Proformative presents Revenue Recognition, Beyond the Numbers, Process and Case Study. Special thanks to Steve Hobbs, Managing Director and Proviti. To download the full presentation, visit http://bit.ly/cL7cF4

1. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Revenue Recognition
Update

2. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Revenue Recognition:
Beyond the Numbers
Steve Hobbs
Managing Director
Protiviti

3. 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.
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© Protiviti 2010

4. 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
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© Protiviti 2010

5. 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
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© Protiviti 2010

6. 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
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© Protiviti 2010

7. 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
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© Protiviti 2010

8. 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
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© Protiviti 2010

9. 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
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© Protiviti 2010

10. 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.
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© Protiviti 2010

11. 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
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© Protiviti 2010

12. 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
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© Protiviti 2010

13. 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
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© Protiviti 2010

14. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Thank You

15. THE RESOURCE FOR CORPORATE FINANCE, ACCOUNTING & TREASURY PROFESSIONALS
Panel Discussion and Q&A