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The New Revenue Recognition Rules:
Systems, Data, Reporting and Creating a Transparent Audit Trail
May 21, 2015
2 © 2015 Protiviti Inc.
You can download a copy of the presentation via the Resources Area on your screen. Following
the w...
3 © 2015 Protiviti Inc.
• We are offering 1.5 CPE credits for this webinar
• To be eligible to receive these credits, plea...
4 © 2015 Protiviti Inc.
Find additional resources on revenue recognition, including webcasts and more at:
www.financialexe...
5 © 2015 Protiviti Inc.
Kevin Swartzendruber is vice president and corporate controller
for Flextronics International Ltd....
6 © 2015 Protiviti Inc.
Raji Gunasekera is Senior Director, Assistant Corporate
Controller at Flextronics. Raji joined Fle...
7 © 2015 Protiviti Inc.
Chris Wright, from Protiviti’s New York office, is the firm-wide
Managing Director of our Finance ...
8 © 2015 Protiviti Inc.
Steve Hobbs is a Managing Director in the San Francisco office
of Protiviti and is the global lead...
9 © 2015 Protiviti Inc.
Siamak Razmazma has over 25 years of experience in enterprise
systems and business process automat...
Webinar Agenda
11 © 2015 Protiviti Inc.
Future Revenue Recognition Webinars
Protiviti and FEI are please to offer a five-part webinar ser...
12 © 2015 Protiviti Inc.
Today We Will Cover…
Transition Strategy and the Six Elements of
Infrastructure
Overview of the N...
13 © 2015 Protiviti Inc.
Six Elements of Infrastructure
About the Six Elements
• The six elements of infrastructure (six e...
14 © 2015 Protiviti Inc.
PCAOB Issues Practice Alert
Related to Auditing Revenue
FASB Considering Revenue Recognition Dela...
15 © 2015 Protiviti Inc.
Effective Date of Revenue Recognition Standard to be Deferred
• The Financial Accounting Standard...
16 © 2015 Protiviti Inc.
Impact on Public and Private Companies
• The standard, as originally issued, is expected to be ef...
17 © 2015 Protiviti Inc.
The FASB’s Proposal…
• Public companies would be permitted to elect to
early adopt the new standa...
18 © 2015 Protiviti Inc.
What Does the Deferral Mean?
Not a Surprise1
Not only was it expected, but it has been an assumpt...
19 © 2015 Protiviti Inc.
Early Adoption Option
Presents an opportunity for those who have started, were focused on the new...
20 © 2015 Protiviti Inc.
Use this time wisely Don’t take your foot off of the gas1 2
Keep working through an
adoption plan...
21 © 2015 Protiviti Inc.
A. Yes
B. No, but it is on my to-do list
Have you read the new Financial Accounting Standards Boa...
Overview of the New Standard
23 © 2015 Protiviti Inc.
New Revenue Recognition Standard – Overview
Final Standard Released May 28, 2014
Transition Appro...
24 © 2015 Protiviti Inc.
High-Level Application of Revenue Model in Five Steps
Identify the contract(s) with a customer1
I...
25 © 2015 Protiviti Inc.
Multiple Element
Arrangements
• Entities that enter into contracts with customers to provide a se...
26 © 2015 Protiviti Inc.
Construction-Type
Contracts
• Recognition of contract revenue and contract cost would be separate...
27 © 2015 Protiviti Inc.
Notable Implications
1
2
4
Industries that are likely to experience the most significant
changes ...
28 © 2015 Protiviti Inc.
A. Yes
B. No
C. Don’t know
If the effective dates for the new revenue recognition standard are ex...
Transition Strategy and the Six
Elements of Infrastructure
30 © 2015 Protiviti Inc.
Phase I – Preliminary Diagnostic Phase II – Project Implementation Phase III – Embedding
Revenue ...
31 © 2015 Protiviti Inc.
What Does This Mean to Me?
Scope
&
Analyze
Methodology
Business
Policies
Business
Processes
Syste...
32 © 2015 Protiviti Inc.
Revenue Recognition – Impact on Six Elements of Infrastructure
Methodology
Business
Policies
Busi...
33 © 2015 Protiviti Inc.
A Cross-Functional Impact
Methodology
Business
Policies
Business
Processes
Systems and
Data
Repor...
34 © 2015 Protiviti Inc.
