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CBIZ & MHM Executive Education Series™

Revenue Recognition Implementation Brad Hale & Mark Winiarski Nov. 7 & 22, 2016

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About Us

• Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide

A member of Kreston International A global network of independent

accounting firms

MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.

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Before We Get Started…

• To view this webinar in full screen mode, click on view options in the upper right hand corner.

• Click the Support tab for technical assistance.

• If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.

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CPE Credit

This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.

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Disclaimer

The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

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Presenters

Brad began his career in public accounting with Deloitte and most recently

served as the Director of Accounting and Risk Management for Bloomin’ Brands

Inc., where he was an integral part of completing their IPO. He focuses on

building MHM’s attest footprint through relationships with companies facing

complex technical accounting matters and growing the Accounting Advisory

practice, particularly through Topic 606 advisory engagements.

Brad is a member of MHM’s Professional Standards Group where he performs

internal consultations on complex private or public company engagements, as

well as focuses on the firm’s SEC audit methodology. He serves the PSG as a

subject matter expert in revenue recognition, leasing, business combinations,

share-based compensation, debt vs. equity treatment, complex financial

instruments, goodwill, and consolidations & VIEs.

727.572.1400 • bhale@cbiz.com

BRAD HALE, CPA MHM’s Professional Standards Group

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Presenters

Located in our Kansas City office, Mark is a member of MHM’s

Professional Standards Group (PSG). Mark's role includes instructing in

our national training program, presenting as a subject matter expert at

webinars and conferences, and preparing MHM publications on

accounting and auditing issues.

As a PSG member, Mark consults with clients and engagement teams

across the country in many areas of accounting and auditing. Mark has

served clients as an auditor, consultant and advisor in numerous

industries including manufacturing, distribution, mining, retail sales,

services and software.

816.945.5614 • mwiniarski@cbiz.com • @KCWini

MARK WINIARSKI, CPA MHM Shareholder

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Agenda

02

01

03

04

Challenges and Lessons Learned

Topic 606Example

Implementation Strategy

Questions

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IMPLEMENTATION STRATEGY

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2019 1

2

3

January 1, 2017 – Entities can elect to early adopt

January 1, 2018 – Public Business Entities* must adopt

December 31, 2019 – All other entities must adopt

2017

* Includes NFP that has issued, or is conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or over the counter market, and EBPs that files/furnishes financial statements with the SEC

Topic 606 Calendar Year-End Timeline

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Stages of Implementation

• Brainstorm with cross functional team to identify all revenue streams and areas in which revenue has an impact (i.e. debt or compensation arrangements)

• Scope the project and develop a project plan

• Deliver a high-level power point summary of areas most subject to change for client to share with constituents

1 Planning

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Stages of Implementation

• Begin with preparation of an example evaluation tool for each revenue stream or a representative contract

• Gain consensus with client’s audit firm

• Complete the evaluation tool for the remainder of the client’s revenue streams or contracts

2 Contract

Deep-dive

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Stages of Implementation

• Timing should occur closer to implementation date

• Assist client with quantifying impact of adoption and preparation/review of disclosures

3 Disclosure

and Quantification

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TOPIC 606 PRACTICE AID AND EXAMPLE

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5-Step Process

1 • Identify the contract(s) with a customer

2 • Identify the performance obligations in the contract

3 • Determine the transaction price

4 • Allocate the transaction price to the performance

obligations in the contract

5 • Recognize revenue when (or as) the entity satisfied

a performance obligation

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Customer contracts with Consultant Co. on a cost recovery project that includes consulting on the design of A/P controls. The terms are as follows: • For every dollar of cost recovery (i.e. duplicate expenses, etc.) Consultant

Co. receives $0.10 • If Consultant Co. recovers more than $100,000 for the customer, a

$10,000 bonus is received • Consultant Co. receives a $5,000 fixed fee for the A/P internal control

consulting recommendations, which is determined to be representative of standalone selling price

