Leeyo and PwC Webinar on IT Impact of ASC 606 Revenue Recognition Rules

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


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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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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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.


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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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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PwC’s Suggested Overall Project Approach

Phased approach entities should consider in implementing the Standard

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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 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


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


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


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


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


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


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


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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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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Leeyo and PwC Webinar on IT Impact of ASC 606 Revenue Recognition Rules

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