A Cross-Functional Impact (cont’d)
Sales & Marketing IT Operations Legal/Taxes
• Structure of dea...
35 © 2015 Protiviti Inc.
The Revenue Recognition Diagnostic Process
Item Element Background
Diagnostic
Question
Applicable...
36 © 2015 Protiviti Inc.
Revenue Recognition Diagnostic Steps
Assess Reporting
System Capabilities
Update Critical
Account...
37 © 2015 Protiviti Inc.
Example Diagnostic – Establish a Steering Committee
Ref
#
Item Element Background Sub Ref Diagnos...
38 © 2015 Protiviti Inc.
Six Elements of Infrastructure
Methodology
Business
Policies
Business
Processes
Systems and
Data
...
39 © 2015 Protiviti Inc.
A. Yes
B. No
C. Don’t know
Has your organization established a steering committee to provide over...
Impact on Systems and Data
41 © 2015 Protiviti Inc.
Six Elements of Infrastructure – Systems and Data
Systems and Data
• Support the modeling and rep...
42 © 2015 Protiviti Inc.
Solution Design Approach
Finalize
Solution,
TCO, and
Roadmap
Create TCO
and
Roadmap
Conduct
Proto...
43 © 2015 Protiviti Inc.
New Revenue Recognition Principle System Components
Most of revenue-generating arrangements are c...
44 © 2015 Protiviti Inc.
Impact of New Revenue Recognition Standard on
Enterprise Business Systems Landscape
Legend
Contra...
45 © 2015 Protiviti Inc.
Revenue Recognition – System Redesign
The new revenue recognition standard impacts all the system...
46 © 2015 Protiviti Inc.
A. Yes
B. No
Has your organization started to assess the impact of the new revenue
recognition st...
Reporting Considerations
48 © 2015 Protiviti Inc.
Six Elements of Infrastructure – Reporting
Reporting
• Reports should be actionable, easy to use ...
49 © 2015 Protiviti Inc.
Financial Reporting Disclosures
Transaction price
allocation
Methods and
assumptions
Remaining
pe...
50 © 2015 Protiviti Inc.
Management
Reports
Commissions, Bonus and
Compensation Structure
Executive
Dashboards
Forecasting...
51 © 2015 Protiviti Inc.
A. Yes
B. No
Have you started to assess the impact of the new revenue recognition standard
on you...
52 © 2015 Protiviti Inc.
Q & A
Let us know how we did on this webinar. Click on the
Survey icon to give us feedback.
Submi...
53 © 2015 Protiviti Inc.
New Revenue Model – The Next Steps?
Take Time to Learn,
Diagnose and
Assess Now…..
1. Education: ...
54 © 2015 Protiviti Inc.
Thank
You
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The New Revenue Recognition Rules - Systems, Data, Reporting and Creating a Transparent Audit Trail

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These slides are from our May 21 webinar in which we discussed the impact of the new revenue recognition rules on systems, data, and reporting processes and their importance in creating a transparent audit trail. To hear the full webinar, please visit our website at http://www.protiviti.com/en-US/Pages/Webinars.aspx

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The New Revenue Recognition Rules - Systems, Data, Reporting and Creating a Transparent Audit Trail

  1. 1. The New Revenue Recognition Rules: Systems, Data, Reporting and Creating a Transparent Audit Trail May 21, 2015
  2. 2. 2 © 2015 Protiviti Inc. You can download a copy of the presentation via the Resources Area on your screen. Following the webinar, all attendees will receive a link to a copy of the presentation and recording. During the webinar you can ask questions by clicking on the Questions Area on your screen. Please provide your e-mail address for a swift reply. There will be a Q&A session at the end of the webinar. If you are having trouble hearing the audio through the computer, a separate phone line is available. US/Canada Line +1 (855) 707-0664 International Line +1 (734) 385-2579 Conference ID 28330988 A Reminder…
  3. 3. 3 © 2015 Protiviti Inc. • We are offering 1.5 CPE credits for this webinar • To be eligible to receive these credits, please ensure you answer at least four (4) out of the five (5) polling questions • You will receive the CPE certificate via e-mail approximately 2-4 weeks after the webinar date • In the Resources Area, you can: − Save/Print copy of today’s presentation − Download Protiviti's Revenue Recognition Flash Reports CPE Credits and Supplemental Information If you are having trouble hearing the audio through the computer, a separate phone line is available. US/Canada Line +1 (855) 707-0664 International Line +1 (734) 385-2579 Conference ID 28330988
