Tech-Savvy CFOs Ensure Growth Through Compliance

Tech-Savvy CFOs Ensure Growth Through Compliance

May 9, 2017

Revenue RecognitionASC 606

May 9, 2017

Cathy Patton

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• An entity should recognize revenue

– To reflect the transfer of promised goods or services to customers

– In an amount that reflects the consideration to which the entity expects to beentitled in exchange for those goods or services

• More judgment and estimates required

Core Principle

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Revenue Recognition• Current Status

– ASU 2014-09 issued in May 2014

– Four amendments issued to date:• ASU 2015-14 Deferred Effective Date

• ASU 2016-08 Gross vs. Net

• ASU 2016-10 Identifying Performance Obligations and Licensing

• ASU 2016-12 Narrow-Scope Improvements and Practical Expedients

• ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers

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AICPA Revenue Recognition Task Force

Aerospace & Defense

Airlines

Broker Dealers

Engineering & Construction

Depository

Gaming

Healthcare

Hospitality

Insurance

Investment Asset Management

• Not-for-Profit

• Oil & Gas

• Power Utility

• Software

• Telecomm

• Timeshare

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• “Public entities”

– Fiscal years beginning after December 15, 2017

– Interim periods

• Nonpublic entities

– Annual reporting periods beginning after December 15, 2018

• Early adoption allowed for periods beginning after December 15, 2016

Effective Date

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All contracts with customers to provide goods or services in the ordinarycourse of business, except for:

• Leases (ASC 840)

• Insurance contracts (ASC 944)

• Financial instruments (debt, equity, derivatives)

• Guarantees, other than warranties (ASC 460)

• Nonmonetary exchanges between entities in the same line of business

Scope

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Steps in Applying Revenue Recognition Model

• Identify the contract(s) with the customers

• Identify the performance obligations in the contract

• Determine the transaction price

• Allocate the transaction price to the separate performance obligationsin the contract

• Recognize revenue when (or as) the performance obligations aresatisfied

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• Timing of revenue recognition

• Deferral of costs

• Expanded disclosure requirements

Potential Financial Reporting Impacts

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• Software

– Lack of VSOE

– Term Licenses

• Multiple Elements

– Upfront Fees

– Perfunctory Elements

• Variable Consideration

• Extended Payment Terms

Timing of Revenue Recognition

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• Current Requirement

– Vendor-specific objective evidence (“VSOE”) of fair value of undelivered items

• New Guidance

– Estimate standalone selling price (“SSP”) of all items and allocate ratably

Software – Lack of VSOE

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• Determined at contract inception

• Estimate if not directly observable

• Allows any reasonable method

– Consistent with standalone selling price notion

– Maximizes observable inputs

– Consistently applied

• Do not presume stated price is standalone selling price

• Update to timely reflect changes in circumstances

Standalone Selling Prices

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• All readily available information

• Market conditions

• Entity-specific factors

• Documentation

– More robust when observable data is limited

Factors to Consider

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• Perpetual software license which includes two years of support afterdelivery in initial contract of $240,000

• Contract states software has a value of $200,000 and annual support is$20,000 per year

• No VSOE established for support

Software – Lack of VSOE Example

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Software – Lack of VSOE

Current GAAP New GAAP

Recognize $10,000/month once software is

delivered

Estimate standalone selling price for software of

$160,000 and support of $40,000 per year

Recognize $160,000 when software is delivered

Recognize support $3,333 per month

Year 1 Revenue $120,000 Year 1 Revenue $200,000

Year 2 Revenue $120,000 Year 2 Revenue $40,000

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• Current GAAP

– License fee recognized ratably over the license term

• New GAAP

– Assess the nature of an entity’s promise in granting a license to a customer as toprovide either:

• A right to access the entity’s IP as it exists throughout the license period, or

• A right to use the entity’s IP, as it exists, at the point in time at which the license isgranted

Software – Term Licenses

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Software – Term Licenses (cont.)

• Does software remain functional without updates and technical support?

• Are updates and technical support distinct within the contract?

• Do the entity’s normal business practices create reasonable customerexpectations for continued activities by the vendor that significantlyaffect the IP to which the customer has rights?

