www.financialexecutives.org

Report
The New Revenue Recognition Rules
What Finance Compliance Executives Need
to Know
March 20, 2015
Agenda
• Overview of the New Accounting Standard
• Approaching the New Standard From All Angles: The
Six Elements of Infrastructure
• Impact of the New Standard on People and Training
• Considerations for Audit Committees
• Considerations for Finance Compliance Activities
• Final Thoughts
1
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Overview of the New Accounting Standard
• PCAOB Practice Alert – For Current Accounting
Standards
• New Revenue Recognition Standard
• High Level Implementation Timeline
• Transition and Effective Date
• Taking the First Steps
• High Level Application of the Revenue Model in Five
Steps
2
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But First…..
PCAOB Practice Alert – Auditing Revenue
• Directed toward external auditors, but certain elements are
relevant to issuers:
– Areas which could lead to needs for policies/white papers:
o Contractual arrangements, particularly non-standard
contracts
• Additional emphasis on percentage of completion
estimates on long-term contracts
o Indicators of gross vs. net revenue presentation
o Allocation of sales value to multiple elements in a
bundle
o Timing of revenue recognition
o Fraud detection and fraud risk management
– Areas which could lead to more work for auditors or
clients:
o Additional sample sizes
o Additional control testing
o Additional cut-off testing
o Additional locations to be tested
o Support for additional analytical review by auditors
(hypothesis development, etc.)
Source: Protiviti PCAOB Flash Report - PCAOB Issues Practice Alert Related to Auditing
Revenue
3
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New Revenue Recognition Standard
Final Standard Released May 28, 2014.
Effective January 1, 2017 (subject to postponement)
• Minimum one-year deferral for nonpublic
entities.
Transition Approaches
• Retrospective, or
• Cumulative effect at the date of adoption.
Objective of project
• Achieve a single, comprehensive revenue
recognition model
Removes existing industry specific guidance
Expands qualitative and quantitative disclosures
Core principle – revenue recognition depicts transfer of promised goods or services to
customer in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services
4
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New Revenue Recognition Standard
• At its January 26 meeting, the Transition Resource Group
(TRG) discussed several implementation issues related to
the new revenue standard.
• Some of these issues will likely result in further
discussions by either the TRG or the FASB and the IASB.
• The boards also provided an update on their outreach to
date on licenses, identification of distinct goods or
services, and principal vs. agent (gross vs. net)
considerations.
• The FASB staff announced that stakeholder outreach is
still ongoing related to the potential delay in the effective
date of the new standard. The FASB expects to vote on
any delay in the effective date in early Q2 2015.
5
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New Revenue Recognition Standard
• FASB and IASB have largely given up on convergence
with this standard
• Although the new standard is supposed to be
“principles” based, the TRG and proposed rev rec
exposure draft process are potentially driving the
standards close to “rules” based
• SEC still hasn’t come forth with their proposed
guidance (wait and see what FASB does on deferring
effective date)
• TRG is providing guidance – but “not authoritative”
• Still a lot of uncertainty on the impact of this new
standard
6
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High Level Implementation Timeline
Analyze
Implement
Design
May 28th, 2014: Issuance
of revenue recognition
standard
2014
Optional
retrospective
reporting period
2015
Potential Scenarios :
Low impact
Moderate impact
High impact
Retrospective
adopter
Key:
7
Analyze
Design
Implement
Sustain
Sustain
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Effective date of
revenue recognition
standard
2016
1/1/17
“Steady
State”
Transition and Effective Date
Transition Method
2015/2016
2017
Date of Cumulative
Effect Adjustment
Full Retrospective
Restate for all contracts
Apply new revenue
standard to all contracts
January 1, 2015
Retrospective Using
One or More Practical
Expedients
Restate for all contracts
under the new revenue
standard except for
contracts covered by the
practical expedients
elected by the preparer
Apply new revenue
standard to all contracts
January 1, 2015
Cumulative Effect at
the Date of Adoption
These periods not
restated for any
contracts
Apply new revenue
standard to new and
existing contracts;
disclose effect of
applying new standard
January 1, 2017
SEC Update: If use retrospective approach, SEC will not require restatement of the five-year
selected financial data table (only two previous years).
