Revenue Recognition Webinar-May 19th, 2015

Compliance Made Simple ™
Revenue
Recognition
Internal Control Considerations
2015
Presented by:
Sonia Luna, CPA, CIA

2Compliance Made Simple ™
House Keeping Items
• GREEN BUTTON – CPE CREDIT
• Q&A = Chat box
• Polling Questions MUST = CPE CREDIT
• COSO Implementation MEMBERS = MUST FOR CPE
– See LinkedIN invitation today/tomorrow
• Recording will be available in 2 weeks

Today’s Presenters
Sonia Luna, CEO, Aviva Spectrum
– CONNECT: www.linkedin.com/in/sonialuna
– EMAIL: Sonia.luna@avivaspectrum.com
– PHONE: (213) 250-5700
Larry Stewart, VP, Information Security / IT Compliance at
PennyMac
– CONNECT: www.linkedin.com/in/larrystewart
– EMAIL: larrystewart@bearwire.net
– PHONE: (805) 358-0016
Luis Puncel, President, Puncel Consulting Associates
– CONNECT: www.linkedin.com/in/luispuncel
– EMAIL: lpuncel@puncelconsulting.com
– PHONE: (949) 466-1368
Revenue Recognition Controls

Agenda
• Revenue Rec. internal control updates
– Overview
– SEC/PCAOB Point of views
• IT CONTROL Considerations
• Revenue Rec. the basics of adoption

What you SHOULD know about New
Rev. Rec. Standards?
1. It’s not as long as it looks:
Longest written standard in FASB History (700 pages)…but here’s the
math
Revenue Rec Internal controls
Standard Area Pages Purpose
Basis for Conclusion 200 Overview of why it needed to
change
Conforming
Amendments
350 Readers digest codification to
specific industries
Actual Guidance 150 The Real Meat to read
Grand Rev. Total pgs 700 Argument to have it postponed

What Problems does it solve now?
It’s more comprehensive than what it replaces.
Short list of areas that Companies will have guidance that
aren’t in the codification today:
1. Contract modifications
2. Changes in estimates of contract life, trans. Price, level
of effort, and deliverables
3. Costs of rev transactions
4. Service rev recognition
5. IP deliverables other than software, motion picture & a
few others
6. Loyalty programs
7. Balance sheet presentation
8. Disclosures
Source: Compliance Week 08/2014

Polling: Disclosure Change Question
How many are implementing new
revenue rec footnotes this 2016?
Revenue Rec Internal Controls

Who’s heard of the 5 Step Model?
Step 1 Identify the contract(s) with a customer
Step 2 Identify the separate performance obligations in the
contract.
Step 3 Determine the transaction price.
Step 4 Allocate the transaction price to the separate
performance obligations.
Step 5 Recognize revenue when (or as) the entity satisfies a
performance obligation.

Polling Question?
Who’s on Step 1 = Contract Identification (Yes/No)?

Rev Rec: Internal Control Analysis
Controls and Processes
Variable fees like performance bonuses and other forms of
contingent consideration can be a significant portion of
revenues for certain industries, like aerospace and defense,
engineering and construction, asset management,
entertainment and media etc. In the past, many businesses had
to delay revenue recognition for variable fees until they were
received or earned.
Under the new model, if a company can point to experience
with similar arrangements, revenue may be recorded earlier.
This may result in the need for new processes (and controls) to
estimate variable amounts and to then revisit these estimates
each reporting period.

Footnote Options: Internal Controls

Case of wrong footnotes
Kenote Systems
• Initial IMPACT Year = FYE: 09/30/2011
• Keynote offers service for planning, testing and monitoring the
functionality, usability, performance and availability of mobile apps
and websites.

