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),

    MD&A)

  • Page 13

    Disclosure requirements contd

    A public entity is required to disclose information about remaining performance obligations, including: The amount of the transaction price allocated to performance obligations

    that are unsatisfied (or partially unsatisfied) as of the end of the reporting period

    When it expects to recognize the amount(s) in its interim and annual financial statements

    FASB provided optional exemptions that allow an entity to elect not to make quantitative disclosures about remaining performance obligations in certain situations, including when: An estimate of the transaction price would be made solely for disclosure purposes Contracts have an original expected duration of less than one year

    When the optional exemption is applied, additional qualitative disclosures are required.

  • Page 14

    Disclosure requirements contd

    Category Subcategory Information type Frequency

    Contracts with customers

    Disaggregation of revenue Quantitative Interim/annual

    Contract balancesQuantitative Interim/annual

    Qualitative Annual

    Performance obligationsQuantitative Interim/annual

    Qualitative Annual

    Significant judgments N/A Qualitative Annual

    Contract costs N/AQuantitative

    AnnualQualitative

    Other

    Practical expedients Qualitative Annual

    TransitionQuantitative

    Interim/annualQualitative

    SEC requirementsQuantitative

    Interim/annualQualitative

  • Page 15

    Disclosure requirementsChanges

    Current disclosures Potential changes

    Future requirements

    Potential MD&A discussion of

    significant WIP and deferred

    revenue

    Contract balances

    Revenue by segment

    Disaggregated revenue

    Further disaggregation within segments Disaggregation by multiple categories

    More prescriptive requirements for narrative discussion

    Applies to all contract balances Required to be audited

  • Page 16

    Disclosure requirementsChanges

    Current disclosures Potential changes

    Future requirements

    No current requirements

    Significant judgments and contract cost

    assets

    Backlog Performance obligations

    Required for all unsatisfied performance