8
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Transition and Effective Date (Cont’d)
Transition
Optional practical expedients:
• Would not restate contracts completed before date of initial application that begin and
end in the same annual reporting period
• Preparer would be permitted to use the transaction price at contract completion for
contracts with variable consideration that were completed prior to initial application
• For all reporting periods presented before the date of initial application, an entity is not
required to disclose the amount of the transaction price allocated to remaining
performance obligations nor provide an explanation of when the entity expects to
recognize that amount as revenue
Transition Disclosure – Disclose the amount by which each financial statement line item
changed in the current year as a result of applying the new revenue standard and an
explanation of the significant changes between amounts reported under the new revenue
standard versus legacy guidance
Early Application
Is prohibited
Public Company Effective Date
Effective for reporting periods beginning on or after January 1, 2017
9
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Taking The First Steps
Take Time to Learn, Diagnose and Assess Now…..
1. Education: Review final standard and implementation guidance
2. Analyze current revenue policy vs. the proposed standard to identify
expected changes:
− Customer contracts with unique terms
− Changes to cost recognition policies
3. Depending on significance of accounting policy gaps, consider extent of tax
(or legal) involvement that may be required
4. Perform a high level analysis of data gaps:
− Will required information be available from your existing processes?
− Will system changes be required?
5. Develop high level approach regarding transition method:
− Retrospective versus cumulative effect
− Consider complexity of performing the transition and whether specific
tools/systems may be required
6. Identify and assess additional resource needs; internal / external;
temporary or permanent
7. Educate senior management team, key stakeholders and board of directors
10
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High-Level Application of Revenue Model in Five Steps
11
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 satisfies a performance obligation
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New Revenue Model – Potential Significant Accounting
and Reporting Changes
Multiple
Element
Arrangements
Estimated
Selling Price
•
Entities that enter into contracts with customers to provide a series of
promised goods or services delivered consecutively will need to assess
whether the contract is a single performance obligation or contains
multiple separate performance obligations
•
Use of observable inputs should be maximized, but if the stand alone
selling price of a good or service is variable or uncertain, the residual
approach would be allowed
•
Variable consideration is reasonably assured if BOTH of the following
criteria are met: (i) The entity has experience with similar types of
performance obligations and (ii) the entity's experience is predictive of the
amount of consideration to which the entity will be entitled in satisfaction
•
Collectability will no longer be a recognition threshold, so revenue might
be recognized earlier by entities that currently defer recognition of
revenue due to collectability concerns – Note: SEC Staff Accounting
Bulletin No. 104 is still in effect.
•
The transaction price should reflect the time value of money when the
contract includes a significant financing component; a practical expedient
allows entities to disregard the time value of money for short-term
contracts
•
Each performance obligation would be evaluated to determine whether it
is satisfied (a) over time or (b) at a point in time; might lead to more
“over time” recognition
Variable
Consideration
Collectibility
Time Value
of Money
Timing of
Revenue
Recognition
12
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New Revenue Model – Potential Significant Accounting
and Reporting Changes (Cont’d)
Contract Costs
•
Certain contract acquisition costs would need to be capitalized
•
Recognition of contract revenue and contract cost would be separated
from each another. Predictive margins would only be possible if a
company uses a cost-to-cost method of measuring progress towards
satisfaction of the performance obligations
•
Contract costs not eligible for capitalization (e.g., as inventory or direct
fulfillment costs) would be expensed as incurred
•
Further guidance is expected to help determine whether a license
transfers a right or provides access
•
VSOE of the FV of the undelivered items would no longer be required to
separately account for elements in a software arrangement
•
The standard includes a number of disclosure requirements intended to
enable users of financial statements to understand the amount, timing,
and judgments related to revenue recognition and cash flows
ConstructionType Contracts
ConstructionType Contract
Costs
Software
Subscription
Accounting
Separation Criteria
for Elements in
Software
Arrangements
Disclosures
13
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Other Provisions
Cost to Fulfill a Contract – Recognize asset in accordance with other topics (inventory,
PP&E, software) otherwise capitalize costs that:
• Relate directly to contract
• Generate/enhance a resource that will be used to satisfy obligations in the future
• Are expected to be recovered
• Assets are amortized on a systematic basis consistent with the transfer of related
goods or services
Rights of Return – Not a separate performance obligation, but do not recognize revenue
for goods expected to be returned
Product Warranties
• Assurance warranties – use a cost accrual accounting model
• An optional purchase or go beyond normal assurance would be a potential
performance obligation
14
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Other Provisions (Cont’d)