Face of the P&L in FYE2012
SOURCE 09/2011 FN #2: FASB's new accounting guidance (Accounting
Standards Update 2009-13 and 2009-14) commencing in the
first quarter of fiscal year 2011
TABLE from FYE: 09/2012

Source: FASB

Foot note 4 in FYE 2012

FYE 2011 – Effects of Adoption FN #2
As a result of adopting the new accounting guidance, the Company
recognized $7.8 million of net revenue and $0.7 million of
related direct costs of revenue for the year ended September 30, 2011, that
would otherwise have been recognized in subsequent periods under the
previous accounting guidance.
If the new accounting guidance had not been adopted,
reported $27.2 million of ratable license revenue,
no system license revenue,
no maintenance and support revenue
and net revenue of $95.2 million for FYE 2011.

Stock Impact on Acctg Change
Year End Filing Date
Stock
Price b4
filing
Stock price
after filing Explanation
09/30/2011 12/13/2011 $19.36 $19.54 2011 Year of
Transition w/o
Retro #s
09/30/2012 12/11/2012 $13.18 $13.34

Stock Price – graph
AFTER 10K 2011

Stock Graph – “up tick”
First quarter
“hit”

• Analysts didn’t read and understand
2011 FN!
• Analysts are people too, sometimes
VERY YOUNG people
• Other factors came to play!
Market Reactions

What Caused Keynote’s Stock Drop?
Polling Question

REGULATORS

Audit Alert # 12
PCAOB issued Staff Audit Practice Alert # 12 on Sept 9, 2014:
Matters related to Auditing Revenue In an Audit of FS
Highlights requirements of PCAOB standards related to aspects of
auditing revenue:
– Testing revenue recognition, presentation, and disclosures:
contractual arrangements, presentation of gross vs net, testing
period of recognition, evaluating disclosures
– Other Aspects of Testing Revenue: Responding to risk of Material
Misstatement due to Fraud (“fraud risks”), testing controls over
revenue, audit sampling, substantive analytical procedures, testing
multiple locations.

PCAOB’s Revenue Concerns
• Examples
–DATA
–Key CONTROL
TESTING on
COMPLETENESS
of
arrangements

Example #1: BIG 4 (08/2012 report)

Example #2: Big 4 (2011 part II)

COSO Implementation
MEMBERS ONLY!
5 Steps
5
Questions
Risk
Score

Internal Control Revenue RISKS!

5 Steps w/5 questions!

Control Compliance Analysis
REVENUE IC RISK STANDARDS
1. Top Transition Failures (Restatement Issues)
2. Audit Evidence required
3. Priority Driven by the 5 Steps
4. Latest PCAOB Internal Control Standards
info@avivaspectrum.com
Subject: CCA Reservation

Control Compliance Analysis (“CCA”)
Email us for 2 SPOTS ONLY:
Info@avivaspectrum.com
Subject: CCA
CCA
Report
BenchmarkIn-take

Q & A session (5 – 8 Min)
CONNECT: www.linkedin.com/in/sonialuna
SLIDES: www.slideshare.net/soxppt
VIDEOS: http://avivaspectrum.com/webcasts

Compliance Made Simple
What IT auditors and Finance folks keep missing?
Presented By:
Larry Stewart
IT Control Considerations
TM

34Compliance Made Simple ™ Revenue Recognition and Internal Controls
Presenter:
Larry Stewart
TM

What are the IT control
considerations for the New
Revenue Recognition Standard
TM

What is the core principle of the new
standard
Recognized revenue to detect 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.
TM

A company would apply the following five steps
to achieve the core principle:
Revenue Recognition and Internal Controls
Identify the
contract with a
customer
Identify the
performance
obligations
(promises) in
the contract
Determine the
transaction
price
Allocate the
transaction
price to the
performance
obligations in
the contract
Recognize
revenue when
(or as) the
reporting
organization
satisfies a
performance
obligation
Data Classification
Contract
Information Pricing
Information
SDLC / Change Management
Calculation
within the
System
Forecasting
Oversight
Reporting
•Management
•Exception
What are the Technology Control Considerations May 13, 2015
TM

