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Revenue Recognition

Media Finance Focus 2016

Denver, Colorado

Panelists

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Dwight Delapenha, Deladad Advisory

Dan Drobac, PwC

Sue Tuxill, Salem Media Group

Mike Ruggiero, ATV Broadcast

Overview of New Revenue Standard

Recent FASB Amendments

Media Company Examples

Disclosure Requirements

Revenue Recognition—Agenda

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4

Effective Date

Public entities – 2018 (annual and interim periods)

Nonpublic entities – 2019 (annual periods); 2020 (interim

periods)

Earlier adoption as of original effective date (2017) permitted

Effective date is deferred for all entities by one year.

The effective dates for Topic 606 and IFRS 15 for public

entities are aligned.

Transition MethodsPY2

(2016)PY1

(2017)CY

(2018)CY Footnotes

Full

Retrospective

Cum

ula

tive

ca

tch

-up

Rev rec under new standard

Modified

RetrospectiveRev rec

under legacy

standard

Cumulative

catch-up Rev Rec

under

new

standard

Disclose

legacy

standard for

CY (2018)

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Overview of Revenue Recognition Model

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1. Identify

the contract(s)

with the

customer

2. Identify

the

performance

obligations

3. Determine

the

transaction

price

5. Recognize

revenue when

(or as) a

performance

obligation is

satisfied

4. Allocate

the transaction

price

Recognize revenue to depict the transfer of promised goods or services to customers in an

amount that reflects the consideration to which the entity expects to be entitled in

exchange for those goods or services

• Unit of Account

• Distinct Criteria

• Variable

consideration

• Significant financing

• Noncash

consideration

• Consideration

payable to customer

• Criteria for

identifying a contract

• Combinations

• Modifications

• Relative standalone

selling price

• Discounts and

contingent amounts

• Over time criteria

• Point in time indicators

Steps to apply the core principle:

Core Principle:

Clarifications to Issued Standard

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Input from Transition Resource Group led to projects to address

implementation challenges:

Principal versus Agent Considerations (March 2016)

Identifying Performance Obligations and Licensing (April 2016)

Narrow-Scope Improvements and Practical Expedients (May

2016)

Technical Corrections and Improvements (Exposure Draft)

Amendments aimed to clarify Board’s intent and reduce cost

and complexity of implementing the new guidance

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Identifying the Contract 1 2 3 54

Role of collectibility in the revenue guidance has changed:

• Current GAAP – Recognition constraint

• Topic 606 – Collection must be probable for a contract to exist

• Objective of collectibility assessment is to determine whether there is

a substantive transaction

• Consider ability to mitigate exposure to credit risk (e.g. ability to

cease providing goods or services upon nonpayment)

• Clarify alternate revenue recognition criteria (which is applied when

unable to meet Step 1)

• Introduces ability to recognize revenue prior to contract

‘termination’

Clarifications

Identifying Performance Obligations

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• No need to assess immaterial promised goods or services

• Shipping and handling practical expedient

Reduce cost and complexity

• Rearticulate “separately identifiable” principle

• Is nature of promise to transfer each good or service or combined item?

Clarifications

Distinct Promises = Performance Obligations = Unit of Account

Current GAAP – standalone value

Topic 606 – two ‘distinct’ criteria (1) capable of being distinct (2)

separately identifiable

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Example: Multiple Performance Obligations

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Media entity A enters an agreement with Programmer P under which

Programmer P is provided a one-hour daypart on Saturdays from 1 pm

to 2 pm to feature their program. The program will run for 26 weeks

starting January 1, 2016.

To promote the one-hour program, Programmer P will receive 15 spots

per week for a total of 26 weeks starting December 1, 2015 and 15

banner advertisements per week on the station website beginning

December 1, 2015 for 26 weeks.

The 15 spots per week and 15 banner ads per week will air between the

hours of 6am and 8pm as determined by the station traffic manager.

The programmer may receive up to 100 bonus spots at the discretion of

the station. The programmer agrees to a cost of $1,000 per week for

the package.