Options to Acquire Additional Goods/Services
• Represents a performance obligation (requiring revenue deferral) if it provides a
material right that would not have been received
Principal vs. Agent Considerations
• Determines whether obligation is to actually provide goods or services (gross) or
arrange for another party to provide (net) goods or services
Customers’ Unexercised Rights – Recognized “breakage” in the pattern of rights
exercised by a customer if amount is reasonably assured (other defer until remote)
• An optional purchase or go beyond normal assurance would be a potential performance
obligation
Non-Refundable Upfront Fees – Generally recognize advance payments when future
goods or services are provided (could be beyond initial contract term)
• Represents a performance obligation (requiring revenue deferral) if it provides a
material right that would not have been received
Repurchase Agreements – If entity has an obligation or right to repurchase the asset the
customer does not obtain control and is accounted for as a lease (ASC 840) or a financing
arrangement
15
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Other Provisions (Cont’d)
Consignment Arrangements – Control typically passes to other party (dealer or
distributor) when that party sells product to customer or a specified period expires
Bill and Hold Arrangements – Evaluate if control has passed to customer
Customer Acceptance – Able to assert control has transferred if entity can objectively
determine good or service meets specifications as required
License and Rights to Use – May give rise to a performance obligation that an entity
satisfies at a point in time (entity transfers a right) or over time (entity transfers a right to
access) based on an indicator analysis
16
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Other Provisions
Disclosures
Disaggregation of
revenue
Information about
contract balances
Contract costs
Information about
performance
obligations
Description of
significant
judgments
Policy decisions –
TVM and costs to
obtain a contract
Transaction price
allocation
Methods and
assumptions
17
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Remaining
performance
obligations
Notable Implications
While no industry will be exempt…
1. Industries that are likely to experience the most significant
changes include software, telecommunications, asset
management, airlines, real estate, aerospace and construction
2. Changes won’t be limited to these industries, of course, so all
companies should consider the need to assess the implications of
the new standard and develop implementation plans to address
those implications of the new standard and develop
implementation plans to address those implications
3. The new guidance may enable some companies to recognize
revenue sooner than they typically do under existing accounting
standards
18
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Notable Implications (cont’d)
While no industry will be exempt…
4. Companies with longer delivery cycles, or those with nonstandard
and complex contract terms, will be the most affected
• These organizations will require greater resources from systems
or process to provide the necessary information to meet the
data requirements to account for and describe revenue
recognition
5. The impact of the new standard could be far-reaching and
potentially disruptive, as it may also affect processes and reporting
associated with:
• Commissions, bonus and compensation structure
• Key financial performance metrics
• Partnerships, alliance and joint ventures
• M&A activities (working capital adjustments, revenue
projections, post-deal multiple earnout provisions, etc.)
• Internal controls and SOX compliance
• Loan financial covenant compliance
19
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Approaching the New Standard From All Angles:
The Six Elements of Infrastructure
• Transition Strategy Roadmap
• What Does This Mean to Me?
• Impact on The Six Elements of Infrastructure
– Methodology
– Business Policies
– Business Processes
– Systems and Data
– Reporting
– People
20
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Revenue Recognition – Transition Strategy Roadmap
Each conversion project is a change management process that runs through
multiple phases. Each phase can be addressed in a structured way using the
Protiviti Six Elements of Infrastructure Model.
Phase I – Preliminary Diagnostic
Phase II – Project Implementation
Phase III – Embedding
Step I – Preliminary Diagnostic
Step II – Develop Project
Management
Step III – Detailed Project Set
Up
Step IV – Detailed Gap
Analysis/Transition Method
Step V –Transition Year 1
Reporting
Step VI –Integrate Change &
Ongoing Compliance
Deliverables
21
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What Does This Mean to Me?
During the scope and analyze phase of the transition process, it is important to consider
the implications to your organization’s infrastructure. You can do this by using the Six
Elements of Infrastructure Model.
Methodology
Business
Policies
People
Scope
&
Analyze
Business
Processes
Reporting
Systems
and
Data
22
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Six Elements of Infrastructure
Key elements of infrastructure must be linked by design:
Methodology
Business
Policies
Business
Processes
Systems and
Data
Reporting
People
About the Six Elements
• The six elements of infrastructure (six elements) is a useful tool for categorizing issues,
understanding where problems are occurring within the organization, and drawing conclusions to
form the basis for recommendations.
• In Protiviti’s view, the elements of infrastructure should be considered when designing a new process
or assessing an existing process. Also, the six elements are common to each process or function.
• These elements represent the capabilities that each process or function should possess; and they
provide a comprehensive and consistent framework to communicate the requirements for the
appropriate operation of a process or function.