Polling Question
Of all the possible control considerations which need to be considered,
which is the most important set of controls needing to be addressed
when considering the new Revenue Recognition Standard?
A. Access and Security Controls
B. Software Development Life Cycle and Change Management
C. IT Operations – Monitoring for the new standard
D. All of the above are equally important
TM

Data Classification
Just as we have had to classify data for NPPI, the
identification or classification of contract Information
and Pricing Information will need to be controlled.
What controls need to be considered:
Access:
Who is authorized to change the data?
Change Management:
Has the changing of the information been approved or
authorized?
Monitoring:
Is there monitoring of this data?
Contract
Information
Pricing
Information
TM

SDLC / Change Management
This is the CORE of the IT Control consideration
for this new standard.
What controls need to be considered:
Access:
Appropriate Segregation of duties for deployment of the code
Change Management:
Source code
Testing of the calculations
Approvals of the calculations by the Business Unit
Monitoring:
Is the data and applications appropriately monitored for
completeness and accuracy
Calculation
within he
System
Forecasting
TM

Oversight
Controls Considerations:
• During the SDLC process needs to come up with Use
cases
• Review all new reports, test, verify, test and verify
again
• Verify source data
• Verify calculations
• Need to ensure that there is a process for handling
exceptions
• What would constitute an Exception?
• What is the reporting process of an exception?
• How is an exception resolved?
Recognize
revenue when
(or as) the
reporting
organization
satisfies a
performance
obligation
Reporting
Management
Exception
TM

Use Case IT Control Considerations
Identify and classify the data
What will the system have to
calculate? Is there Appropriate UAT
sign-off from the Business Unit
(Accounting)
Oversight through reporting: Define
reports for the various revenue
streams to ensure completeness
and accuracy
• Large DC based 501(c)(3) with federal contract.
• Fiscal year end of 6/30/xx and Contract year is
12/1/x0-11/30/x1.
• Contract contains multiple option years after
first year.
• Contract contains multiple revenue streams
- Cost reimbursement
- Fixed Fee
- Performance based
• Cost reimbursable
- Subject to Federal Acquisition Reg.
(FAR)
• Fixed Fee
- Based on percentage of completion.
• Performance based
-Based on the judgment of the agency.
TM

Conclusion
The standard IT General Controls apply
But…
They need to be very precise or focused on how they are being
applied
– Need to ensure Integrity of the data and Information
– Need to ensure that solid SDLC / CM processes are in place
– Need to understand how to handle the exceptions
TM

Interim Questions?
• IT Control considerations Q&A
TM

Puncel Consulting Associates
(949) 466-1368
www.puncelconsulting.com
Challenges in Adoption of the
New Revenue Recognition
Standard
May 19, 2015
Luis Puncel, CPA
Illuminating GAAP and Financial Reporting

(949) 466-1368
About The Presenter
Luis Puncel, President of Puncel Consulting Associates, is a former PwC audit partner with
more than 30 years’ experience in consulting on accounting and financial reporting matters,
auditing, and business advisory services to public and private companies ranging from early
stage to Fortune 500 in a number of industries, such as manufacturing, technology, software,
web services, manufacturing, medical device, and others.
Luis assists company management, audit committees, CPA firms and others in interpreting
and applying generally accepted accounting principles to complex transactions. His specialties
are performing technical accounting research and analysis of complex GAAP and SEC financial
reporting issues of all types, audit preparation, and providing training programs.
He worked with PricewaterhouseCoopers for 21 years, including 10 years as an audit partner
heading private and public company audit engagements. Subsequently he was the
partner‐in‐charge and technical consulting partner for another international accounting firm.
Also, he worked for an international public company, where he managed the successful
first‐year implementation of Section 404 of the Sarbanes‐Oxley Act.
Luis graduated from the University of Southern California with a degree in Business
Administration. He is a licensed CPA in California, a member of the American Institute of
Certified Public Accountants, and is a nationally recognized author of the 2008 through 2011
editions of Knowledge‐Based Audit™ Procedures and Knowledge‐Based Audits™ of Public
Entities: A Guide to PCAOB Standards and SEC Rules published by CCH. He also authored
editions of the Knowledge‐Based Audit™ (KBA) Tools for audits of commercial entities, which
are currently in use by accounting firms across the U.S. He is a frequent speaker, panelist, and
trainer on topics related to accounting, auditing and SEC matters.
46