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Software – Term Licenses (cont.)

• If functionality is maintained, updates and support are distinct within the contract and charged separately within contract and in practice, term license fee may be recognizable on delivery.

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• Services offered by SaaS vendors to their customersat the inception of the relationship– Installation

– Configuration

– Training

– Integration with 3rd party software

– Legacy data integration or migration (may or may not be essential tofunctionality of the software)

– Professional services

– Consulting services

Upfront Fees – Set-Up Services

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• Are set-up services distinct (have standalone value) and qualify as aseparate performance obligation (unit of accounting)?

• Does not include activities that must be undertaken to fulfill a contractunless those activities transfer a good or service

– Administrative tasks to set up a contract

– Tasks do not transfer a good or service

• Must be distinct within contract

Upfront Fees – Set-Up Services (cont.)

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• Not required to identify as performance obligation (“PO”) if immaterial inthe context of the contract. Entity must consider whether optional goodsor services provide the customer with a material right.

– Additional training hours at a discounted price – is total discount material?

– Tickets or passes to user conferences

• If not identified as PO, do not have to allocate portion of contract value.

Perfunctory Elements

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• Provides guidance on reporting significant financing components

• Objective: revenue should reflect the cash selling price

• Applies when customer prepays and when the contract contains extendedpayment terms

• Practical expedient – terms > one year

• Eliminates current restraint in software revenue recognition

Extended Payment Terms

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• Incremental costs of obtaining a contract

• Costs incurred in fulfilling a contract not in other GAAP

– Inventory

– Internal-use software

– Costs of software to be sold

– PP&E

• Excludes G&A unless explicitly chargeable to customer

• Must be recoverable

Deferral of Contract Costs

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• Amortize as related goods and services are delivered

• Includes anticipated renewal periods

• Updates to amortization period accounted for as a change in estimate

• Subject to impairment

• Practical expedient for delivery period < one year

Amortization of Contract Costs

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• Disaggregation of revenue into categories

• Rollforward of contract balances

• Impairment on contracts

• Aggregate amount of transaction price for remaining performanceobligations

• Significant judgments

Disclosures for Nonpublic Companies

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Transition

• Begin considering the potential impact now

• Detailed rules for all specific situations not likely

• Be cognizant of other implications of changes to revenue recognition methods

– Contract language

– Commission and incentive compensation plans

– Income taxes

– Debt covenants

– IT systems

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• Requires retrospective application

– Full retrospective application

– Modified retrospective application

• Only recast contracts active at implementation date

• Record cumulative effect at opening balance sheet

• Either method will require applying current ASC 605 and 606 in at least one year of transition

Transition (cont.)

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Questions?

Cathy Patton, Sr. Audit Manager

[email protected]

(919) 232-5989

mailto:[email protected]

Become a Tech-Savvy CFO

Presenter

Philip Massey, CPAMassey Consulting

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The Pace of Change is Driving the Need for Insight

Growth

“Has the new pricing model reduced churn?”

“Are we hitting our revenue per customer targets?”

“Are our new services offerings as profitable as the existing ones?”

“Why are operating costs higher for our newest

locations?”

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An Abundance of Visibility… …And a Shortage of Insight

Decreased15%

Stayedthe same

21%Increased

64%

Change in amount of data contained in management reports over past two years

Average amount of data deemed useful in management reports

Useful5%

Not useful95%

Reporting statistics

• Average length of management report: 21 pages

• Data points: 6,000 – 7,500

80% of CFOs Rank Reporting as the #1 Initiative

BUT…

Sources: CEB, “High Impact Performance Management, and Intacct, “CFO Perspectives Survey”

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Make metrics timely

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To Replace Visibility with Insight, Become Tech-Savvy

Make metrics relevant1

Keep metrics accurate2

Make metrics actionable for managers

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Bringing Relevance to Financial Data

GAAPperformance

Transaction data

Metrics alignedw/strategy

Operationalmeasures

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Operational Metrics That Shape Future Success

“The Intacct Digital Board Book gives us real-time financial and operational insights

for making business decisions with agility and confidence ”