• While these elements are not necessarily intended to be a strictly linear process, the components of
the framework are generally designed from left to right. The use of this structure helps organize the
otherwise complex network of risk management activities into a comprehensive and consistent
framework. In particular, it ensures that all key components are appropriately considered.
• In planning to adopt the new revenue standard, companies would benefit from considering the six
elements of infrastructure.
23
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Revenue Recognition –
Impact on Six Elements of Infrastructure
Methodology
• Gap analysis
• 5 step analysis
framework
• Transition strategy
– PMO
Business
Policies
• Transition retrospective vs
cumulative effect
• Transition
timeline defined
and monitored
• Impact on
contracting,
pricing,
performance
obligations
• Identify
processes
impacted –
contracting, order
entry, deal desk,
revenue
allocation,
reporting,
forecasting
• Update risk
assessment and/or
control framework • Update
documented
• Cross functional
policies and
awareness,
guidelines
training and
deployment
• Judgment
considerations –
• Multipleevidence of an
performance
arrangement,
obligations
collectability
revenue allocation
• Established
• Consistent
materiality
performance
thresholds
measures/metrics
24
Business
Processes
• Identify
performance
metrics to
track/control the
Rev Rec process
• IA/SOX program
modifications
• Clearly-defined
review/approval
processes
Systems and
Data
• Determine data
elements allowing
systems to
process automatic
and judgmental
rules differently
• Define integration
points between
contracts T&Cs/
sales orders
Reporting
People
• Significant new • Identify crossdisclosures –
functional
quantitative and
collaboration
qualitative
team
• Updated
• Appropriate
executive level
segregation of
dashboards and duties for key
performance
revenue/issue
metrics
resolution
• Revenue
• Clearly defined
allocation drillresponsibility
• Define revenue
down
and
allocation rules
capabilities that
accountability
based on contract
enable quick
framework linked
groupings
reference to
to periodic
• Design solutions to supporting
performance
rebuild the current
detail
evaluations
systems and
• Transparent
• Training on
support multiple/
audit
trail
policies,
parallel rev rec
procedures, and
principles
enabling tools
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Six Elements of Infrastructure – Business Policies
Key elements of infrastructure must be linked by design:
Methodology
Business
Policies
Business
Processes
Systems and
Data
Reporting
People
Business Policies
In this component of the six elements:
The formal Business Policy framework includes specific guidelines as well as the more general principles that apply to all
aspects of the business and management of its risks. Policies enable process owners to understand what the organization
intends to accomplish with a process. Policies are linked to strategy; they put strategy in play.
These policies:
• Articulate the selected process objectives so that process owners and personnel will understand what the risk
management capabilities are intended to accomplish.
• Guide management and process owners toward achieving specific process goals, implementing specific risk strategies,
designing specific processes, using designated products, executing specific transaction types, and complying with
specific risk tolerances and expected standards of conduct.
• Help senior executives and the Board clarify their understanding of the process and the related impact on the business.
Strategies and policies provide key company stakeholders with a common understanding of the company’s:
• Objectives
• Risk appetite
• Risk tolerances
• Expected standards of conduct
25
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Business Policies – Revenue Recognition
Methodology
Business
Policies
Business
Processes
Systems and
Data
Reporting
People
Business Policies – Revenue Recognition
•
A critical first step is the determination of impact from new accounting policies on all significant revenue stream
policies:
– Understand in depth the new standards requirements and transition alternatives - Retrospective vs
Cumulative Effect
– Differences between new / proposed accounting requirements and current accounting policies will need to be
identified  perform a technical accounting diagnostic
– Impact on contracting, pricing, performance obligations and revenue allocation
– Modeling and pro-forma analysis
– Decisions and finalization of accounting policy determination
– Establish materiality thresholds
26
•
Update documented policies and use of judgment guidelines (evidence of arrangement, collectability) – clear
definitions
•
Changes in accounting policies could impact business strategies, loan covenants, KPIs/metrics and other agreements
•
Consistency across all business units and functions is required
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Impact of the New Standard on People and Training
• Six Elements of Infrastructure: the People
Element
• The People Element: a Cross-Functional Impact
• “People Management” in Managing Change
• Cross-Functional and Collaborative Ownership of
the Process
27
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Six Elements of Infrastructure: The People Element
Key elements of infrastructure must be linked by design:
Methodology
Business
Policies
Business
Processes
Systems and
Data
Reporting
People
People
In this component of the six elements:
•
•
•
•
•
•
•
People execute processes
Key tasks are assigned to people with the necessary knowledge, skill, and expertise