  4. 4. 4 © 2015 Protiviti Inc. Find additional resources on revenue recognition, including webcasts and more at: www.financialexecutives.org/revrec FEI Resources on Revenue Recognition
  5. 5. 5 © 2015 Protiviti Inc. Kevin Swartzendruber is vice president and corporate controller for Flextronics International Ltd., a leading end-to-end supply chain solutions company with $26 billion in sales generated a through a network of facilities and innovations centers in approximately 30 countries and across four continents, and employing approximately 200,000 globally. During his almost ten year tenure with Flextronics, Kevin has also served as an assistant corporate treasurer and director of SEC reporting and technical accounting. Prior to joining Flextronics Kevin was a director of SEC reporting and technical accounting with EchoStar (Dish Network) and was also with Deloitte first in its Denver practice’s audit group and later in mergers and acquisitions in San Francisco. Kevin is a Certified Public Accountant and received his Bachelors of Business Administration in accounting and finance, with honors, from the University of Cincinnati. To learn more about Flextronics, visit www.flextronics.com. E-mail: Kevin.Swartzendruber@flextronics.com Speakers Trouble hearing the audio through the computer? Dial in! Phone: (855) 707-0664; International (734) 385-2579, Conference ID: 28330988
  6. 6. 6 © 2015 Protiviti Inc. Raji Gunasekera is Senior Director, Assistant Corporate Controller at Flextronics. Raji joined Flextronics as a Director in the Corporate Accounting group four years ago to oversee the Company’s SEC reporting and technical accounting functions. He has expanded his responsibilities in to consolidations, month end close processes and other core accounting and finance functions within the Corporate Accounting group. Prior to joining Flextronics, Raji was with PwC for almost 9 years, of which 3 years with their firm in Botswana and 6 years in their technology audit practice in San Jose. Raji is a Certified Public Accountant holding a license in California and also a Chartered Accountant from Sri Lanka. To learn more about Flextronics, visit www.flextronics.com. E-mail: Rajindra.Gunasekera@flextronics.com Speakers Trouble hearing the audio through the computer? Dial in! Phone: (855) 707-0664; International (734) 385-2579, Conference ID: 28330988
  7. 7. 7 © 2015 Protiviti Inc. Chris Wright, from Protiviti’s New York office, is the firm-wide Managing Director of our Finance Remediation and Reporting Compliance group. Chris is also the Regional Managing Director for Protiviti’s Eastern Region in the United States. He has over twenty-five years of experience serving clients as an external auditor, including 6 years as a partner at two global accounting firms (Arthur Andersen and KPMG), and as an internal auditor and financial reporting risk consultant. E-mail: Christopher.Wright@protiviti.com Speakers Trouble hearing the audio through the computer? Dial in! Phone: (855) 707-0664; International (734) 385-2579, Conference ID: 28330988
  8. 8. 8 © 2015 Protiviti Inc. Steve Hobbs is a Managing Director in the San Francisco office of Protiviti and is the global leader of the firm’s Public Company Transformation solution. He has over 30 years of experience providing business consulting and financial reporting services to clients in various industries, primarily technology and consumer products entities. Prior to joining Protiviti in 2006, Steve was a partner at KPMG for three years and spent nearly 20 years at Arthur Andersen, where he was also a partner. He has served on the board of directors at three companies, one as Chairman and two as Audit Committee Chair. Steve has served over 100 public companies during his career with assistance in corporate governance, financial reporting, and numerous business transformation issues. E-mail: Steve.Hobbs@protiviti.com Speakers Trouble hearing the audio through the computer? Dial in! Phone: (855) 707-0664; International (734) 385-2579, Conference ID: 28330988