− Shawna Fisher, VP Finance, Apperian

• Cloud service for private, enterprise app stores

• Growth drivers

– Transition to cloud delivery and pricing model

• Key insights

– Unit economics that determine long-term success

– GAAP: Revenue, expenses, cash

– Operational: CMRR, churn, customer lifetime value

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Modern ERP Systems Capture Context at the Source

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Board-ready Insights for SaaS Companies

Dashboard of Performance Cards, charts, graphs and reports

Cost of Acquisition

CustomerChurn

Recurring Revenue

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Make metrics timely

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Make metrics relevant

Keep metrics accurate


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Ensuring Insights Stay Relevant and Accurate

Simplify Data Entry

Enforce Controls

Change Context Without IT

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Make metrics timely

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Create Quick Understanding Through Visualization

Tell a Broader Story

Say More with Less

Focus Attention

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Visualizations Focus Attention “Our initiative to lower sales costs is not succeeding.”

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Visualizations Focus Attention “Our initiative to lower sales costs is not succeeding.”

“The F5000 Business Line is a drag on margins.”

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Say More With Less “Our initiative to lower sales costs is not succeeding.”

“The F5000 Business Line is a drag on margins.”

“This margin problem has been building over time.”

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Make metrics timely





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The Need for Decision-Making Information Drives the Need for a Fast Close…

Source: Adra Match Market Survey

Pressure to Close Faster

90%

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The Lack of Automation Hinders a Fast Close

Manual allocations and accruals for expenses

Manual entries for depreciation, amortization, and adjustments

Manual revenue recognition

Manual consolidations, currency conversions, intercompany eliminations

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Automation for Timely Global Insights

“I’ll be able to add new entities into our financial system in minutes and have immediate access to

everything I need for full company consolidations.”

− Jim Harper, Controller, DataXu

• Advertising and marketing platform

• Growth drivers

– Global expansion, acquisitions

• Reduced close from 20 to 8 days

• Key insights

– Revenues by campaign, service, industry

– Profitability by campaign

– True profitability by country through allocations

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Automation Needs Evolve Over Time

Yesterday…

• Identified process requirements and challenges

• Evaluated solutions

• Result: State-of-the-art solution that meet your needs

• Process automation: CHECK!

Today…

• Spreadsheets everywhere

• Need for more accounting and operational staff

• Increasing time to close the books

• Wide gulf between supply and demand for decision-making insights

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Revenue Recognition Rules

The context you know

Affects all software or intellectual property-based business

New Guidelines

• ASU 2014-09

• ASC 606

• IFRS 15

Effective Dates

• Public 2018

• Private 2019

New Terminology

• Performance Obligations

New Focus

• Emphasis on the “contract”

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Intacct’s Contract Solutions

Solutions for Billing, Revenue, Expenses, and InsightBilling Flat fee and usage-based billing

Revenue Straight-line and usage based recognitionAutomated MEA reallocation

Expenses Same or different periods associated with revenue

Insight Dual book reporting and SaaS metrics

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Billing to Match Your Business Model

• Usage-based billing

• Price by CPM (price per thousand)

• Discount tiers in price list

• Minimum flat fee with usage price lists

• Billing schedules (linear and non-linear)

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Sophisticated Revenue Accounting

• Multi-book accounting: “old” and “new” revenue recognition rules simultaneously

• Extensive “Unbilled,” “Billed,” and “Paid” accounting

• Execute revenue allocation process when needed, multiple times during a contract

• Usage-based revenue recognition (associated with fixed fee billing)

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Flexible Contract Expense Management

• Expense amortization over time

• Link to specific line items or overall contract

• Contract term dates can be the same or different from revenue recognition term dates

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Flexible Forecast Insight

Forecasting across billing, revenue, and expense Side-by-side in both “old” and ”new” books

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Questions?

Philip Massey

[email protected]

(919) 875-9635

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Wes Pollard

[email protected]

919-559-9157

mailto:[email protected]

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Patrick Dunnigan

[email protected]

919-374-5600

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Questions?

Tech-Savvy CFOs Ensure Growth Through Compliance

Business

Transcript of Tech-Savvy CFOs Ensure Growth Through Compliance