As people take on new risk management responsibilities, their roles, accountability and relationships with other risk
owners should be clearly defined
Process owners should be satisfied that everyone’s job is clearly spelled out so that they can hold people
accountable, both within and outside the organization
Roles and responsibilities of risk-taking versus risk-monitoring functions should be clearly defined and delineated
Process owners are accountable for losses experienced with undesirable risk incidents occur
Key tasks are assigned to people with the requisite knowledge, skill, and expertise; roles and responsibilities of risktaking versus risk-monitoring functions must be defined and delineated
This risk element is deficient if:
•
28
People lack the knowledge and experience to perform the process
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The People Element: A Cross-Functional Impact
Methodology
Business
Policies
HR
•
•
•
•
•
Metrics for measuring
performance
Sales commission,
compensation and
bonus plans
Resources required by
all areas to ensure
compliance during
transition
Training
Target staffing
operating model
(ongoing)
Systems and
Data
•
•
•
•
•
•
•
•
Accounting policies and procedures
Forecasts, budgeting and financial
metrics
Analytical reviews
Data accuracy
Financial reporting of results and
associated disclosures
(reconciliation of contract balances,
disaggregation of performance
obligations, qualitative disclosures,
interim period disclosures
Accounting deviations
Increased judgment and estimates
(allocation of transaction price,
variable considerations, discounts)
Revenue process
Capitalizing contract costs
Margin
Net income
Bonuses and other key
performance metrics
Investor relations
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Reporting
People
Internal Audit and
Compliance
Accounting/Finance
•
•
•
•
•
29
Business
Processes
•
•
•
•
•
•
•
Impact on systems and
controls due to changes
in policies and processes
Controls and processes
surrounding additional
estimates and required
disclosures
Awareness of fraud
indicators
Audit skills
enhancement
ERM augmentation
Change management
Controls adjusted (realtime)
Treasury
•
•
•
•
•
•
Debt covenants
(potential
modification to
maintain original
intent)
Cash flow
projections/analysis
Foreign currency
Provisions for
significant financing
component
Hedging/Derivative
considerations on
long-term contracts
with interest
Contract review
(embedded features)
The People Element: A Cross-Functional Impact (cont’d)
Methodology
Business
Policies
Sales & Marketing
•
•
•
•
•
•
•
•
•
30
Structure of deals
Product bundling
Assessment of
performance obligations
Consideration of extended
payment terms (financing
component, time value of
money factor)
More leeway in
determining the
information shared with
customers
Pricing strategy
Contract terms and
conditions (multiple
deliverables, variable
consideration terms,
discounts, special
provisions)
Order entry
Sales commissions
Business
Processes
Systems and
Data
IT
•
•
•
•
Changes to the processes
used for processing
transactions
Capturing and reporting
on required data
Modification to support
the computing of selling
price allocation and
estimate the standalone
selling price for software
elements
Impact to enterprise
business systems
landscape
Reporting
Operations
•
•
•
•
•
•
Changes to different
revenue streams
Evaluation of satisfaction of
performance obligations
Right of return and
warranties
Determining control transfer
Professional services
Logistics (shipping)
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People
Legal/Taxes
•
•
•
•
•
•
•
•
Investor relations
(informing shareholders
on impact of standards)
Timing of tax payments
Sales tax
Additional book-tax
adjustments
Inventory revenue
arrangements and
review contracts
Reexamine contract
terms and strategies
Contract compliance
and monitoring
Transfer pricing
“People Management” in Managing Change
People have to adapt to change – not organizations. It is essential that people do not feel
excluded from change management initiatives, leaving them lacking the necessary skills and
capabilities to adapt to change. Several elements make up people management:
Employee engagement
Effective Training
Communication
Planning workshops
Employee surveys (before, during and after change)
Education and awareness programs
Development of performance/effectiveness measures
31
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Cross-Functional and Collaborative Ownership of the
Process
Responsibility
• While CFOs will likely own the responsibility to assess the
requirements of the new standard, its implications and the
appropriate transition plan, the responsibility for the design and
implementation of solutions must be cross-functional in nature
• The effort itself, must be overseen through a project-driven
discipline and approach (perhaps by a project management
office (PMO) structure for large, complex organizations)
Collaborative
Involvement
and Change
Management
32
• Collaborative involvement and appropriate change management
activities are critical to an effective and efficient revenue
recognition transformation initiative
• In particular, change management becomes a major determinant
of success by overseeing the allocation of resources, establishing
the transition framework and supporting appropriate training at
all levels of the organization
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Considerations for Audit Committees
• 2015 Audit Committee Mandates: Enterprise,
Process and Technology Issues
• Questions for Consideration: Audit Committees
• Questions for Consideration: Audit Committees
and Management
33
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2015 Audit Committee Mandates – Enterprise, Process