(949) 466-1368
New Revenue Recognition Standard
• Eliminates specific industry accounting rules, e.g. software.
• New focus is on contractual performance obligations and
satisfaction of performance obligations
• Significant new focus (for all entities/industries) on service
transactions (performance obligations fulfilled over time)
• Defines types of costs required to be capitalized.
• Adds voluminous and granular disclosures
• Largely “principles-based”
• Many judgments and estimates
• Therefore, need to capture of supporting data, and documentation is
critically important.
47

(949) 466-1368
Core Principle of New Model
• An entity should recognize revenue to depict the transfer of control
of promised goods or services via contracts with customers at either
at a point in time or over time, at the amount that reflects the
consideration to which the entity expects to be entitled (including
variable consideration) in exchange for those goods and services.
• To achieve that core principle, apply a five step revenue recognition
process
48

(949) 466-1368
Five Step Process
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied
49

(949) 466-1368
Step 1: Identify the Contract(s)
With a Customer
50
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied

(949) 466-1368
Definition of a Contract
51
Payment
terms can be
identified
Approved by
both parties
Rights can be
identified
Commercial
substance
Collectability
is probable
Contract
(legally
enforceable
rights and
obligations)

(949) 466-1368
Expected Impact
• No more specific requirement to have both signatures on a contract
• Legally enforceable is the standard
• Contracts may be written, oral or implied by an entity’s customer’s business
practice
• May require legal team involvement to document specific point when a
contract becomes enforceable
• If an entity enters into non-standard contracts, this will be a bigger challenge
• There may be cross-border considerations
• Entities may assess collectability using a portfolio approach if the result is
expected not to vary from a case-by-case review, but must have
processes/controls to identify outliers
• An entity may want to consider changes to standard contracts to better
document when they become enforceable
52

(949) 466-1368
Step 2: Identify the Performance
Obligations in the Contract
53
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied

(949) 466-1368
Identifying Performance Obligations
• A performance obligation is a promise in a contract with the customer to
transfer to the customer either:
• A good or service (or a bundle of goods or services) that is distinct
• A series of distinct goods or services that are substantially the same and have
the same pattern of transfer to the customer.
• Assess promised goods or services at inception of contract
• Goods or services promised can be either:
• Explicitly stated in the contract, or
• Implicit (if there is a valid expectation that the seller will provide a good or
service based on the seller’s customary business practices, published policies,
or specific statements)
54

(949) 466-1368
When is a Good or Service Distinct?
• A good or service is distinct if both:
a. Customer can benefit from the good or service either on its own or
together with other resources that are reasonably available to the
customer (i.e., the good or service is capable of being distinct)
• A readily available resource is a good or service that is sold separately by the entity or
another entity, or that the customer has already obtained from the entity
b. The entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e., the good
or service is distinct within the context of the contract)
• A good or service that is not distinct should be combined with other
promised goods or services until the seller identifies a bundle of
goods or services that is distinct.
55

(949) 466-1368
Expected Impact
• Potential increase in number of separate performance obligations vs.
separate elements identified in existing GAAP and may accelerate
revenue
• Important to understand entity’s policies and practices,
representations made during contract negotiations, marketing
materials, and business strategies when identifying the promises in
an arrangement.
• Must identify, document and track ongoing impact of marketing materials,
roadmaps, etc., which may change over time
• Performance obligations may be identified using a portfolio
approach, but will need to have process to identify outliers
• If non-standard contracts are used, will have to identify distinct goods
or services on an individual contract basis
• May want to consider contractual changes to better define when
goods or services are distinct “within the context of the contract”.
56

