Revenue Recognition - mediafinance.org · Steps to apply the core principle: ... Topic 920-605,...
Transcript of Revenue Recognition - mediafinance.org · Steps to apply the core principle: ... Topic 920-605,...
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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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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
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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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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
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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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