7/24/2018 Revenue Recognition: Considerations for Technology & Software Companies J U LY 2 5 , 2 0 1 8 To Receive CPE Credit • Individuals • Participate in entire webinar • Answer polls when they are provided • Groups • Group leader is the person who registered & logged on to the webinar • Answer polls when they are provided • Complete group attendance form • Group leader sign bottom of form • Submit group attendance form to training@bkd.com within 24 hours of webinar • If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar 1
7/24/2018 INTRODUCTIONS Mike Van Booven Director mvanbooven@bkd.com 1 The Five-Step Model OUR GOALS FOR TODAY 2 Contract Costs 3 Transition Methods 4 Disclosure Requirements 2
7/24/2018 FIVE-STEP REVENUE MODEL Step 1 Step 2 Step 3 Step 4 Step 5 Identify Contracts Identify Determine Allocate Recognize with Customers Performance Transaction Transaction Revenue Obligations Price Price Step 1 – Identify the Contract • Approval by all parties • All parties are committed to perform their obligations • Each party’s rights can be identified • Payment terms are identified • Commercial substance • Transaction price likely to be substantially collected 3
7/24/2018 Step 2 – Identify the Performance Obligations • Identify each promised good or service • Determine if each obligation is distinct & distinct within the context of the contract • Disregard immaterial obligations • Immaterial in the context of the contract • Costs associated must be accrued when revenue recognized Step 2 – Identify the Performance Obligations • Types of performance obligations • Software as a Service (SaaS) – cloud computing or hosted software • On-premises software – licenses of software that are run on the customer’s premises • Hardware & networking equipment • Post-contract support (PCS) • Professional services 4
7/24/2018 Step 2 – Identify the Performance Obligations • Does contract contain promise of a license? • Promise of license exists when • Customer can take possession of the software at any time & • Customer can run the software on its own (or easily contract with another unrelated party) • SaaS arrangements generally do NOT contain a promise of a license • Recognized over time per 606-10-25-27 Step 2 – Identify the Performance Obligations • Are the promised goods/services (license, installation services, support, updates) distinct? • Capable of being distinct & • Customer can benefit from the good/service either on its own or with readily available resources • Distinct within the context of the contract • Consider the nature of the promise of the contract • If distinct, then considered separate performance obligations 5
7/24/2018 Step 2 – Identify the Performance Obligations • Post-contract support/maintenance considerations • Are these promises distinct? • What is the nature of the promise? • Stand-ready to provide services to the customer • TRG agrees straight-line is generally acceptable method to recognize (but must support) • Unspecified upgrades • When-and-if-available • Could be considered a stand-ready obligation provided over time (but must evaluate) Step 2 – Identify the Performance Obligations • Material rights • Future discounted pricing offered • Considered a separate performance obligation if material • Must consider if other customers would be offered similar pricing independent of the contract • If a separate performance obligation, allocate a portion of the transaction price based on its relative standalone selling price 6
7/24/2018 Step 3 – Determine the Transaction Price • Collectibility • Consideration must be substantially collectible • Variable consideration • Implied price concessions • Options for additional goods & services • Volume discounts – could be option or variable consideration Step 3 – Determine the Transaction Price • Significant financing component • Does the contract include extended payment terms? • e.g. , subscription-based license paid over time • Must evaluate to determine if actually a price concession • Consider the purpose of the extended terms • Excluded: Contracts with payment terms less than 1 year • Subject to constraint 7
7/24/2018 Step 4 – Allocate the Transaction Price • Standalone Selling Price • Observable standalone selling prices (preference) • PCS, e.g. , renewal rates • Services, e.g. , standard hourly rates • Bundles of goods/services frequently sold at discounts • Residual approach only appropriate if good/service is sold at highly variable amounts (or price is not established) • Licenses Step 4 – Allocate the Transaction Price • Vendor-specific objective evidence • No longer required • Cloud-based term license example • Three-year term license with coterminous related support • License & support both deemed to be distinct • Legacy • License & support combined as cannot establish VSOE for support • New guidance • License & support are distinct promises • License recognized upon transfer of control • Support recognized over three-year term 8
7/24/2018 Step 4 – Allocate the Transaction Price • Term licenses • Allocating between performance obligations (license & PCS) • Any reasonable method used but must use observable prices when available • May be able to demonstrate relationship with perpetual license Step 5 – Recognize Revenue • Recognition cannot occur until • License is made available to the customer & • The beginning of the period during which the customer is able to use & benefit from the license • The customer must have the contractual right to use the license even if they are provided access to the license • Functional IP – point in time • Symbolic IP – over time 9
7/24/2018 Principal v. Agent: Hardware Sales • Nature of promise to customer • Provide good (hardware) to customer – entity is a principal • Arrange for good (hardware) to be provided to customer – entity is agent • Is the good provided (hardware) controlled by the entity before it is transferred to the customer? • If yes – entity is a principal, recognize gross • If not – entity is an agent, recognize net Termination Clauses • Is the termination clause substantive? • If not substantive, enforceable rights & obligations may be affected • e.g. , contract length may be impacted • Entity must use judgment & consideration of all facts to determine if termination clause is substantive 10
7/24/2018 Contract Costs • Costs to obtain a contract • Must be incremental • Not incurred without obtaining the contract • If still incurred without contact, they are not incremental to the contract • e.g. , sales commissions • Required to be capitalized • If entity expects to recover the costs • Does not require costs to be direct in order to be capitalized • Need to evaluate all compensation plans • Bonus payments • Amortization • Over the contract term • Contract terms of one year or less can be expensed Transition Methods • Determine transition method • Full retrospective – adjust each prior reporting period • Change everything – all prior periods reported • Practical expedients • Contracts that begin & end in same period – no adjustment • Completed contracts & variable consideration – use actual transaction price instead of estimating • Comparative periods before date of application – do not disclose transaction price allocated to remaining performance obligations • No retrospective restatement of contracts modified before beginning of earliest reporting period 11
7/24/2018 Transition Methods • Modified retrospective • Only change current year • Cumulative effect in beginning retained earnings of the period of adoption • Additional disclosures • Amount each current year (year of adoption) financial statement line item is affected, had revenue been recognized under ASC 605 • Reasons for significant changes to each line item affected • Can choose to apply to all contracts or only to contracts yet to be completed as of the date of adoption Disclosure Requirements • New disclosures • Disaggregation of revenue • Point in time vs. over time • Qualitative information • Information about performance obligations • Significant payment terms • Nature of goods & services 12
7/24/2018 Effective Dates Nonpublic Entities Annual reporting periods beginning after December 15, 2018 Calendar year January 1, 2019– December 31, 2019 Implementation Considerations • Start early! • Remember, even if nothing changes, this has to be proved through documentation • Decide transition method • Determine revenue streams • Determine contracts in revenue streams & if they can be grouped together (portfolio method) • Analyze contracts to determine recognition under new standard • Gather information for disclosures • Documentation is key to effective & efficient adoption • BKD has tools to help 13
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