(949) 466-1368
Step 3: Determine the
Transaction Price
57
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied

(949) 466-1368
Definition of Transaction Price
• The transaction price is the amount of consideration (e.g., payment)
to which a seller expects to be entitled in exchange for transferring
promised goods or services to a customer
• Affected by:
• Variable consideration
• The existence of a significant financing component
• Noncash consideration
• Consideration payable to the customer
58

(949) 466-1368
Variable Consideration
• If the contract includes variable consideration, must estimate
• Variable consideration may be:
• Explicit, or
• Implicit
• Implicit if either:
a. Customer has a valid expectation arising from the seller’s
customary business practices, published policies, or specific
statements that the seller will accept a lower amount of
consideration, or
b. Other facts and circumstances indicate that the seller’s intention
at the outset is to offer a price concession.
59

(949) 466-1368
Variable Consideration
60
Common types of variable consideration
Bonuses Incentive payments Penalties
Refunds Money-back guarantees Volume discounts
Rights of return Price concessions Volume rebates
Credits Performance bonuses Royalties

(949) 466-1368
Estimating Variable Consideration
• Should be estimated using the method that better predicts the amount to which
the entity is entitled based on its facts and circumstances
• The method should be applied consistently throughout the contract and for
similar contracts
61
• Sum of the probability-weighted
amounts in a range of possible
outcomes
• Most predictive when the
transaction has a large number of
possible outcomes
• Can be based on a limited number of
discrete outcomes and probabilities
• The single most likely amount in a
range of possible outcomes
• Most predictive when the
transaction will produce only two
outcomes
Estimate using one of the following two methods
Expected Value Most Likely Amount

(949) 466-1368
Constraint on Amount of Variable
Consideration
• An entity may only include in the transaction price the probable
portion of variable consideration that would not result in a significant
revenue reversal.
• Variable consideration should be updated (cum catch-up) at each
reporting date as probable amount changes
62
Probable
Significant potential
revenue reversal
Min Max
Include in Transaction Price Do Not Include

(949) 466-1368
Expected Impact
• Recording estimated variable consideration may significantly affect the
timing of recognition compared to today.
• Significant judgment will be required to estimate the amount of variable
consideration that should be included in the transaction price.
• If there are standard arrangements and performance obligations, this may
require significant effort, although entities may assess by class of customer,
products or services, distribution channel, etc. if it is expected to provide the
same result. However, there will have to have processes/controls to identify
any outliers.
• Must identify and document customary business practices, published
policies, specific statements and/or intent to offer a price concession
• Must track over time to incorporate changes in customary practices
• May be more of a challenge if there are non-standard practices by product,
location, etc.
63

(949) 466-1368
Step 4: Allocate the Transaction
Price to the Performance
Obligations in the Contract
64
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied

(949) 466-1368
Allocating the Transaction Price to More Than
One Performance Obligation
• Allocate to each performance obligation the amount of consideration
which the entity expects to be entitled in exchange for satisfying each
performance obligation.
• Allocate based on relative standalone selling price (if available)
• The price which a the entity sells the good or service separately
• The best evidence is the observable selling price of a good or service
if sold separately in similar circumstances/to similar customers
• Contractually stated price or list price may be (but is not presumed) the
standalone price for the good or service
65

(949) 466-1368
Allocating Transaction Price When Standalone
Selling Price Does Not Exist
66
Market
conditions
Residual Approach
(If highly variable or uncertain
standalone selling prices)
Expected Cost Plus
Margin Approach
Adjusted Market
Assessment Approach
Entity-specific
factors
Information
about
customer/class
of customer
• Maximize use of observable inputs
• Apply method consistently in similar
circumstances
(Competitors’ prices, adjusted
to reflect seller’s costs and
margins)
(Total transaction price
minus sum of observable
standalone prices)
Inputs
(Forecasted expected
cost plus appropriate
margin)
Three Estimation Approaches