and Technology Issues
√
Update the company’s risk profile to reflect changing
conditions
√
Oversee capabilities of the finance organization and internal
audit to ensure they can deliver to expectations
√
Pay attention to risk culture to address the risk of
dysfunctional behavior undermining risk management and
internal control
√
Understand how new technological developments and trends
are impacting the company
√
Assess committee effectiveness
Source: Protiviti’s The Bulletin – Volume 5, Issue 9: Setting the 2015 Audit Committee Agenda
34
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2015 Audit Committee Mandates – Financial Reporting Issues
√
Pay attention to revenue recognition
√
Inquire if there is an impact of the PCAOB on the audit
committee approach
√
Understand impact of COSO’s update of the Internal Control
– Integrated Framework
√
Understand and evaluate management’s significant
accounting estimates
√
Stay current on audit reform developments
Source: Protiviti’s The Bulletin – Volume 5, Issue 9: Setting the 2015 Audit Committee
Agenda
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The Audit Committee Should…
√
Pay attention to revenue recognition
• Ensure the company is undertaking the appropriate steps to
transition effectively to the new standard
• Ensure there is emphasis on:
 Education the senior management team, key stakeholders
across the organization and the board of directors
 Organizing the project management structure
 Resourcing the team needed to plan and execute the transition
 Analyzing the current revenue policy and process against the
proposed standard to identify expected changes
 Consider the implications to upstream and downstream linked
processes such as contract management and revenue
assurance
 Performing a high-level analysis of system and data gaps
 Formulating an appropriate transition strategy
Source: Protiviti’s The Bulletin – Volume 5, Issue 9: Setting the 2015 Audit Committee Agenda
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Questions for Consideration: Audit Committees
• Has the audit committee discussed the adoption of the revenue
recognition standard with company leadership?
• Does the audit committee believe that management understands how
adoption of the revenue recognition standard will affect the company and its
financial reporting process?
• Does the audit committee believe that management understands the
full extent of the changes to the company and its financial reporting
process?
• Does the audit committee have an oversight plan for monitoring the
implementation and progress of adoption of the revenue recognition
standard?
• What impact does the new revenue recognition standard have on
internal control and financial statement presentation and disclosures?
Source: AICPA, Brief: Revenue Recognition Primer for Audit Committees
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Questions for Consideration; Audit Committees (cont’d)
• How will audit committee members become knowledgeable about the new
revenue recognition standard?
• How will the audit committee understand and question management’s
revenue recognition accounting policy choices? (The new revenue
recognition standard contains less detail than current GAAP)
• How will the audit committee inform the board of directors,
compensation committee and others of the impact of the company’s
transition to the revenue recognition standard?
• How will the audit committee know if management’s informational
goals for shareholders and analysts are being met?
Source: AICPA, Brief: Revenue Recognition Primer for Audit Committees
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Questions for Consideration – Audit Committee and
Management
•
What are the changes to the entity’s revenue recognition accounting policies
due to the adoption of the new revenue recognition standard? What is the
potential financial impact of those changes?
•
What are the tax implications of adopting the new revenue recognition standard
(Such as change in tax accounting methods as well as transfer pricing and
advance payments)
•
Are there particular revenue recognition accounting issues for the industry in
which the entity operates?
•
What type and level of education on the new revenue recognition standard will
the company’s employees need?
•
What is the company’s plan for educating stakeholders (investors, analysts,
lenders, creditors, and the like) so that they understand accounting policy and
financial statement changes?
•
How will the company address the restatement of comparative periods and its
possible impact on investors?
Source: AICPA, Brief: Revenue Recognition Primer for Audit Committees
39
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Questions for Consideration – Audit Committee and
Management (cont’d)
•
What steps is the company taking now to prepare for adoption of the revenue
recognition standard? Does the company have an implementation plan for
adopting the revenue recognition standard?
•
Does the company have a transition plan that includes financial assessment,
key conversion activities, a timetable, require resources, and project-and
change-management training?
•
How will the revenue recognition standard affect the company’s business
practices? (Examples include changes to IT and other internal systems, risk
monitoring and controls, contractual arrangements, lending agreements and
covenant requirements, budgeting and forecasting, key performance indicators,
compensation, joint ventures and alliances, subsidiaries and legal issues,
among other practices)
•
Will external advisors be use to help with the transition to the new revenue
recognition standard? If yes, what will be their qualifications and roles?
