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Revenue Recognition, Beyond the Numbers, Process and Case Study
 

Revenue Recognition, Beyond the Numbers, Process and Case Study

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Proformative presents Revenue Recognition, Beyond the Numbers, Process and Case Study. Special thanks to Steve Hobbs, Managing Director and Proviti. ...

Proformative presents Revenue Recognition, Beyond the Numbers, Process and Case Study. Special thanks to Steve Hobbs, Managing Director and Proviti.

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Revenue Recognition, Beyond the Numbers, Process and Case Study Revenue Recognition, Beyond the Numbers, Process and Case Study Presentation Transcript

  • THE  RESOURCE FOR  CORPORATE  FINANCE,  ACCOUNTING  &  TREASURY  PROFESSIONALS Revenue Recognition Update
  • THE  RESOURCE FOR  CORPORATE  FINANCE,  ACCOUNTING  &  TREASURY  PROFESSIONALS Revenue Recognition: Beyond the Numbers Steve Hobbs Managing Director Protiviti
  • Some Practical Considerations • Companies able to establish Vendor-Specific Objective Evidence (VSOE) would continue to use VSOE and cannot switch to estimated selling price without adequate justification. • Prospective adoption will only impact new arrangements or materially modified arrangements entered after the adoption date. Early adoption requires retrospective application to the beginning of the early adopt year. • This means existing arrangements will continue to use old methods. • Heavy use of spreadsheets for VSOE analysis and manual allocation for pre-adoption date arrangements will probably still remain. 20 © Protiviti 2010 View slide
  • Revenue Recognition - Impact on 6 Elements of Infrastructure Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Established • Well documented • Clearly defined • Standardized issue • Executive level • Appropriate methodology to policies and review and approval tracking and dashboards and segregation of duties evaluate / assess guidelines processes reporting to allow performance (e.g., separate account risk revenue processing metrics (e.g., individuals for • Clear definitions • Timeline defined by exception recognized vs. processing revenue • Methodology is supporting policies and tracked in the deferred revenue, and resolving issues / monitored for and guidelines finance calendar • Access to timely revenue correcting errors adherence and & and accurate forecasting, identified during the re-evaluated for • Established • Focus on information though materiality systematic root customer credit risk, RevRec process) relevance on a robust reporting views by major line periodic basis thresholds causes of Rev Rec • Clearly defined exceptions • Automated revenue item and by responsibility and • Approach / processing by employee, list of accountability methodology for • Use of performance setting up business unresolved items, framework that is revenue recognition metrics to track & rules in the tool etc.) linked to periodic documented and control the Rev Rec • Drill-down performance deployed across the process • Use of standard capabilities that evaluations entire organization reporting tools to • Periodic quality generate revenue enable quick • Training on policies, • Consistent audits and reviews forecasting reference to procedures, and performance by independent statements supporting detail enabling tools measures used teams / peers • Auto-workflow for • Transparent audit • Dedicated staff who review / approval of trail understand the revenue processing accounts, exceptions transactions, and FASB rules 21 © Protiviti 2010 View slide
  • A Case Study - Background • A company selling software, hardware and maintenance in multiple element arrangements – VSOE for maintenance only – Using residual method to recognize software and hardware upon shipment • Will now need to – Establish Estimated Selling Price (ESP) for software and hardware elements – Continue to assert VSOE for maintenance – Use relative fair value method to allocate and calculate revenue recognition 22 © Protiviti 2010
  • A Case Study - Methodology Business   Systems  and   Methodology Business  Processes Reporting People Policies Data Establishing ESP - As with VSOE values, ESPs can be pegged in a number of different ways depending on pricing and selling patterns: • Fixed price per item • Fixed price per item based on deal or customer characteristics – Location, currency, company size, industry, etc. • Percentage of other item’s selling price – E.g., maintenance, support • Range of prices – When valid standalone prices fall within a narrow range, it may be possible to define ESP as a narrow range of prices (as some companies have done with VSOE) – If stated prices for all items on a transaction fall within the defined range, stated prices are used for allocating revenue; if the stated price of any items falls outside the range, allocation based on mid-point or end-point of ESP range 23 © Protiviti 2010
  • A Case Study – Methodology (Cont’d) Business   Systems  and   Methodology Business  Processes Reporting People Policies Data The best estimate of selling price will be consistent with the objective of determining VSOE. ESP is defined as the price at which the vendor would transact if the deliverable were sold by the vendor regularly on a standalone basis considering market conditions as well as entity- specific factors. Meet  with  your  auditors  and  agree  on  the  approach Step  1 Gather  all  appropriate  data Step  2 Stratify  data  if  needed standalone  vs.  bundled,  location,  deal  size,  etc. Step  3 Weigh  available  information  and  make  best  estimate Step  4 Establish  processes  for  ongoing  monitoring Step  5 24 © Protiviti 2010
  • A Case Study – Policy Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Update Revenue Recognition Policy to reflect the new rules and company methodology • Consider revisiting price/discount policies for the software, hardware and maintenance elements • Consider reviewing Commission policy/structure changes as the potential earlier revenue recognition may impact timing commission expenses and payout 25 © Protiviti 2010
  • A Case Study – Process & Controls Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Review existing process such as Order Entry and Item Master Maintenance to ensure key data is being captured and readily reportable for ESP analysis purposes – SKU, Product Group, Region, Price List, Actual Price, Discount • Establish on-going monitoring process for exception reporting • Design process to keep comparative revenue records for first year disclosure purposes 26 © Protiviti 2010
  • A Case Study – Process & Controls (Cont’d) Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Review existing key internal controls update accordingly, e.g. – may need to build in additional check points to the order review control – may need to add additional line items onto the revenue recognition checklist, given additional elements are being reviewed – may need to strengthen revenue allocation and calculation review control or automate the control, given the relative fair value is only allowed, which is more mathematical than residual method. 27 © Protiviti 2010
  • A Case Study – System and Data Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Assess system capabilities for capturing key data for ESP – e.g. software and hardware order price/discount history at SKU level • Assess system functionalities in automating revenue allocation and calculation under the new rules • Assess impact on KPI and need to adjust the metrics 28 © Protiviti 2010
  • A Case Study – Reporting Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • The new rules may change your external reporting requirements – – new revenue and cost line items to be broken out on P/L (e.g. between software and hardware) – disclosure of comparative revenue numbers will be needed for the new orders using old and new rules • Internal KPIs may be adjusted • System reporting capabilities need to be re- assessed for adequate multi-dimensional reporting (e.g. by order, by SKU, by quarter/period, by customer, by product group, etc.) and exception reporting • Exception Reporting for prices outside set parameters 29 © Protiviti 2010
  • A Case Study – People Business   Systems  and   Methodology Business  Processes Reporting People Policies Data • Initially, could mean more work for the team to build the new methodology, processes and system • Need team work with other departments such as Legal, Sales, Order Admin and IT for contract negotiation, pricing and discount approval, order entry as well as system requirements. • Need capable Accounting resources to work with auditor for proper application of the new guidance • Need communication and training of new processes and controls across all relevant functions 30 © Protiviti 2010
  • THE  RESOURCE FOR  CORPORATE  FINANCE,  ACCOUNTING  &  TREASURY  PROFESSIONALS Thank You
  • THE  RESOURCE FOR  CORPORATE  FINANCE,  ACCOUNTING  &  TREASURY  PROFESSIONALS Panel Discussion and Q&A