Example: Multiple Performance Obligations

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Estimated Stand Alone

Selling Prices

Current market rate for 1 hour programming on Sat is $500 $ 13,000

:30 on air spots 6-8am and 4-6pm run $35

All other times $20, therefore blended rate $25 $ 9,750

Banners run $10 per :30 $ 3,900

Bonus spots MAY be provided, no obligation to do so/no

refund to programmer $ -

$ 26,650

Allocation

Programming Air-Time $ 12,683

Promotional Spots On-Air $ 9,512

Promotional Banner Ads on station website $ 3,805

Up to 100 bonus spots $ -

$ 26,000

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Licensing

Current GAAP includes limited, industry-specific guidance on revenue recognition for licenses.

New guidance includes a comprehensive model to be applied to all industries.

Contractual

Provisions

Sales- or Usage-

Based Royalties

Nature of License: Functional or Symbolic

Clarify that there is a

distinction between contractual

provisions that:

• Require transfer of control

of additional goods or

services to a customer

(multiple performance

obligations)

• Define attributes of a

single promised license

Clarify scope and applicability

of exception to variable

consideration constraint

guidance

• Applies when royalty

completely or

predominantly relates to

license

• Royalties should not be

split into portions to which

exception does and does

not apply

Improve operability of “right to

use” vs. “right to access”

assessment

• Based on significant

standalone functionality

• Functional: point in time

recognition

• Symbolic: over time

recognition

1 2 3 54

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Licensing Example 1

Media Company licenses 4 seasons of a television program to

an over the top distributor. Media Company will also add

season 5, which is currently in production, as each episode is

available. The contract price is $5 million.

How should Media Company account for this license?

What if the consideration were based on the number of

subscribers to the over the top distributor’s service?

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Licensing Example 2

Media Entity A enters a licensing agreement with Broadcaster B under

which Broadcaster will have the right to broadcast 2 programs

produced and distributed by Media Entity A over a 12 month period.

The total amount due to Media Entity A under the agreement is

$100,000 due in quarterly installments of $25,000.

The programs include:

1. 26 weekly news programs - one hour in length delivered via

satellite as produced

2. 10 two hour special feature programs to be selected from Media

Entity A’s current available inventory

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Principal vs. Agent Considerations 1 2 3 54

• Current GAAP based on risk and rewards notion

• New guidance is based on overarching principle of control…indicators no longer

weighted in guidance

• Unit of account: each specified good or service

• Control of a service

• Indicators:

• Do not override control assessment

• Relative importance based on facts and circumstances

• Reframed to indicate when an entity is a principal (vs. an agent)

• Credit risk was removed as an indicator

Clarifications

• Principal (gross revenue) – provides specified good or service

• Agent (net revenue) – arranges for specified good or service to be provided

Copyright 2014 by Financial Accounting Foundation, Norwalk, CT. For non-commercial, educational /academic purposes only.

Media Company B owns and operates a website. Media Company B enters an exclusive

agreement under which Entity C will sell all web-based advertisements on Media

Company B's website.

Entity C guarantees minimum annual revenue of $100,000. If Entity C does not meet

minimum revenue of $100,000, it will pay Media Company B an amount equal to 70% of

the difference between the minimum gross revenue and the actual gross revenue.

Entity C is responsible for all creative services with the advertiser and is responsible for

servicing, maintenance, display and reporting to the advertiser. Entity C is responsible for

all billing, invoicing and collections. Entity C will remit all payments to Media Company B,

less applicable commissions of 30%

Entity C enters an advertising agreement with Advertiser D under which Advertiser D is

featured on Media Company B's website for 3 months for a total of $10,000. How should

Entity C report revenue generated from sales of web-based advertisements on Media

Entity B's website?

Principal vs. Agent Example

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Determining the Transaction Price

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1 2 3 54

Presentation of Sales Taxes Noncash Consideration

Reduce cost and complexity

Accounting policy election: exclude all sales

(and other similar) taxes collected from

transaction price

Note: if election not applied, then principal

vs. agent guidance should be applied for

each tax and jurisdiction

Current GAAP allows net or gross

presentation through policy election

Clarifications

• Define measurement date as contract

inception

• Changes in fair value due to form are not

included in transaction price

• If fair value not estimable:

• Current GAAP – use fair value of

assets received or relinquished

• Topic 606 – use estimated selling

price of promised goods or services

Variable Consideration

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Include estimate of variable consideration in the

transaction price only if it is probable that a significant

revenue reversal will not occur when the uncertainty is

resolved

For licenses of intellectual property, include sales-based or

usage-based royalties in transaction price when sales or

usage occurs

Update the transaction price at each reporting date

1 2 3 54

Media Entity A enters an agreement with Philanthropic Entity B under

which Entity B will be featured on-air for a three month period from

January through March. Air-time is provided during the AM Drive

between 7 am and 9 am with a minimum of 2 spots aired per week.