•
How will the new standard affect accounting for licenses, warranties, sales
returns and doubtful accounts?
Source: AICPA, Brief: Revenue Recognition Primer for Audit Committees
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Considerations for Finance Compliance Activities
• Revising the Test Plan
• Team Composition
• Fraud Awareness
• Change Management
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Revising the Test Plan
• New or revised business practices
+
• New or revised accounting policies
=
• Revised:
– Process Documentation
– Risks and Controls
– Audit test plans
• Timing and Sequencing
42
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Team Composition
• New risks and controls = New skills
– Auditing “judgment” vs. “compliance”
– Subject matter expertise:
 Contracts
 Logistics
 Sales
 Systems
43
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Fraud Awareness
• Subjectivity
• New or Revised Frameworks
• Potential for Manipulation or Fraud
44
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Change Management
• Successful Execution Through Effective Change
Management
• The ABCs of Change
• Change Enablement Best Practices
45
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Successful Execution Through Effective Change
Management
Barriers
Organization and process silos that result
in integration and “common language”
challenges
•
Stakeholder and readiness assessment
•
Communication strategy and plan
•
Process inefficiencies, including
duplicative and potentially unnecessary
steps
•
Clear business requirements and
stakeholder alignment
•
Lack of common process definition,
understanding, and discipline
•
Knowledge transfer and training program
•
Clear accountability, roles and
responsibilities
•
Streamlined processes
•
Measurement and aligned performance
measurement
•
•
46
Guiding Principles
Manual process steps that are error
prone, lack consistency in execution, and
are heavily reliant on spreadsheets
•
Ineffective use of systems, which results
in a lack process repeatability and control
•
Lack of key reporting and process
effectiveness metrics and measurements
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The ABCs of Change
Change management is a key determinant of success in every transformation.
Project Management
A
B
Awareness
Buy-In
C
Commitment
Change Architecture
Future State
Current State
Organizational Transition
Communication Strategy
Organization Design & Performance Management
Individual Transition
Leadership & Stakeholder Commitment
Culture & Change Alignment
Individual & Team Capacity
Organization Readiness
47
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Vision for Change
Change Enablement Best Practices
48
1
Assess organizational readiness to change
2
Articulate a clear vision of the change
3
Build an appropriate change infrastructure
4
Implement a two-way, multi-audience communication plan
5
Build leadership capacity and stakeholder support
6
Align cultural values
7
Build individual and team capacity to change
8
Align performance management and HR systems
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Final Thoughts
• Insights on Preparedness to Date
• A Structured Approach
• Critical Success Factors
49
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Insights on Preparedness to Date
Overall Results
50
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Insights on Preparedness to Date
Question 1 - Results
Has your organization initiated the training and education process related to the new revenue
recognition standard?
Yes, training and education is currently
underway
10.3%
No, nothing is planned at this time
No, but it is under development
Don't know
51
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36.7%
22.9%
30.0%
Insights on Preparedness to Date
Question 2 - Results
Has your organization started to assess the impact of the new revenue recognition standard on
revenue reporting and related processes?
Yes
No
52
52.4%
47.6%
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Insights on Preparedness to Date
Question 3 - Results
Have you read the new Financial Accounting Standards Board (FASB) Accounting Standards
Update No. 2014-09, Revenue from Contracts with Customers (new revenue recognition
standard), issued on May 28, 2014?
Yes
21.6%
No, but it's on m to-do list
53
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78.4%
Insights on Preparedness to Date
Question 4 - Results
If the effective dates for the new revenue recognition standard are extended beyond the current
requirements, does your organization plan on moving ahead with a transition strategy in 2015?
Yes
No
21.5%
18.1%
Don't know
54
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60.4%
Insights on Preparedness to Date
Question 5 - Results
Is your organization using a structured change management strategy to implement the new
revenue recognition standard?
Yes
No
10.2%
12.5%
Haven't started implementing the new
standard
Don't know
55
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47.2%
30.1%
Results for Top Five Industries
56
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Insights on Preparedness to Date
Question 1 - Results
Has your organization initiated the training and education process related to the new revenue
recognition standard?