  9. 9. 9 © 2015 Protiviti Inc. Siamak Razmazma has over 25 years of experience in enterprise systems and business process automation. He provides advisory and assurance services to executive management and process leads assisting them with defining the business systems strategy and selecting the appropriate solutions. Siamak is a thought leader in designing solutions supporting ERP and enterprise system strategies that help organizations achieve measurable return on their investment. He has played a leading role in the conception of an innovative and holistic approach to optimize and automate business processes centered on enterprise systems such as SAP, Oracle, Microsoft, NetSuite, Hyperion, and Revenue Recognition Automation tools. E-mail: Siamak.Razmazma@protiviti.com Speakers Trouble hearing the audio through the computer? Dial in! Phone: (855) 707-0664; International (734) 385-2579, Conference ID: 28330988
  10. 10. Webinar Agenda
  11. 11. 11 © 2015 Protiviti Inc. Future Revenue Recognition Webinars Protiviti and FEI are please to offer a five-part webinar series on the new Revenue Recognition Standard, recently issued by the Financial Accounting Standards Board (FASB). Participants will learn how to implement an appropriate transition plan to the new standard and why this plan must be cross-functional in nature. Webinars will occur approximately every 60 days following the prior webinar, ending in mid-2015. Webinar Series • Listen to the recorded version of our November 20th, January 20th and March18th webinars: http://www.protiviti.com/en-US/Pages/Webinars.aspx • Next webinar: July 23, 2015 - An invitation will follow this event • Future webinar topics: - More transition considerations - Industry implications Future Revenue Recognition Webinars
  12. 12. 12 © 2015 Protiviti Inc. Today We Will Cover… Transition Strategy and the Six Elements of Infrastructure Overview of the New Standard Impact on Systems and Data Reporting Considerations
  13. 13. 13 © 2015 Protiviti Inc. Six Elements of Infrastructure 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. Key elements of infrastructure must be linked by design: Methodology Business Policies Business Processes Systems and Data Reporting People
  14. 14. 14 © 2015 Protiviti Inc. PCAOB Issues Practice Alert Related to Auditing Revenue FASB Considering Revenue Recognition Delay to Reduce Uncertainty
  15. 15. 15 © 2015 Protiviti Inc. Effective Date of Revenue Recognition Standard to be Deferred • The Financial Accounting Standards Board (FASB) voted to defer, by one year, the effective date of its new revenue recognition standard • Issued almost a year ago, this new guidance resulted from a collaborative effort by the FASB and International Accounting Standards Board to agree on a global standard based on common principles that can be applied across industries and regions • The FASB voted for a one-year deferral of the effective date of the new standard and has issued an exposure draft proposing the deferral, with a 30-day comment period • We anticipate there will be an impact on public and nonpublic entities Source: Protiviti Flash Report – Effective Date of Revenue Recognition Standard to be Deferred
  16. 16. 16 © 2015 Protiviti Inc. Impact on Public and Private Companies • The standard, as originally issued, is expected to be effective for fiscal years beginning after December 15, 2017, and interim periods thereafter • The proposal would now require application of the new standard no later than annual reporting periods beginning after December 15, 2018, including interim reporting periods therein  For example, a calendar year reporting company would be required to apply the new standard during 2019, including the interim periods therein Private Companies • In the original release, the new standard is expected to be effective for fiscal years including interim periods beginning after December 15, 2016 • The proposal would now require application of the new standard no later than annual reporting periods beginning after December 15, 2017, including interim reporting periods therein  For example, a calendar year reporting company would now be required to apply the new standard during 2018, including the interim periods therein Public Companies
  17. 17. 17 © 2015 Protiviti Inc. The FASB’s Proposal… • Public companies would be permitted to elect to early adopt the new standard as the original effective date – in effect, a year earlier than the proposed new effective date • Nonpublic entities may elect to apply the amendments as part of the original effective date for public companies • The proposal is based on FASB’s outreach to various stakeholders • Determined that a deferral is necessary to provide companies adequate time to effectively implement the new standard • The IASB has not provided a specific timeline to make a decision regarding a potential delay in its original effective date.