• Management determines the standalone selling price of the cost recovery project as $20,000

• Consultant has completed 10 similar projects for companies this size in this industry

• The threshold of $100,000 has been eclipsed in 8 of 10 of those similar projects

Example: Cost Recovery

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Executive Summary

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Scope

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Step 1: Identify the contract(s) with a customer

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Step 2: Identify the performance obligations in the contract

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Step 2: Identify the performance obligations in the contract

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Step 2: Identify the performance obligations in the contract

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Step 3: Determine the transaction price

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Estimating Variable Consideration

$ Recovered

Variable consideration +

Incentive Probability Expected

Value $60,000 $6,000 1% $ 60

70,000 7,000 2% 140 80,000 8,000 4% 320 90,000 9,000 6% 540 100,000 20,000 24% 4,800 110,000 21,000 20% 4,200 120,000 22,000 16% 3,520 130,000 23,000 10% 2,300 140,000 24,000 8% 1,920 150,000 25,000 6% 1,500 160,000 26,000 3% 780

$20,080

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Step 3: Determine the transaction price

Variable consideration is constrained to the amount for which it is probable that a significant reversal or revenue will not occur.

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Evaluating the Constraint on Variable Consideration

$ Recovered

Variable consideration +

Incentive Probability Expected

Value $60,000 $6,000 1% $ 60

70,000 7,000 2% 140 80,000 8,000 4% 320 90,000 9,000 6% 540 100,000 20,000 24% 4,800 110,000 21,000 20% 4,200 120,000 22,000 16% 3,520 130,000 23,000 10% 2,300 140,000 24,000 8% 1,920 150,000 25,000 6% 1,500 160,000 26,000 3% 780

87% $20,080

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Step 4: Allocate the transaction price

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Methods of Determining Stand-alone Value

Adjusted Market

Assessment

Expected Cost plus a Margin

Residual Approach

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Step 5: Recognize revenue

Cost Recovery: The transfer of control is occurring as savings are being identified, the most appropriate measure is (Savings to date/Expected savings over the life of the contract). Controls Consulting: Customer is receiving the benefit and we are transferring control of the findings as hours are devoted to the project, the most appropriate measure of progress is hours completed in relation to expected total hours.

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Recognizing performance obligations

Selecting a method to calculate variable

consideration

Considering qualitative

information

Key Takeaways

Evaluating the

constraint on variable

consideration

Reassessing assumptions

each reporting

period

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CHALLENGES AND LESSONS LEARNED

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Would Anyone Early Adopt?

• Anticipate early adoption to be rare

• Entities that have accelerated revenue recognition may consider early adoption • Software entities • Matchmaking services

(insurance brokers) • Specialized manufacturing

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Choosing a Transition Approach

• Retrospective:

• Modified Retrospective:

*Disclosure of difference from Topic 605 is required 1 Adjust opening retained earnings

*Disclosure of changes under Topic 606 is required 1 Adjust opening retained earnings

Financial Statements Year ended December 31, 2018, 2017 and 2016

2018 2017 2016 Reported based on: Topic 606 Topic 606* Topic 606*1

Financial Statements Year ended December 31, 2018, 2017 and 2016

2018 2017 2016 Reported based on: Topic 606*1 Topic 605 Topic 605

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Transition Considerations

• Retrospective • Re-audit of prior period amounts

• Timing • Cost

• Modified Retrospective • Audit Topic 605 disclosure

in year of adoption • Resource availability • Cost

• “Lost Revenue” • “Double Expenses”

Is there a change in accounting method

for income tax reporting?

