Revenue Recognition Control Tools

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1 Revenue Recognition Control Tools May 2010

description

Revenue Recognition Control Tools. May 2010. Agenda. Revenue Recognition Controls - Overview CSA - Basics CSA - Fields Interpretation CSA - Revenue Decision Trees CSA - Revenue Upload CDR – Client Document Repository RRT - Revenue Reconciliation Template Available reports - PowerPoint PPT Presentation

Transcript of Revenue Recognition Control Tools

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Revenue Recognition Control Tools

May 2010

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Agenda

• Revenue Recognition Controls - Overview

• CSA - Basics

• CSA - Fields Interpretation

• CSA - Revenue Decision Trees

• CSA - Revenue Upload

• CDR – Client Document Repository

• RRT - Revenue Reconciliation Template

• Available reports

• Summary of Errors

• Enhancements

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Revenue Recognition Controls – Overview

Revenue Recognition Controls are a critical component of our overall control

environment in ensuring the accurate recording and reporting of the

financial results of our business

To that end, Revenue Recognition Control (RRC) tools have been developed with a focus on Agency-level controls, supported by Regional, Network, and Corporate management monitoring controls:

• Client Services Arrangement Form (CSA)

• Revenue Reconciliation Form (RRT)

https://frc.interpublic.com

• Client Document Repository (CDR)

http://e-imaging.interpublic.com/Contracts

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CSA BASICS

IPG EMEA RMC

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Purpose of Revenue Recognition Tools: CSA

• CSAs have been designed to capture and maintain critical accounting related information about IPG agreements with clients (such as contracts, purchase orders, signed estimates, etc.) and the revenue streams associated with them to facilitate the consistent selection and application of the appropriate revenue recognition method(s).

The tool also facilitates and documents the appropriate levels of review and approval.

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CSA Basics

• What information is captured in the CSAs?

CSAs contain various information including: Client and account executive name;

Description of services to be provided and the expected type of revenue streams;

Form of persuasive evidence;

Contract value and term of the arrangement;

Existence of continuation clauses or termination provisions; and

Sign-offs

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CSA Basics • When to create a CSA?

Completion of a CSA is required for all client agreements

NOTE: All revenue earned by an agency for services provided shall be included in a CSA for each arrangement regardless whether services are provided to clients who are also vendors and affiliates

• CSAs are typically single/standalone but may be bundled (when certain criteria are met)

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CSA Basics

• When to edit a CSA After CSAs have been created, they should be periodically

reviewed in order to make corrections or update information for changes regarding the arrangement

However, updates should be made when changes requiring modification to the CSA take place or when the information becomes available

Examples of reasons for modifying CSAs: Addition of new services (new revenue stream) or change in contract

value

Changes in contract terms and conditions or scope of work

Changes in the form or status of persuasive evidence, for example The receipt of a formal signed contract replacing an interim agreement

letter

Notification of contract termination

Annually RMC contract compliance sends an email to remind users to review CSAs for possible required updates

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CSA Basics• When to edit a CSA (cont’d)

Corporate Controllers issued new guidelines in late 2009 that fee changes less than 5% of total contract value do not require timely updates to the CSA

Update is required if incremental fee results in contract value reaching threshold requiring additional level of review

Validation errors will result when attempting to upload revenue in excess of CSA contract value

NEW ENHANCEMENT (April CSAs) : New validation logic:

Uploaded revenue can exceed contract value up to 5% before validation error occurs Edits to contract value (regardless of whether they are greater or less than 5% of

contract value) do not require a restart of workflow Contract value increases requiring the next level of review will automatically be routed

to the next level for sign off However, changes to form of persuasive evidence will still require a restart of workflow

CSA User Guide and SP&P 210 will also be updated as necessary

NOTE: A significant number of deficiencies were noted for lack of updating the CSA for changes – primarily relating to additional revenue streams, changes in contract value and the form of persuasive evidence.

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CSA Basics

Role of the reviewer

• Ensures information included on the CSA document is complete and accurate based on the persuasive evidence provided

CSAs need to be reviewed when document status is not “final”

Reviewers should utilize available management and ad-hoc reports to assist them in their review (i.e. to identify CSAs with overridden revenue methodologies, CSAs not in “final” status, etc.)

• Ensures that adequate persuasive evidence exists

• Ensures revenue methodology selected is in accordance with IPG Policy

• Signing the CSA document is confirmation of the above

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CSA FIELD INTERPRETATION

IPG EMEA RMC

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CSAs are organized into the following 10 Sections:

• 1. Administration

• 2. CSA Information

• 3. IPG Role

• 4. Persuasive Evidence

• 5. Fixed or Determinable Price

• 6. Collectability

• 7. Revenue Streams

• 8. Comments

• 9. Revenue Upload- Revenue Stream Balances

• 10. Sign Off

CSA Fields Interpretation Guidance

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Section 2: CSA Information

• CSA ID

• Master CSA ID

• CSA Description

• Effective Date

• Is there a specific End Date?