  18. 18. 18 © 2015 Protiviti Inc. What Does the Deferral Mean? Not a Surprise1 Not only was it expected, but it has been an assumption baked into the planning and implementation practices among many companies that have started the transition to the new standard in earnest “Full Steam Ahead”2 Public companies should continue to work on transitioning to the standard, especially for those who many not have begun working on the transition process Nearly Half of the Year is Gone3 The only delay is in the effective date of the standard; there should be no delay in management’s efforts to position the organization in a prudent state of readiness
  19. 19. 19 © 2015 Protiviti Inc. Early Adoption Option Presents an opportunity for those who have started, were focused on the new standard and now are, or will be, ready to adopt early Another choice to add to the list of decisions for companies when determining whether to adopt prospectively or retrospectively Include your audit committee and external auditor when making this decision Analysts, regulators, lenders and other stakeholders may have an interest in this aspect of the organization’s decision
  20. 20. 20 © 2015 Protiviti Inc. Use this time wisely Don’t take your foot off of the gas1 2 Keep working through an adoption plan rather than deferring preparations There is not a lot of time to waste3 4 Don’t stop and continue waiting Other uncertainties still loom over adoption efforts (e.g. IASB)5 6 Recommendations
  21. 21. 21 © 2015 Protiviti Inc. A. Yes B. No, but it is on my to-do list 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? Reminder: Answer 4 out of 5 questions to qualify for CPE credit. Poll Question #1
  22. 22. Overview of the New Standard
  23. 23. 23 © 2015 Protiviti Inc. New Revenue Recognition Standard – Overview Final Standard Released May 28, 2014 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 Still a lot of uncertainty on the impact of this new standard 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
  24. 24. 24 © 2015 Protiviti Inc. High-Level Application of Revenue Model in Five Steps Identify the contract(s) with a customer1 Identify the performance obligations in the contract2 Determine the transaction price3 Allocate the transaction price to the performance obligations in the contract 4 Recognize revenue when (or as) the entity satisfies a performance obligation 5
  25. 25. 25 © 2015 Protiviti Inc. Multiple Element Arrangements • 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 Estimated Selling Price • 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 • 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 Time Value of Money • 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 Timing of Revenue Recognition • 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 New Revenue Model – Potential Significant Accounting and Reporting Changes
  26. 26. 26 © 2015 Protiviti Inc. Construction-Type Contracts • 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 Construction-Type Contract Costs • Contract costs not eligible for capitalization (e.g., as inventory or direct fulfillment costs) would be expensed as incurred Software Subscription Accounting • Further guidance is expected to help determine whether a license transfers a right or provides access Separation Criteria for Elements in Software Arrangements • VSOE of the FV of the undelivered items would no longer be required to separately account for elements in a software arrangement Disclosures • 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 Contract Costs • Certain contract acquisition costs would need to be capitalized New Revenue Model – Potential Significant Accounting and Reporting Changes (Cont’d)
  27. 27. 27 © 2015 Protiviti Inc. Notable Implications 1 2 4 Industries that are likely to experience the most significant changes include software, telecommunications, asset management, airlines, real estate, aerospace and construction 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 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 3 The new guidance may enable some companies to recognize revenue sooner than they typically do under existing accounting standards While no industry will be exempt…
  28. 28. 28 © 2015 Protiviti Inc. A. Yes B. No C. Don’t know 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? Reminder: Answer 4 out of 5 questions to qualify for CPE credit. Poll Question #2
  29. 29. Transition Strategy and the Six Elements of Infrastructure
  30. 30. 30 © 2015 Protiviti Inc. Phase I – Preliminary Diagnostic Phase II – Project Implementation Phase III – Embedding Revenue Recognition – Transition Strategy Roadmap Step I – Preliminary Diagnostic Step II – Develop Project Management Step VI –Integrate Change & Ongoing Compliance Step V –Transition Year 1 Reporting Step IV – Detailed Gap Analysis/Transition Method Step III – Detailed Project Set Up Deliverables Each conversion project is a change management process that runs through multiple phases. Every phase can be addressed in a structured way.
  31. 31. 31 © 2015 Protiviti Inc. What Does This Mean to Me? Scope & Analyze Methodology Business Policies Business Processes Systems and Data Reporting People During the Scope and Analyze Phase, it is important to consider the implications to your organization’s infrastructure. You can do this by using the Protiviti Six Elements of Infrastructure Model.