Entity B will seek donations from listeners that listeners send directly to

Entity B. Entity B pays Media Entity A 10% of all donations collected as

consideration for air-time.

Media Entity A places entity B on-air in two markets. The first market is

a mid-size market that has aired similar campaigns in the past. The

second market, also a mid-size market, has never aired a campaign of

this nature.

Variable Consideration Example

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In 1993, Congress passed the Cable Act which forced TV broadcasters to

sit down every three years and elect either must carry or retransmission

consent rights with the carriers of their signal. Must carry is where the

MVDP will carry the TV signals in 99% of the cases. RTC election means

the two parties hammer out a carriage deal or go dark on the MVDPs

systems.

At first all carriage agreements were cash less and then that evolved into

cash deals around 2006. These cash deals were once a nominal effect to

a station’s cash flow, however, when the fees became material, that is

when the networks caught on, and they wanted their share. This could set

up an issue on how to properly account for this revenue stream when ASC

606 is effective. One of the key considerations is accounting for estimates

and the impact of variable consideration.

Retransmission Revenue

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Example: Retransmission revenue

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Broadcaster enters into a retransmission agreement with Cable Company

to carry its programming for five years. The consideration is based on the

number of Cable Company subscribers. The rate per subscriber is $1 in

year one and increases ratably to $2 in year five. How should the contract

be accounted for under the new revenue standard?

License or service

Application of series guidance

Reporting on lag or estimating variable consideration

Allocating consideration?

Disclosure or remaining performance obligation

Changes to Industry-Specific Guidance

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Industry-specific guidance has been eliminated by Topic 606:

Topic 920-605, Broadcasters – Revenue Recognition

Topic 920-845, Broadcasters – Nonmonetary Transactions

Topic 926-605, Films – Revenue Recognition

Topic 926-845, Films – Nonmonetary Transactions

Guidance on barter transactions has been superseded.

Companies will need to look to Revenue guidance in Topic 606,

Topic 610 – Other Income, or Topic 845 - Nonmonetary

Transactions.

Amendments to Transition Guidance

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• Contract modifications practical expedient – aggregate effect of all contract modifications as of date of initial application

• Full retrospective approach – not required to disclose effect of accounting change in period of adoption

• Modified retrospective approach may be applied to all contracts or completed contracts only

Reduce cost and complexity

• Completed contract = substantially all revenue recognized under legacy GAAP

Clarifications

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• Qualitative and quantitative* disaggregation of revenue

into categories that depict how revenue and cash flows

are affected by economic factors

• Explain the relationship with segment disclosures

• When the entity typically satisfies POs

• Significant payment terms

• Obligations for returns; types of warranties

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Disaggregation of

revenue

Disclosure Requirements

Information about

contract balances

• Opening and closing balances

• Amount of revenue recognized from contract liabilities

• Explanation of significant changes in contract balances

Disaggregation of

revenue

Performance

obligations

* Disclosure requirements in gray are not required for nonpublic entities

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• Method used to recognize performance obligation over

time

• Judgments to determine the point in time that revenue is

recognized

• Methods and inputs to determine the transaction price

Disclosure Requirements

Interim requirements • Quantitative disclosures

Significant judgments

Remaining performance

obligations

• Transaction price allocated to remaining performance

obligations

• Quantitative or qualitative explanation of when amounts

will be recognized as revenue

• Practical expedient for contracts less than one year and

certain types of variable consideration

21* Disclosure requirements in gray are not required for nonpublic entities

Revenue Recognition 2015 SurveyPwC & Financial Executives Research Foundation

Key Takeaways:

A majority of respondents (75%) had not completed an initial impact assessment

Areas of highest accounting impact include licensing, variable consideration and disclosure

Challenging business aspects include customer contracts, billing systems and business processes

Considerable systems changes are anticipated, 53% expect some change and 25% are not sure

Only 5% of respondents have started to implement system, process and control changes

No consensus on the method of adoption -- 83% are undecided and more companies are considering full retrospective

Questions or Comments?

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