• Are separate fee arrangements required?

• Fee Arrangement End date

• Discontinue after December of this year?

CSA Fields Interpretation Guidance

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Effective date:

• Date when the client arrangement becomes in force

• It is not necessarily the date the agreement was signed!

• Effective Date of the CSA remains the same for framework agreements even when fees and scope are negotiated annually

The question “Are separate fee arrangements required?” should be answered YES.

• It is recommended that additional commentary be added in connection with the receipt of additional forms of PE (such as Local Participation Agreements; Local Addendum; WO’s; Annual SOW and fee arrangements; PO’s; etc.) under Section 4: Persuasive Evidence.

The relevant additional PE and the framework contract should be uploaded into CDR

• In a bundled CSA, the Effective Date should be completed with the first day of the month when the CSA is initially created

CSA Fields Interpretation Guidance

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End Date:

• The end date is when the client arrangement term expires

• It will normally be found in the term & termination clauses in contracts

• If there is no end date or term indicated and nature of services is ongoing, it implies it is an evergreen contract

All non-evergreen agreements require an end date

NEW ENHANCEMENT :

• (April) CSA signoffs will remain on the document for 3 months after the specified end date or fee arrangement end date. If there is no change to the document, and it is rolled into the 4th month, all signoffs will be removed

CSAs that have used an end date of 12/31/2009 or prior will no longer have signoffs on the April documents

• (Proposed) Create a report that would identify CSAs where both “End Date” and “Fee arrangement end date” are blank

CSA Fields Interpretation Guidance

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End Date (cont’d):

• “Revenue Recognition and Contracts Anniversary Report” can currently be reviewed to identify CSAs with expired end dates as well as those expected to expire in next 90 days (in Management Reports section of tool)

NEW ENHANCEMENT:

• (Proposed) Add “Fee Arrangement End Date” to the report

CSA Fields Interpretation Guidance

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Are separate fee arrangements required?

• In those cases where the fee is not included in the general framework arrangement or is not valid for the entire period of the arrangement, the answer to this question should be “YES”. This is common in the following situations:

Framework contracts

Evergreen contracts or contracts beyond 1 year duration

Note: Deficiencies were noted where the question was answered NO due to the existence of a continuation clause although annual fee discussions were expected

CSA Fields Interpretation Guidance

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Discontinue after December of this year?

• This refers to the ability to stop the roll forward of the CSA to the next calendar year

• This should be answered “YES” when there is a specified end date within that calendar year

In multiple year contracts it should be answered “NO” until the final year of the contract

• CSA should be updated to select “YES” if contract or services have been terminated early

NEW ENHANCEMENT:

• (April) As noted previously if a CSA is rolled 4 months past the specified “End Date” or “Fee arrangement End date” all sign offs will be removed from the document.

CSA Fields Interpretation Guidance

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Discontinue after December of this year? (cont’d)

NEW ENHANCEMENT (cont’d):

• (Proposed) Considering validation logic that would prevent ALL CSAs from rolling into 2011 Due to the number of enhancements during 2010 to ensure all

CSAs are the most recent version

• (Proposed) Deleting the question “Discontinue after December of this year” as it is no longer needed with the question “No future revenues expected” in Section 10 as well as the above (Proposed) Enhancement

NOTE: A number of deficiencies were noted in connection with rolling over CSAs inappropriately; CSA question answered incorrectly; as well as rolling over CSA with outdated decision trees that documented wrong revenue recognition method

CSA Fields Interpretation Guidance

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Evergreen contracts

• These are contracts with no End Date

• In most cases the general terms and conditions will continue indefinitely but fees and scope of work need to be negotiated annually

• This should not be confused with an “Evergreen/Continuation” clause which gives the agency the ability to continue to bill the client at the prior year rate until such time as a new fee is negotiated

Need to look closely at language to assess whether revenue can continue to be recognized

CSA Fields Interpretation Guidance

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Case: 1

Contract reads:

• “The contract will become effective (either earlier or later) when it is fully signed by Client and Agency”.

• “The contract expires on December 31, 2011, unless terminated earlier by either party”.

• “Client will pay Agency 8% commission on net media spend for the provision of media services as described under clause 5”

Note: Contract is signed by the agency on December 1, 2009 and by the client on January 1, 2010.

QUESTIONS What is the effective date? Is the contract evergreen? Is there a termination date? Do we need a separate annual fee arrangement? Will it discontinue after December this year?

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Case 1

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Section 2: CSA Information – (cont’d) (i)

• Client Name

• Group Name / Additional Client Detail

• Ultimate Parent Name

• Services To Be Provided Primary

Secondary

Other

• Is this a bundled CSA?