  32. 32. 32 © 2015 Protiviti Inc. Revenue Recognition – Impact on Six Elements of Infrastructure Methodology Business Policies Business Processes Systems and Data Reporting People • Gap analysis • 5 step analysis framework • Transition strategy – PMO • Update risk assessment and/or control framework • Cross functional awareness, training and deployment • Multiple- performance obligations revenue allocation • Consistent performance measures/metrics • Transition - retrospective vs cumulative effect • Impact on contracting, pricing, performance obligations • Update documented policies and guidelines • Judgment considerations – evidence of an arrangement, collectability • Established materiality thresholds • Transition timeline defined and monitored • Identify processes impacted – contracting, order entry, deal desk, revenue allocation, reporting, forecasting • Identify performance metrics to track/control the Rev Rec process • IA/SOX program modifications • Clearly-defined review/approval processes • Determine data elements allowing systems to process automatic and judgmental rules differently • Define integration points between contracts T&Cs/ sales orders • Define revenue allocation rules based on contract groupings • Design solutions to rebuild the current systems and support multiple/ parallel rev rec principles • Significant new disclosures – quantitative and qualitative • Updated executive level dashboards and performance metrics • Revenue allocation drill- down capabilities that enable quick reference to supporting detail • Transparent audit trail • Identify cross- functional collaboration team • Appropriate segregation of duties for key revenue/issue resolution • Clearly defined responsibility and accountability framework linked to periodic performance evaluations • Training on policies, procedures, and enabling tools
  33. 33. 33 © 2015 Protiviti Inc. A Cross-Functional Impact Methodology Business Policies Business Processes Systems and Data Reporting People HR Accounting/Finance Internal Audit Treasury • 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) • 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 • 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 (real-time) • 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)
  34. 34. 34 © 2015 Protiviti Inc. A Cross-Functional Impact (cont’d) Sales & Marketing IT Operations Legal/Taxes • 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 • 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 • Changes to different revenue streams • Evaluation of satisfaction of performance obligations • Right of return and warranties • Determining control transfer • Professional services • Logistics (shipping) • 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 Methodology Business Policies Business Processes Systems and Data Reporting People
  35. 35. 35 © 2015 Protiviti Inc. The Revenue Recognition Diagnostic Process Item Element Background Diagnostic Question Applicable to the Organization Current State Recommendation Estimated Effort Estimated Urgency
  36. 36. 36 © 2015 Protiviti Inc. Revenue Recognition Diagnostic Steps Assess Reporting System Capabilities Update Critical Accounting Policies Perform Gap Analysis and Establish 5 Step Analysis Framework Establish a Transition Project Management Office Update Financial Statement and Other Reports Update Financial Reporting Controls Establish a Transition Strategy Determine the Transition Method Establish a Steering Committee 3 1 2 4 6 7 8 9 5 Diagnostic Steps
  37. 37. 37 © 2015 Protiviti Inc. Example Diagnostic – Establish a Steering Committee Ref # Item Element Background Sub Ref Diagnostic Question 1 Establish a Steering Committee Business Process A dedicated task force should be established to provide oversight to the transition process. The task force should include resources from areas likely to be impacted by the transition, including accounting, financial reporting, tax, internal audit, sales operations, IT, legal and human resources. 1a Has the company's functional framework been evaluated to identify which processes will be impacted by transition and to what extent? People 1b Has a transition steering committee been formed? Does the committee include resources from each critical process impacted by the transition? People 1c Have all members of the transition steering committee been provided sufficient training on the new revenue recognition standard?
  38. 38. 38 © 2015 Protiviti Inc. Six Elements of Infrastructure Methodology Business Policies Business Processes Systems and Data Reporting People • Gap analysis • 5 step analysis framework • Transition strategy – PMO • Update risk assessment and/or control framework • Cross functional awareness, training and deployment • Multiple- performance obligations revenue allocation • Consistent performance measures/metrics • Transition - retrospective vs cumulative effect • Impact on contracting, pricing, performance obligations • Update documented policies and guidelines • Judgment considerations – evidence of an arrangement, collectability • Established materiality thresholds • Transition timeline defined and monitored • Identify processes impacted – contracting, order entry, deal desk, revenue allocation, reporting, forecasting • Identify performance metrics to track/control the Rev Rec process • IA/SOX program modifications • Clearly-defined review/approval processes • Determine data elements allowing systems to process automatic and judgmental rules differently • Define integration points between contracts T&Cs/ sales orders • Define revenue allocation rules based on contract groupings • Design solutions to rebuild the current systems and support multiple/ parallel rev rec principles • Significant new disclosures – quantitative and qualitative • Updated executive level dashboards and performance metrics • Revenue allocation drill-down capabilities that enable quick reference to supporting detail • Transparent audit trail • Identify cross- functional collaboration team • Appropriate segregation of duties for key revenue/issue resolution • Clearly defined responsibility and accountability framework linked to periodic performance evaluations • Training on policies, procedures, and enabling tools