(949) 466-1368
Expected Impact
• Determining standalone selling price may require significant
management judgment and estimates
• If performance obligations differ based on particular transactions, the
estimates may need to be performed on a contract-by-contract basis
• Allocating based on relative standalone selling prices, especially
where variable consideration is involved could necessitate significant
modifications to the information systems currently used to record
revenue.
• The requirement to estimate and allocate standalone selling price
would have a particular impact on software companies. Since VSOE
of fair value is no longer required, in situations where revenue was
deferred under the old standards, recognized revenue may now be
accelerated.
• Estimation of standalone selling price may require significant outside
inputs and documentation is paramount.
67

(949) 466-1368
Step 5: Recognize Revenue When
(or as) the Entity Satisfies a
Performance Obligation
68
Step 1:
Identify the
Contract(s)
with the
customer
Step 2:
Identify the
separate
Performance
Obligations
in the
Contract
Step 3:
Determine
the
Transaction
Price
Step 4:
Allocate the
Transaction
Price
Step 5:
Recognize
revenue
when (or as)
a
Performance
Obligation is
Satisfied

(949) 466-1368
Satisfying a Performance Obligation
• At inception of contract, must determine whether each performance
obligation is transferred over time or at a point in time.
• The new standard defines when performance obligations are transferred
over time
• If the if a performance obligation is not transferred over time, then it is
transferred at a point in time.
• Recognize revenue allocated to a performance obligation when (or
as) the entity transfers a promised good or service to a customer.
• Good or service is transferred when (or as) the customer obtains
control of that good or service (asset).
69

(949) 466-1368
Performance Obligations Satisfied Over Time
70
Entity creates or enhances asset
that customer controls as it is
created or enhanced
Entity's performance does not
create an asset with alternative
use, and the entity has a right to
payment for performance
completed to date
Customer is receiving and
consuming the benefits of entity’s
performance as entity performs
Another entity would not
have to re-perform work
completed to date
Control
of
goods
and
services
is trans-
ferred
over
time.
and
Control of goods and services is transferred over time if one of the
following three criteria is met:
Control
of goods
and
services
is trans-
ferred at
a point
in time. No
No
No
No Yes
Yes
Yes

(949) 466-1368
When Control Is Transferred - Performance
Obligations Satisfied at a Point in Time
• Indicators of seller’s transfer of control (customer obtains control of a
promised asset) and seller’s satisfaction of a performance obligation,
include, but are not limited to:
• Seller has a present right to payment
• Customer has legal title
• Customer has physical possession
• Seller has right to non-refundable payment
• Customer has the significant risks/rewards of ownership
• Customer has accepted the asset
71

(949) 466-1368
Measuring Progress Towards Completion –
Performance Obligations Transferred Over Time
• Measure the progress toward control transfer by one of the two
methods:
• Output (hourly billings, milestones)
• Input (costs, labor hours, time) methods
72

(949) 466-1368
Expected Impact
• The concept of transfer of control may require more judgment.
• It may change revenue timing, because it is no longer focused
narrowly on transfer of title (FOB terms) and risks and rewards of
ownership.
• Determining when control transferred may involve legal
considerations that vary across jurisdictions, performance
obligations, distribution channels, etc.
• The transfer of control concept may change revenue recognition
pattern for companies who currently use “sell-through” policy.
• The new guidance on service transactions may represent a significant
change to entities outside of the construction/contracting industry
who use various methods to recognize services revenue.
73

(949) 466-1368
Disclosures
74

(949) 466-1368
Disclosures
• Objective: to provide sufficient information to enable users of
financial statements to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers
• Requires numerous qualitative and quantitative disclosures
• Required for each period for which an income statement and balance
sheet are presented
75