CSA Fields Interpretation Guidance

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“Bundled” CSA

• Generally, jobs can be “bundled” together as a single CSA if the following criteria is met:

All jobs have appropriate Persuasive Evidence as well as the following: Individual jobs have a total value of less than $250,000 and

All jobs are for the same client (and each job has a separate arrangement / project statement) or

The jobs are for different clients but all jobs use the same revenue recognition method

• In situations when an agency has a large number of small Jobs that are not covered by a “master services agreement” or “framework contract”, then these Jobs can be combined (“bundled”) together into one or more bundled CSAs

• Agreements for which a revenue stream will be overridden should not be included in a ‘bundle’ with agreements where the revenue stream will not be overridden (i.e. a PP contract overridden to SL should not be bundled with agreements that SL is valid without an override)

CSA Fields Interpretation Guidance

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“Bundled” CSA (cont´d.)

• Bundled CSAs have too often become a dumping ground to meet “compliance” with CSA requirements without considering the appropriateness of the bundle

NEW ENHANCEMENT:• (Proposed) The aggregate contract values be subjected to the threshold reviews by

Regional, Network and Corporate management, as appropriate (i.e. delete “bundle” question)

• (Proposed) Embedding an excel template to track each agreement in the bundle The template will include the “key” questions for revenue recognition The questions will need to answered when an agreement is added to the bundle as well as

each quarter

NOTE: A number of deficiencies were noted for improper bundling primarily for values in excess of $250,000 and different clients with different revenue recognition methods

CSA Fields Interpretation Guidance

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Creation of a “Bundled” CSA

• Created in the same manner as other CSAs with the following exceptions:

• The field, Effective Date, will be the first day of the month the CSA is initially created

• Answer to the question, “Is this a bundled CSA?” is YES

• The fields regarding the appropriate signatures of the arrangement in Section 4, are left blank

Note: These fields are disabled when there is a “YES” to question “Is this a bundled CSA?”

• The field, Contract Value, in Section 5 should be completed with an estimate

The level of review required currently remains at the local controller level

CSA Fields Interpretation Guidance

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Case: 2

Contract reads

• “This Contract is effective on January 1, 2010 and shall remain in force until terminated by any party. This Contract sets up the general work conditions between the parties. For each of the Services listed on Annex I the parties will agree upon a separate Project Agreement (PA) for which the general conditions of this Contract are applicable. If any terms of this Contract are in conflict with any terms of the specific PA, the terms of this Contract shall govern, unless explicitly set forth otherwise in the specific Project Agreement”.

Note: Client and Agency sign a PA for each of the services and each PA is below 250K USD, the sum of all PAs are over 250KUSD . All PAs are covered by the terms and conditions of the Contract.

QUESTIONS Is this a Bundled CSA?

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Case 2

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Section 2: CSA Information – (cont’d) (ii)

• Is there an Evergreen Clause and Continuation Clause that allows you to recognize revenue?

• Is proof of acceptance required? Form of Evidence

• Is proof of delivery required? Form of Evidence: April enhancement: Are there significant deliverables noted in the contract?

• Is there a reconciliation or periodic reporting requirement? April enhancement: The response to this question will be compared to decision tree to

ensure consistency

Is there a requirement for periodic reconciliation or periodic reporting of hours?

• Is there a true up or settlement requirement? April enhancement: The response to this question will be compared to decision tree to

ensure consistency

Needs to be an independent question (not a drop down based on previous question)

• Is this a requirement for information purposes only? April enhancement: This question has been deleted

CSA Fields Interpretation Guidance

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Section 2: CSA Information – (cont’d) (ii)

• Is there a termination clause indicating the agency is entitled to a portion of the revenue? Or does local law support this agency claim?

Proposed: Rewording to read “Does the agreement contain a termination clause?” (Y/N)

If Yes: Is revenue earned based on days past? (Y/N)

If No: Is revenue earned based on hours worked? (Y/N)

Validate the answer to these questions to the answers in the decision trees for Fee based PP and Fee based SL

CSA Fields Interpretation Guidance

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Section 2: CSA Information

CSA Fields Interpretation GuidanceSection 2: CSA Information

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Evergreen & Continuation clause

• An Evergreen or Continuation Clause is a clause in contracts longer than a year that indicates that the current period’s fee and/or billing can continue into the future or until such time that a new fee is negotiated

• An Evergreen Clause is NOT an Evergreen Contract but may be included in one

• The answer should be YES for Evergreen Contracts (indefinite period) or multiple year contracts where the compensation scheme is settled for the entire life of the agreement (e.g. Commission Revenue)

NEW ENHANCEMENT:

• (April) The question will read “Is there a Continuation Clause?” If YES a TEXT BOX will be available to include the key terms of the clause from the contract. The clause will need to interpreted as to whether revenue recognition is appropriate