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Contract Issues

• Do current sales contracts complicate accounting? • Financing features • Extended or implied warranties • Bill and hold arrangements • Options, coupons, discounts • Modifications

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• Does adoption impact non-sales contracts? • Loan covenants

• EBITDA, Net Income based covenants • Working capital changes

Accrue contract costs Distinguishing accounts receivable and contract assets Significant Financing

• Employment • Sales commissions • Bonus plans • Stock based compensation

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Control Environment & Risk Assessment

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• Control Environment • Demonstrates tone at the top • Exercises oversight responsibility • Establishes structure, authority,

and responsibility • Maintains an effective internal

audit function • Demonstrates commitment to

competence

• Risk Assessment • Identifies and mitigates

risk • Considers the potential

for fraud • Assesses the risk of

meeting the company’s objectives

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Information and Communication & Monitoring

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Information and communication • Gathers the appropriate information to make judgments and satisfy disclosure requirements

•Retains data for reliable restatement

Monitoring • Selects, develops, and

performs ongoing evaluations of internal control

• Evaluates and communicates deficiencies in internal control in a timely manner

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Internal Control Areas of Concern

Variable consideration •Identification •Estimation Utilizing a portfolio

Combining contracts

Contract costs

Industry specific issues •Right of return process •Warranty evaluation •Stand-alone value

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Control Activities: Step #1

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Identifying contracts that meet the criteria under Topic 606

Reassessing arrangements not initially meeting the criteria

Assessing management’s and the customer’s ability to perform

Ensuring payments terms are properly considered

Assessing the collectability criterion

Evaluating whether to combine contracts

Evaluating contract modifications

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Control Activities: Step #2

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Identifying both explicit and implicit performance obligations

Evaluating whether a promised good or service is distinct

Evaluating whether a series of promised goods or services should be treated as a single performance obligation

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Control Activities: Step #3

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Estimating the transaction price, particularly any form of variable consideration

If valuation experts are utilized, assessing their competence and objectivity

Evaluating whether any portion of variable consideration should be constrained

Determining the fair value of noncash consideration

Identifying and measuring whether there is a significant financing component in the contract

Determining the accounting for consideration payable to a customer

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Control Activities: Steps #4 and #5

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• Estimating standalone selling price, including maximizing observable inputs

• Determining the appropriate transaction price allocation, including variable consideration and discounts

Step #4

•Determining whether performance obligations are satisfied at a point in time or over time

•Measuring progress toward satisfaction of a performance obligation measured over time

•Recognizing revenue only when or as control is transferred to a customer

Step #5

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Increased Presentation and Disclosure Requirements - Examples

The disclosure requirements are significantly in excess of what is currently required under U.S. GAAP.

Delineation between contract assets, contract liabilities and receivables

Quantitative disclosures showing over-time and point-in-time revenues

Qualitative discussion about economic factors impacting revenues and

cash flows • Customer types

• Geographical locations • Types of contracts

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? QUESTIONS

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If You Enjoyed This Webcast…

Upcoming Courses: • 11/15 & 12/1: Individual Year-End Tax Planning Tips for 2016 and Beyond

• 11/29 & 12/13: The Combined Benefits of Cost Segregation and Tangible Property, Part 3 – Compliance Considerations and Partial Asset Dispositions

• 11/30: Accounting for Impairment under the Credit Loss Impairment Rules

• 12/6: Understanding Complex Debt and Equity Transactions

Recent Publications: • Revenue Recognition Serial: Part 7 – Revenue Recognition and Licensing Arrangements

• Understanding the Leasing Standard: Sale and Leaseback and Other Types of Lease Transactions

• Tax Rates and Inflation-Adjusted Figures Released for 2017

• Expanding Disclosure for New Accounting Standards and Other Updates from the EITF

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Connect with Us

linkedin.com/company/ mayer-hoffman-mccann-p.c.

@mhm_pc

youtube.com/ mayerhoffmanmccann

slideshare.net/mhmpc

linkedin.com/company/ cbiz-mhm-llc

@cbizmhm

youtube.com/ BizTipsVideos

slideshare.net/CBIZInc

MHM CBIZ

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THANK YOU CBIZ & Mayer Hoffman McCann P.C. cbizmhmwebinars@cbiz.com