(949) 466-1368
Examples of Qualitative Disclosures
• How estimates are made for:
• Determination of transaction price
• Determination of variable consideration, with separate discussion of each
significant type and how potential for reversal is evaluated
• Allocation of transaction price to performance obligations
• Returns, refunds and similar items
• Significant judgments and changes in judgments in determining the
timing of satisfaction of performance obligations (over time or at a
point in time), and determining the transaction price and amounts
allocated to performance obligations
• The methods used to recognize revenue for performance obligations
satisfied over time and an explanation of why the methods used
provide a faithful depiction of how control is transferred
76

(949) 466-1368
Examples of Quantitative Disclosures
• Amount of transaction price allocated to remaining performance
obligations at end of the period
• When amounts will be recognized
• Variable consideration not yet included
• Revenue disaggregated into categories (by reportable segment and
other categories) that reflect different responses to economic factors
• Roll-forward of contract assets and liabilities
• Assets recognized from the costs to obtain or fulfill a contract
• Revenue and impairments recognized
• Information about contract balances (assets and liabilities)
77

(949) 466-1368
Disaggregated Revenues
• Principle: disaggregate revenue into categories that depict how the
nature, amount, timing, and uncertainty of revenues and cash flows
are affected by economic factors.
• In addition, an entity should disclose sufficient information to enable
users of the financial statements to understand the relationship
between the disclosure of disaggregated revenue and revenue
information that is disclosed for each reportable segment.
• Categories are based on entity’s specific facts and circumstances
• To decide categories, must consider how revenue disclosures:
a. Have been provided outside the financial statements, e.g., earnings
releases,
b. Are reviewed by the chief operating decision maker, and
c. In other information similar to that in (a) and (b) is used by the entity or
external users to evaluate financial performance and resource allocation.
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Disaggregated Revenues
• Example categories include (but are not limited to):
• Type of good or service (e.g., major product line)
• Geographical region (e.g., country or region)
• Market or type of customer (e.g., government and nongovernment)
• Type of contract (e.g., fixed-price and time-and-materials contracts)
• Contract duration (e.g., short-term and long-term)
• Timing of transfer of goods or services (e.g., point in time and over time)
• Sales channels (e.g., direct to consumers and sold through intermediaries)
• Judgment required regarding level of aggregation or disaggregation
(well in advance of adoption)
• Categorization may necessitate changes in information systems
• Private companies may elect not to present certain types of
disaggregated disclosure
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Example: Disaggregated Revenue Disclosures
80
Segment – Primary
Geog. Markets
Consumer
Products Transportation Energy Total
North America $ 990 $ 2,250 $ 5,250 $ 8,490
Europe 300 750 1,000 2,050
Asia 700 260 960
Total $ 1,990 $ 3,260 $ 6,250 $ 11,500

(949) 466-1368
Example – Disaggregated Revenue
Disclosures
81
Segment – Major
Goods and Services
Consumer
Motorcycles $ 500 $ 500
Office Supplies $ 600 600
Appliances 990 990
Clothing 400 400
Automobiles 2,760 2,760
Solar Panels $ 1,000 1,000
Power Plant 5,250 5,250
Total $1, 990 $ 3,260 $ 6,250 $11,500

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Example: Disaggregated Revenue Disclosures
82
Sales Channels Direct Distributors VARs Total
North America $ 990 $ 2,250 $ 5,250 $ 8,490
Europe 300 750 1,000 2,050
Asia 700 260 960
Total $ 1,990 $ 3,260 $ 6,250 $ 11,500

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Example – Disaggregated Revenue
Disclosures
83
Timing of
Revenue
Recognition
Consumer
Point-in-Time $ 1,990 $ 3,260 $ 1,000 $ 6,250
Over Time 5,250 5,250
Total $ 1,990 $ 3,260 $ 6,250 $ 11,500

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Expected Impact
• Significant management judgment required to decide categories of
disaggregated revenue disclosures
• Current information systems may not capture data to provide
disaggregated revenue disclosures. Therefore, consideration of the
proper categories needs to be done early during the planning phase.
• The process of disaggregating revenue may require entities to rethink
segment reporting categories
• Internal and external information considered in determining the
categories will need to be well supported and documented.
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Effective Date and Transition
85