CSA Fields Interpretation Guidance

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Evergreen & Continuation clause (cont’d)

Revenue can generally continue to be recognized for agreements

where the fees need to be negotiated annually BUT the

continuation clause indicates that although a new fee is being

negotiated, the fee has a minimum guarantee or that the

subsequent period compensation will not be less than the

previous compensation

Contracts with continuation clauses should be discussed with the

Regional Controller, Network Controllers and/or IPG Chief

Accountant to determine whether revenue can be recognized

CSA Fields Interpretation Guidance

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Is proof of acceptance required?• Contractual clauses that require a formal ‘client acceptance’ of

our services are presumed to be of such importance to the client that the Agency should defer revenue until the client acceptance is received

• Ability to invoice client may be contingent on acceptance of our services / deliverables

Examples:

• “Client is required to sign off on each individual deliverable listed in the statement of work.” SUBSTANTIVE

• “Client shall not be required to pay any fees until client’s acceptance of such services or deliverables.” SUBSTANTIVE

• “Client will accept or reject each deliverable within 5 business days of delivery.” SUBSTANTIVE

• “Client has the right to review and approve the website to assure that all deliverables satisfactorily meet the requirements of client for the website.” NONSUBSTANTIVE

CSA Fields Interpretation Guidance

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CSA Fields Interpretation Guidance

NEW ENHANCEMENT:(April) The question will read: “Does the agreement contain

language indicating client acceptance of deliverables?”

• If YES, a new question asks: “Is acceptance substantive?”

YES – a text box will be available to describe form of acceptance client will provide

NO – a text box will be available to describe why we have concluded it is not substantive

The response to this question will be compared to the decision tree to ensure consistency in answers. If different, a validation error will result.

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CSA Fields Interpretation Guidance

• Example of Acceptance:

“Any and all references to “Acceptance of Deliverables” as noted in Section 5.3 of the Master Vendor Agreement and as further referred to in the individual Statements of Work refer solely to the approval of deliverables in conjunction with the ordinary conduct of business.  As part of the ordinary conduct of business, approval of deliverables is performed throughout the creative, production and execution processes and is not required to be formally documented.    As is stated in the Master Vendor Agreement, “if vendor fails to correct any deliverables within ten (10) business days after receiving notice of correction, Client, at its discretion may either reject the deliverables or work with Vendor to reach a mutually acceptable resolution.”

This statement is purposely not tied to the payment of Agency

fees.

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Section 4 : Persuasive Evidence

• Form of Agreement/Persuasive Evidence- CDR & Attachments

• Is Evidence Written?

• Explain how client relationship is supported

• Have appropriate signatures been obtained for this agreement ?

CSA Fields Interpretation Guidance

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Section 4 : Persuasive Evidence

CSA Fields Interpretation Guidance

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Section 4 : Persuasive Evidence Is Persuasive Evidence Written?

• Answer should be YES if the agency has an appropriate type of written PE that supports revenue recognition (such as a contract, interim agreement, signed Cost Estimate (CE), PO’s, emails) based on the circumstances and customary business practice with that client

• In the rare occasion the answer is NO, then this CSA is listed in the Management Report “Revenue Recognized Without Written Evidence” and needs to be reviewed and approved by Regional Controller’s team

CSA Fields Interpretation Guidance

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Section 4 : Persuasive Evidence NEW ENHANCEMENT:

(Proposed) Re-order questions in Section 4 to first ask “Is form of PE written”

“NO” results in a validation error

“YES” results in question: “Is form of PE final?“ (Y/N)

“Yes”: Select form from drop down box

“No” : “Is this an interim agreement?” (Y/N)

“YES”: Select form of agreement from drop down box

Note: Deficiencies were noted where persuasive evidence obtained was not sufficient – revenue recognized without acceptable PE; wrong type of PE documented in CSA; fees not fixed in interim arrangement; recognized revenue based on POs however still negotiating final contract

CSA Fields Interpretation Guidance

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Section 5 : Fixed or determinable Price

• Contract Value

• Agency External/Shared revenue

• Deferred revenue

• Does the agreement contain a guarantee or other commitment which may affect the earnings?

• How is the Price Fixed or Determinable

• Parties signatures

CSA Fields Interpretation Guidance

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Section 5 : Fixed or determinable Price

CSA Fields Interpretation Guidance

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Contract Value• Contract value should never be left blank or marked “zero”.