  39. 39. 39 © 2015 Protiviti Inc. A. Yes B. No C. Don’t know Has your organization established a steering committee to provide oversight of the transition to the new revenue recognition standard? Reminder: Answer 4 out of 5 questions to qualify for CPE credit. Poll Question #3
  40. 40. Impact on Systems and Data
  41. 41. 41 © 2015 Protiviti Inc. Six Elements of Infrastructure – Systems and Data Systems and Data • Support the modeling and reporting that are integral to risk management capabilities • Provide relevant, accurate, and on-time information • Should meet the company’s business requirements, and be flexible enough to allow for future enhancement, scalability and integration with other systems • Typically include:  Transaction systems and analytical software  Systems that identify and capture risk drivers  Systems and databases that warehouse key data elements relating to specific tasks  Special-purpose systems that quantify individual risks and aggregate portfolios of risks  Database systems that support the management of individual risks and risk portfolios  Risk analytics programmed into decision-support systems This risk element is deficient if: Information is not available for analysis and reporting Key elements of infrastructure must be linked by design: Methodology Business Policies Business Processes Systems and Data Reporting People
  42. 42. 42 © 2015 Protiviti Inc. Solution Design Approach Finalize Solution, TCO, and Roadmap Create TCO and Roadmap Conduct Prototype Validation Create Prototype Conduct Solution Validation Workshops Solution Design Conduct Discovery Workshops Solution Design Stages Program Management • Understand the characteristics of business processes, organizational structures, key systems, master data, and business rules • Create high level current process models • Determine potential future process changes • Design solutions to support future processes, master data, and business rules governing the new rev rec standard • Present solution designs and their key components, obtain feedback, and refine the models • Based on the solution designs, create the prototype of revenue recognition process, master data, and business rules • Present the revenue recognition prototype, obtain feedback, and validate its practical feasibility • Based on the solution designs and prototype, define all the entities, products, and customers that need to transition to the new standard • Determine TCO for transition including process, system, and organization • Obtain feedback to finalize the TCO and related roadmap • Assist with creating a realistic transition plan and practical rollout 2 3 4 5 6 71
  43. 43. 43 © 2015 Protiviti Inc. New Revenue Recognition Principle System Components Most of revenue-generating arrangements are contractual arrangements of some form between two parties Revenue would be earned and recognized as the reporting organization satisfies performance obligations or promises within the contractual arrangement Timing of revenue recognition may vary depending on whether the contract is for the delivery of goods or for the performance of a service Contract management system providing structured data to order fulfillment and accounting systems Pricing master data categorized and classified to support different price types Rule-based component to pick the right transaction price automatically Rule-based engine to compute and allocate revenue using a decision tree which translates the policy principles Automatic event manager component to capture revenue recognition triggering events Revenue recognition sub- ledger allowing automatic reconciliation and detailed reporting (4) Allocate the transaction price to separate contract performance obligations (3) Determine the transaction price (5) Recognize revenue when (or as) entity satisfies a performance obligation (2) Identify the separate performance obligations in the contract (1) Identify the customer contract(s) Consistent application of the new standard will be achieved through the use of a contract-based model Five steps to achieve the core principle of the new standard