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Proposed* Effective Date and Transition –
Calendar Year-End Public Companies
86
2016
NEW
guidance
2017 2018
NEW
guidance
NEW
guidance
Transition
option #1:
Full
retrospective
Transition
option #2:
Modified
retrospective
Record cumulative effect on retained earnings at 1/1/2016
OLD GAAP OLD GAAP
NEW
guidance
Record cumulative effect on retained earnings at
1/1/2018
Disclose
OLD GAAP
Dual record
keeping in 2016
and 2017
Dual record
keeping in 2018
Effective date = 1/1/2018**
* Subject to exposure draft and 30 day comment period.
** May adopt one year earlier.

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Takeaways
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Why is This a Big Deal Right Now?
• The transition choice has big effect on systems, processes and controls, so the
decision as to which method will be adopted should be made as soon as possible
• Critical decisions and judgments required throughout the standard necessitate
careful consideration and adequate time
• Time will be need to compile and document historical data which may require
changes to information systems
• Determining and documenting the entity’s customary business practices could
require a lot of work.
• The new standard will significantly affect internal controls and SOX compliance
• An entity will need management, audit committee and auditor buy-in, which
should not be left to the last minute
• There is the potential need for contractual changes, e.g., revenue contracts,
compensation structures, loan covenants, and may be others.
• Information systems may (likely) need to be changed
• Training and preparation will be needed throughout the organization
• Will affect multiple departments, functions and geographic regions.
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Who is impacted?
Shareholders
Chief Executive
Officer
Sales &
Marketing
General
Counsel
CIO
Chief Operating
Officer
Chief Financial
Officer
Internal
Audit
Controller
• Training
• Critical judgments and
decisions
• Oversee Implementation
process
• Project management
Audit
Committee
• Training
• Keep abreast of accounting decisions
• Interface with auditors
• Interface with Internal Audit re: changes to ICFR
• Training
• Interpretation of when
there is a contract as a
matter of law
• Revise sales incentive
compensation contracts
• Revise customer
contracts
• Training
• Implement new or
updated Information
systems
• Training
• Oversee implementation
Divisional
CFO’s
Divisional
CFO’s
Business
Unit Managers
• Training
• Oversee all organizational changes
Board of
Directors
Lenders Analysts
• Training
• Understand business process changes
• Oversee changes to and test compliance with ICFR
• Revise debt
covenants
• Explain impact
• Provide guidance
• Training
• Revise incentive compensation
• Provide “talking points” to sales force
• Renegotiate contracts

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What Could Go Wrong?
• May run out of time to do an acceptable job, last minute errors more likely
• Internal controls may not cover the necessary periods
• New internal controls may not have time to mature prior to a SOX assessment
• May run out of time to assess and test internal controls
• May get stuck in the auditor’s last minute crunch
• Many entities may wait until the last minute to adopt
• Service may not be as timely or may run out of time
• No time for feedback in order to correct
• Audit fees may balloon
• May not have adequate time to implement changes to information systems
• May change mind on implementation method, but too late
• Failure to take cross-functional/departmental approach may cause last minute
organizational upheavals and unintended consequences
• May not have considered impact to new product offerings ahead of time.
• May not have time to make necessary contractual changes
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Recommendations
• Start making critical judgments and define the revenue recognition
model to be applied by class of arrangements with customers
• Analyze gaps in IT systems, processes and internal controls
• Anticipate pervasive organizational impact and include affected
departments/disciplines in implementation effort
• Examine both current and future product and service offerings under
current and future GAAP
• Critically evaluate the transition approach – the benefits and
downsides of each
• Determine appropriate internal controls over financial reporting
• Assess whether external resources are needed
• Don’t underestimate or delay the implementation effort
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Questions?
92

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Revenue Recognition Controls

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