• Should enter the annual revenue per client arrangement or the best estimate available

In the case of multi-year contracts, the contract value is for the entire period (per client arrangement or best estimate)

• Section 5: Contract value + Shared revenue + Deferred revenue must be equal or higher than the amount in Section 9: Fee based revenue + Commission based revenue + Studio + Client incentive/bonus + Deferred, otherwise a validation error appears

Should the agreed annual revenue or the best estimate change during the year the Contract Value needs to be amended

• On Intercompany agreements if the Lead Agency has information for the total Contract Value, they should report that amount 

If not, the lead agency should report only its portion The affiliates should report only their portion of revenue in any case

CSA Fields Interpretation Guidance

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Deferred revenue• The Deferred Revenue box should be used to identify the amount of

prior year contract revenue that has been carried over to the current year as a result of being deferred

This box represents the balance of deferred revenue as of December 31st of the previous year related to the particular client service arrangement

• The amount deferred from the prior year should remain fixed in the Deferred Revenue box in Section 5 during the whole current year and the fact that the revenue has been recognized throughout the current year is reflected only in the Section 9: Revenue Stream Balances (reducing the amount of deferred revenue in the Balance Sheet Part and at the same time recording the respective revenue in the P&L Part of this Section)

• The sum of Contract Value and Deferred revenue must exceed or equal the Actual revenue recognized in the Section 9

Note: Improper use of Deferred Revenue Box of the CSA triggers a validation error

CSA Fields Interpretation Guidance

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• Does the agreement contain a guarantee or other commitment which may affect the timing of revenue?

A question has been added to Section 5 of the CSA form as follows:

“Does the agreement contain a guarantee or commitment which the agency is contractually required to deliver to the client such as a price savings guarantee, Target Audience Rating Points (TARP), other Key Performance Indicators (KPIs), or other qualitative or quantitative commitment which may affect the earnings of the base fee or base commission?”

 

The following review and sign offs are required when applicable:

≥ USD 500,000 – Agency’s Network Controller’s Group and Regional Controller’s Group

≥ USD 1,000,000 – Corporate Controller or Chief Accountant

 

CSA Fields Interpretation Guidance

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Revenue Streams

Section 7: Revenue Streams • Revenue recognition types in a CSA

• Decision trees: question and answers for each Revenue Recognition Accounting Methodology.

• Override of a revenue stream

NEW ENHANCEMENT:

• (April) Certain responses in the Fee Based - SL and Fee Based - PP trees will be validated against responses in Section 2

• (Proposed) Adding a new decision tree which would focus on PP – output basis

• (Proposed) Deleting / renaming / reworking the Milestone decision tree

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Revenue Streams

Section 7: Revenue Streams

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Revenue types

Additional revenue stream as a result of additional work

• To add a Revenue stream in Section 7 the user has to select from the drop down menu one or more revenue streams and then respond to a set of questions about the arrangement with the client that are specific to that revenue type• The objective is to validate the selection of the Revenue stream or determine that a different revenue type would be more appropriate • Note that at least one revenue stream needs to be confirmed or overridden to validate a CSA

Exception: If the additional/new revenue stream will result in total revenues of 5% or less of the current contract value, documentation supporting the revenue method that is being followed may be maintained outside the CSA tool. These revenue streams should be closely monitored to ensure that the amount does not exceed the 5% threshold. If the amount exceeds the 5% threshold, the CSA document must be revised to include the additional revenue stream(s)

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• Guidance (advice about revenue stream to select)

• Override Results (when a CSA can be overridden)

• Rationale for Override (explanation provided)

• Management Report in the FRC main page

Override Decision Trees

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Override Decision Trees

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Case: 3

Contract reads:• “Remuneration: The client shall pay the agency 300K USD for

the creative concept, implementation and production services (excluding cost of materials) according to the Client Brief

• Payment terms: Agency shall invoice the client according to the following payment schedule:

Upon development of the creative concept: 100K USD Upon implementation of the creative concept and delivery of

proof Print Materials: 100K USD Upon Production of Print Materials: 100K USD”

Note: Agency has internal recording of hours in place

QUESTION What is the revenue stream to recognize the revenue?

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Case 3

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Case: 4

Contract reads:

• “Remuneration: The client shall pay the agency a fixed monthly fee of 75K USD according to the hourly rates set forth in schedule 1. The Agency shall provide to the Client a quarterly reporting of hours.

• Payment terms: The monthly fees above shall be paid in 30 days upon receipt of invoice.”

Notes: The contract includes an annual scope of work including a staffing plan,

detailing the hourly rates per person There is an audit clause It is a longstanding client

QUESTION What is the revenue stream to recognize the revenue?

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Case 4

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Case 5

Contract reads:

• “Remuneration: The Client shall pay the Agency a fixed monthly fee of 100K USD.

• Payment terms: The monthly fees above shall be paid in 30 days upon receipt of invoice”.

Notes: The contract includes an annual scope of work including a staffing

plan, detailing the hourly rates per function There is no reconciliation clause nor periodic reporting of hours The work is provided on pro rata basis It is a new client

QUESTION What is the revenue stream to recognize the revenue?