  44. 44. 44 © 2015 Protiviti Inc. Impact of New Revenue Recognition Standard on Enterprise Business Systems Landscape Legend Contract Life Cycle Central Library Word Integration Workflow eSignature Sales to Cash Configuration, Pricing, Quote (CPQ) Contract Administration Order Management Customer Invoicing Accounts Receivable Cash Application Procure to Pay Supplier Relation Management Vendor Master Mgt Order Management Delivery Vendor Invoicing Accounts Payable Disbursement Record to Report Budgeting General Ledger Sub Ledger Accounting Consolidation Intercompany Revenue Recognition Cash Management Fixed Assets Equity Accounting Supply Chain Management Contract Manufacturing Demand Planning Inventory Mgt & Planning MDS/MPS MRP Distribution Hire to Retire Employees Expense Mgt System Time Entry Payroll HRMS Reporting and Analytics Financial Statements Transactions Reporting Managerial Reporting Budget vs. Actuals Reporting Operations Analytics Risk to Compliance Governance, Risk, Compliance (GRC) Role-based Security Organization Based Security EHS Tracking Records & Document Management Shared System Components Application requiring design changes to support the new rev rec standards Applications not impacted by the new rev rec standards Interface Programs Workflow Engine Alert Engine External Data Collection
  45. 45. 45 © 2015 Protiviti Inc. Revenue Recognition – System Redesign The new revenue recognition standard impacts all the systems and interfaces related to the revenue reallocation computation rules. The following chart depicts a typical revenue recognition engine used for the high technology industry. This engine requires a comprehensive redesign to support the new revenue recognition principle. Transactions Sales Data Billing Data Receivable Data Contract Data Arrangements Data Discounts (basic, additional) POS Data Rev Rec Data Staging Component ERP Master Data Category Type Price List Discount Product ERP SKU Pricing OrganizationCustomers BESP VSOE List Price Update BSEP Price Calculation VSOE Price Calculation Periodic Automated Process Business rule Rebate is an “additional discount“ which is claimed by the channel partner based on the realization of the sales to the end customer (sell-in) and linked at the serial number/contract number level For Non Reporting Partner Determine Arrangements Using Customer Purchase Orders 1 Determine Arrangements Using End User Names 1 Only For Reporting Partner Determine Channel Rebates corresponding to Arrangements 1.1 Exceptions Exceptions No Exceptions Determine Arrangement Revenue Recognition Principle Resolve Arrangements Exceptions Exception Management Application Business Rule Decision tree to determine which revenue recognition is used Rev Rec Data Staging Component Determine Arrangement Revenue Allocation, Amount, and Timing based on customer registration which occurs at some point after invoicing 32 Store Arrangement Details for Tracking and Analytical Purposes 4 Calculation of VSOE of FV and BESP achievement percentage quarterly START Rebate Data Cleared Exceptions
  46. 46. 46 © 2015 Protiviti Inc. A. Yes B. No Has your organization started to assess the impact of the new revenue recognition standard on data requirements and related IT systems? Reminder: Answer 4 out of 5 questions to qualify for CPE credit. Poll Question #4
  47. 47. Reporting Considerations
  48. 48. 48 © 2015 Protiviti Inc. Six Elements of Infrastructure – Reporting Reporting • Reports should be actionable, easy to use and linked to well-defined accountabilities  Are designed according to the information needs of people who are responsible for executing processes in accordance with the risk strategy • Personnel with risk management responsibilities use reports to monitor achievement of objectives, execution of strategies, and compliance with policies • Management reports include position reports, transaction reports, management and board reports, valuation/scenario analyses and comprehensive reports • Factors to consider when reporting on frequency include the volatility or severity of the risks, the needs for the user and the dynamics of the underlying business activities • Reporting on risks is integral to an organization’s success as reporting on quality, costs, and time • In order for management to make informed decisions, management reports should:  Be prepared with appropriate frequency  Be easy to use  Capture information succinctly and highlight key points for decision-making • This risk element is deficient if: Reports do not provide enough information for management Key elements of infrastructure must be linked by design: Methodology Business Policies Business Processes Systems and Data Reporting People
  49. 49. 49 © 2015 Protiviti Inc. Financial Reporting Disclosures Transaction price allocation Methods and assumptions Remaining performance obligations
  50. 50. 50 © 2015 Protiviti Inc. Management Reports Commissions, Bonus and Compensation Structure Executive Dashboards Forecasting Reports Internal Controls and SOX Compliance Loan Financial Covenant Compliance M&A (Working capital adjustments, revenue projections, post-deal multiple earnout provisions, etc.) Impact on Internal Reports and External Reports Partnerships, Alliance and Joint Ventures The are numerous implications to the internal reporting and external reporting processes. These reports should always be right and create a transparent audit trail. Budget Reports Key Financial Performance Metrics Financial Reporting
  51. 51. 51 © 2015 Protiviti Inc. A. Yes B. No Have you started to assess the impact of the new revenue recognition standard on your organization’s revenue reporting and related processes? Reminder: Answer 4 out of 5 questions to qualify for CPE credit. Poll Question #5
  52. 52. 52 © 2015 Protiviti Inc. Q & A Let us know how we did on this webinar. Click on the Survey icon to give us feedback. Submit Your Questions
  53. 53. 53 © 2015 Protiviti Inc. New Revenue Model – The Next 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
  54. 54. 54 © 2015 Protiviti Inc. Thank You

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