37%
44.9%
10%
23%
39.0%
36.5%
Financial Services &
Real Estate
30%
37.2%
34.4%
35.5%
31.0%
30.1%
27.5%
25.7%
23.7%
25.0%
23.9%
Technology, Media &
Communications
Healthcare and Life
Sciences
20.3%
15.0%
Consumer Products
& Services
16.2%
Energy & Utilities
10.3%
10.1%
6.5% 7.2%
Yes, training and education is
currently underway
57
No, nothing is planned at this No, but it is under development
time
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Don't know
% Responses
for the Option
Insights on Preparedness to Date
Question 2 - Results
Has your organization started to assess the impact of the new revenue recognition standard on
revenue reporting and related processes?
54%
46%
Financial Services & Real
Estate
60.5%
54.0%
53.6%
50.5%
50.3%
49.5%
49.7%
46.4%
46.0%
39.5%
Consumer Products &
Services
Technology, Media &
Communications
Healthcare and Life
Sciences
Energy & Utilities
% Responses
for the Option
Yes
58
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No
Insights on Preparedness to Date
Question 3 - Results
Have you read the new Financial Accounting Standards Board (FASB) Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers (new revenue recognition standard), issued on
May 28, 2014?
23%
77%
80.7%
80.0%
75.4%
69.0%
80.0%
Financial Services & Real
Estate
Consumer Products &
Services
Technology, Media &
Communications
Healthcare and Life
Sciences
31.0%
Energy & Utilities
24.6%
20.0% 20.0%
19.3%
% Responses
for the Option
Yes
59
No, but it's on m to-do list
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Insights on Preparedness to Date
Question 4 - Results
If the effective dates for the new revenue recognition standard are extended beyond the current
requirements, does your organization plan on moving ahead with a transition strategy in 2015?
22%
18%
60%
69.2%
58.1%
57.6%
53.7%
58.6%
Financial Services & Real
Estate
Consumer Products &
Services
Technology, Media &
Communications
Healthcare and Life
Sciences
30.1%
21.4%
20.4%
16.7%
19.7%
21.5%
20.0%
14.1%
Energy & Utilities
22.7%
16.3%
% Responses
for the Option
Yes
60
No
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Don't know
Insights on Preparedness to Date
Question 5 - Results
Is your organization using a structured change management strategy to implement the
new revenue recognition standard?
11%
46%
13%
30%
54.7%
Financial Services & Real
Estate
48.6%
44.1%
40.9%
44.4%
Consumer Products &
Services
35.6%
34.6%
32.3%
23.4%
Technology, Media &
Communications
Healthcare and Life
Sciences
21.5%
Energy & Utilities
12.8%
14.0%
12.5%
8.7%
15.9%
15.0%
12.3%
10.7%
8.6%
9.4%
%
Responses for
the Option
Yes
61
No
Haven't started implementing
the new standard
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Don't know
A Structured Approach
Some initial steps management teams should undertake include:
62
1
Establish a consensus on the appropriate revenue recognition model and
arrangements or classes of arrangements with customers
2
Assess the impact the new guidance will have on the accounting
methodologies employed and system deployment by management
3
Develop a plan to define the policy and supporting process and
technology for each distinctive revenue stream
•
The approach should incorporate an understanding of the company’s revenue
model as well as the authoritative framework provided by the new standard
•
The follow approach ensures adoption of the new standard and leverages best
practices during the different phases of implementation
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Critical Success Factors
We believe the following components will prove to be critical success factors in defining
and adopting the required changes:

Executive Awareness and Education – Educate the senior management team, key
stakeholders across the organization, the board of directors and the street on
adoption alternatives under the new standard as well as the resulting potential
impacts. Establish training materials and provide training to prepare the
organization’s personnel for the impact of the new standards.

Project Management – Manage the adoption process and provide for appropriate
change management protocols.

Resourcing – Identify and assess additional resource needs. Develop staffing plans
for planning and execution.

63
Consider Policy Options – Analyze current revenue policy and process against the
proposed standard to identify expected changes. Consider the implications to
upstream and downstream linked processes such as contract management and
revenue assurance.
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Critical Success Factors (cont’d)
Gap Analysis – Perform a high-level analysis of system and data gaps:
• Assess whether required information will be available from your existing processes.

• Determine if system changes – or new data flows using the same systems – will be
required.
• Evaluate dependencies on external partner data and systems.
Transition Strategy – Develop a strategy for the transition methodology:

• Select the transition method – either (1) retrospective application to each prior
reporting period presented, or (2) cumulative effect reporting in the year of
adoption. As discussed earlier, the difference between these two methods is
primarily around restating comparative years.
• Consider whether to elect one or more of the practical expedients offered by the
new standard for retrospective adoption.
• Consider complexity of performing the transition and whether specific tools and
systems may be required.
64
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65
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