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Case 5

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Proportional Performance-Estimate to Complete

(ETC ) An Estimate to Complete (ETC) calculation is always required when the proportional performance method is used

ETC calculations should be prepared quarterly using: actual hours worked to date, agreed upon rate per hour, contract fee, estimated hours remaining to complete the project

An ETC is critical to ensuring that the timing and amount of revenue recognized is appropriate

Completion of ETCs require the involvement by both financial personnel and account management (or other client service personnel)

Review and approval of ETCs should be documented and include names, dates and signatures

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Note: A significant number of deficiencies were noted in connection with the use of the proportional performance method as well as ETCs as follows:

• ETC calculations were not performed

• ETCs were completed using the wrong inputs or there was no support for the inputs

• Revenue amounts calculated per ETCs were not amounts actually recorded as revenue

• ETCs were not approved or did not involve client management

• Override of proportional performance, as determined by CSA decision trees, to straight line was not properly documented

Proportional Performance-Estimate to Complete (ETC )

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Case 6 – Proportional Performance – Example ETC’s

We have $1,792K USD reconcilable (true-up) annual fee for the year 2009 based on a staffing plan:

As of Sept 30 (nine months into the contract) the value of hours incurred is $1,492K USD (Actual Labor plus OH and Profit) and the total estimated value of hours at completion of the contract is $1,625K USD

Note: Total value of hours incurred = Hours worked * Fully loaded Rate per hour

Total value of hours to complete = (Actual hours to date + Estimate hours to complete )* fully loaded rate per hours. Estimate hours to complete is to be provided by the client account team.

Question What is the realization rate? How much revenue can we recognize as of Sept 30th? How much revenue can we recognized if the fee was fixed/non-

reconcilable (no true-up)

Direct Labor $775K

100% Overhead $775K

Gross Profit 13.5%

$242K

Total Fee $1,792K

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Case 6 - Proportional Performance- Example ETC´s

Answer

Realization Rate: Fee Labor / ETC = $1,792 K / $1,625K = 110%

As the realization percentage is greater than 100% (110% in this example), it is limited to 100% for the purpose of revenue recognition

Revenue to be Recognized:

Realization Rate x Actual Labor value = 100% x $1,492

Components:

Note: As the realization percentage is greater than 100% (110% in this example) and the arrangement required a true-up, it is limited to 100% for the purpose of revenue recognition

Actual Labor Cost $645.5K

100% Overhead $645.5K

Gross Profit 13.5% $201.4K

Total Revenue Recognized

$1,492K

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Case 6-True Up

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CSA – REVENUE UPLOAD

IPG EMEA RMC

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CSA Section 9 - Revenue Stream Balances

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CSA Section 9 - Revenue Stream Balances

Upload recognized revenue

• Roles: the role of Preparer or Local Reviewer is needed in order to upload revenue. Users with other roles cannot upload revenue

• General note: Uploading of revenue for a CSA requiresthat you have the following:

Microsoft Office Professional 2003 (which includes Excel 2003) The Revenue Recognition Excel Add-In, accessed from the FRC

homepage under Excel Add-Ins, must be installed The Excel worksheet, CSA Revenue Import, must be downloaded and

resident on your PC (cannot be opened from the webpage)

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Other considerations

• Section 9 should be completed consistent with revenue stream selected in Section 7

• Section 9: Fee based revenue + Commission based revenue + Studio + Client incentive/bonus + Deferred must be less than or equal to Section 5: Contract value + Shared revenue + Deferred revenue

• RMC Contract Compliance team may provide technical support on-line to upload the revenue, if needed

• Contract Compliance reviews and signs the Contractual part of the CSA before Section 9 is completed. CC does not review or sign off Section 9 of the CSA

NEW ENHANCEMENT:

• (Proposed) Carry forward YTD revenue uploaded to the CSA at 12/31

CSA Section 9 - Revenue Stream Balances

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Sign off - Section 10

CSA Sign off - Contractual part

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• CSA Sign off should have been completed prior to Revenue Sign off Section is enabled

• “By signing off below, I represent that all the information

regarding this Client Service Arrangement is to the best of my

knowledge complete and accurate and I concur with the

assessment of potential credit issues in Section 2:CSA

information”

CSA Sign off Contractual part (cont’d)(i)

Sign off - Section 10

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Sign off

Revenue Sign off Section

• Revenue section should be signed in order to be moved to Final status

• “By signing off below, I represent that revenue has been recognized in accordance with criteria set forth in SAB 104 AND SP&P 210. In particular, we have persuasive evidence, price is fixed or determinable, services have been performed and delivery has occurred, and collectability is reasonable assured for all amounts recognized as revenue. Furthermore, we have complied with all aspects of our contractual arrangement that would have a material effect on revenue balances in the event of non compliance.” No future revenue expected Restart Revenues / Restart All Summary sign off function

If the CSA does not have Final status (indicating all required sign offs have been obtained) the revenue is not uploaded into Revenue Reconciliation Template!!!

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Sign off - Section 10

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Restart the workflow

In the event the CSA has been signed off by all required signatories, if editing is necessary, the only person who is able to reopen the CSA is the Local Reviewer

How to send a CSA back?

Go to Properties page of the particular CSA/Sign off and choose:

Restart Revenues (if only revenue uploaded into section 9 needs to be edited) or

Restart All (in case also the contractual part needs to be amended)

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CLIENT DOCUMENT REPOSITORY (CDR)

IPG EMEA RMC

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Client Document Repository (CDR)

PurposeProvide a central holding spot for global and regional contracts aswell as local arrangements with contract values in excess of 1M

USD

ProcessWhen a contract or other client arrangement documentation isinitially received, it needs to be scanned, digitized and stored in theClient Document Repository (CDR)

All contracts in excess of 1M USD, whether global, regional, or local, must

have an English version

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Client Document Repository (CDR)

http://e-imaging.interpublic.com/Contracts/

To access the CDR Link a particular Request Form needs to be sent to C&C team and approved by Regional C&C manager

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Client Document Repository (CDR)

• After documentation has been uploaded the URL link shall be copied to the clipboard: click on the dropdown box at the bottom of the properties window of the contract (within the CDR), and choose 'copy link

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Client Document Repository (CDR)

• Paste the URL link to the respective CSA - at the Document Properties page, select Add Contract and in the dialog box paste the link. This accomplishes the linking of the CSA with the documentation in the CDR

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Add contract vs. Attachment

• Add contract (upload into CDR) is requested for all global and regional contracts and in case of local contract with contract value exceeding 1M USD

• The link to the contract stored in CDR is automatically rolled forward into following months

• The attachments are NOT rolled forward into following months but are only attached to the CSA in one particular period!

Therefore we recommend using the Attachments for additionaldocumentation supporting the client arrangement. However for “long term” documents (contracts, local addendums, annual PO’s, etc) the Add contract shall be used

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REVENUE RECONCILIATION TEMPLATE

IPG EMEA RMC

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Revenue Reconciliation Templates

RRT Templates – other considerations:

• RRT template is not automatically rolled forward to the following month (as in case of CSA’s) but needs to be created manually for every month

• The revenue from CSA’s that do not have the Final Status will not be uploaded into Revenue Template

In that case the revenue related to such CSA’s needs to be reported as reconciling item in order to reconcile the revenue data stored in CSA’s to the revenue reported in Hyperion in the current month

• The reconciliation items, other than the pre-populated RRT (e.g. AVB’s, Cash Discounts, etc.) shall be an exception which needs to be justified (Area Controller review)

• For further details that might support the RRT the function Attachment shall be used (detailed break down, supporting documentation)

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Revenue Reconciliation Templates

For Revenue Reconciliation documents, four sign-offs are required to

promote the document to Final status:

• 1. Preparer

• 2. Local Controller

• 3. Area Reviewer

• 4. Area Examiner

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AVAILABLE REPORTS

IPG EMEA RMC

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Available Reports

• Management Reports Contain CSA and Revenue Reconciliation template information Available from the FRC home page

Revenue Recognition and Contract Anniversary Report Revenue Recognized without Written Evidence Sites with CSAs not signed off Sites with CSAs Overridden the Decision Trees Revenue Recognition Summary Report Production/Project - Based / Studio Revenue – Completed Contract –

Management Analysis Revenue Reconciliation Summary Report

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Available Reports

• Ad-Hoc reports are available using an excel add-in program Add-in download available on the FRC site Reports can be sorted and filtered as necessary Six reports contain CSA information

“Current” reports - includes data from the most recent two months in FRC

“Prior” reports – include data from all available periods in FRC, excluding the most recent two months

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Ad-Hoc Reports

Report Name What it Contains How it is Helpful Reviewing Frequency

Current (and Prior) CSA – Section 9 Revenue Stream Balances

Report summarizes CSA questions and answers and also includes the amounts that have been uploaded to Section 9. In addition to YTD revenue uploaded on the CSA, the report also calculates the amount of QTD revenue. Each revenue stream selected on a CSA will be shown as a line on the report (i.e. Doc ID will appear multiple times).

Provides QTD and YTD revenue amounts that have been uploaded to a CSA which enables the reviewer to identify revenue amounts recognized on an individual CSA. Also assists in identifying CSAs which may not include all revenue recognition methods used for a particular CSA.

Quarterly

Current (and Prior) CSA – Revenue Streams

Report summarizes CSA questions and answers (excluding Section 9). Each revenue stream selected on a CSA will be shown as a line on the report (i.e. Doc ID will appear multiple times).

Assists in identifying CSAs which may not include all of the appropriate methods of revenue recognition.

Quarterly

Current (and Prior) CSA – Revenue Template

Report summarizes CSA questions and answers (excluding Section 7, Revenue Streams).

Provides MTD and YTD revenue amounts that have been uploaded to a CSA which enables the reviewer to identify revenue amounts recognized on an individual CSA.

Quarterly

Revenue Recognition – Information

Report shows information on the Revenue Reconciliation Template including amounts by line item (i.e. stand alone CSAS, bundled CSAs, etc.) as well as Hyperion account descriptions and balances.

Allows a reviewer to identify revenue reconciliation templates that include reconciling items for the period.

Monthly

84

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Ad-Hoc Report

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Ad-Hoc Report

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Ad-Hoc Report

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Ad-Hoc Report

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Revenue Significant Deficiency

Common CSA Errors:

• Revenue recognized without adequate persuasive evidence (i.e. CSA completed and approved with invalid persuasive evidence).

• Failure to identify correct type of persuasive evidence in the CSA.(i.e. contract, interim agreement, customer purchase order)

• Completed information in the CSA not consistent with terms included in supporting persuasive evidence.

• Actual Revenue recorded using a method different than the one identified in the CSA.

• Failure to identify/document multiple revenue streams used to recognize revenue.

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Common CSA Errors:

• Poor or missing rationale used to override the decision tree revenue

• Lack of updating the CSA – primarily relating to additional revenue streams, changes in contract value and the form of persuasive evidence

• Revenue recognized based on a continuation clause while annual fee discussions were expected

• CSAs rolled over inappropriately

Revenue Significant Deficiency

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Common CSA Errors:

• “Improper Bundling” Individual persuasive evidence in excess of 250k USD Different clients with different revenue recognition methods Same client for individual jobs governed by the same Master

Agreement or a framework agreement

• Proportional Performance (ETCs)

ETCs not prepared

ETCs not properly signed-off

ETCs created but not used in calculating revenue to be recorded

Other errors or omissions.

Revenue Significant Deficiency

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Tool enhancements – April 2010

WHEN TO EDIT A CSA• Validation logic will allow preparers and local reviewers to edit

contract value without ‘restarting workflow’

• If contract value increases to require the next level of review, the CSA will automatically be routed to the next level for review

• All changes to the form of PE will still require a restart of workflow

END DATES• The CSA document will roll 3 months past the end date or fee

arrangement end date. If rolled into the 4 month, without updating, all sign offs will be removed from the document

CSAs having an end date of 12/31/2009 or prior will no longer have sign offs on the April documents

EVERGREEN AND CONTINUATION CLAUSE• The question will read: “Is there a Continuation Clause?” If

YES, a TEXT BOX will be available to include the keys terms of the clause from the contract.

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Tool enhancements – April 2010 (cont’d)

PROOF OF ACCEPTANCE• The question will read: “Does the agreement contain language

indicating client acceptance of deliverables?” If YES:

“Is acceptance substantive?”

YES – describe form of acceptance client will provide

NO – describe why we have concluded it is not

• Added validation logic to ensure consistency between Section 2 and Section 7. If responses are different, a validation error will occur.

OTHER• Also, new validation logic to ensure consistency in responses in

Section 2 and Section 7: “Is there a requirement for periodic reconciliation or periodic reporting of hours? “Is there a true up or settlement requirement?”

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Tool enhancements – Proposed

END DATES• Create a report that would identify CSAs where both “End date” and

“Fee arrangement end date” fields are blank

• Modify the Management Report “Revenue Recognition and Contracts Anniversary Report” to include “Fee arrangement end date” field

• Create validation logic to prevent ALL (outdated) CSAs from rolling into 2011

• Delete the question “Discontinue after December of this year”

BUNDLED CSA• Require that the aggregate contract values (Bundles) be subjected

to the threshold reviews by Regional, Network and Corporate management, as appropriate (i.e. delete “bundle” question)

• Embed an excel template to recorded each agreement in the bundle The template will include the “key” questions for revenue recognition The questions will need to answered when an agreement is added to the

bundle as well as each quarter

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Tool enhancements – Proposed (cont’d)

TERMINATION CLAUSE

• Revise word as follows: Does the agreement contain a termination clause?

Yes: Is revenue earned based on days past? (Y/N)

No: Is revenue earned based on hours worked? (Y/N)

• Include validation logic that would compare responses to section 7 decision trees

PERSUASIVE EVIDENCE

• Re-order questions in Section 4 to first ask “Is form of PE written” “NO” results in a validation error

“YES” results in question: “is form of PE final?“ (Y/N)

Yes: Select form from drop down box

No: “Is this an interim agreement?” (Y/N)

Yes: Select form of agreement from drop down box

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Tool enhancements – Proposed (cont’d)

REVENUE STREAMS

• Adding a decision tree focusing on PP – output basis

• Deleting / renaming / reworking the Milestone decision tree

UPLOADING REVENUE

• Carry forward YTD revenue uploaded to the CSA at 12/31