Prepare for the asc 606 revenue standard

Prepare for the
ASC 606
revenue
standard.
Jordan Scheiderer,
Director & Justine Jacob,
Senior Manager at
Morgan Franklin.

Agenda
I. Revenue Standard Overview
II. Implementing the New Revenue Standard
III. Understanding the New Revenue Standard and Potential
Organizational Impacts
a. The Five Step Model
b. Additional Considerations

Overview
Why issue new revenue recognition guidance?
• Industry guidance historically lead to different accounting treatment for economically similar
transactions
• Supersedes all previous revenue guidance along with most industry-specific requirements
What are the goals of the new standard?
• Removes inconsistencies in revenue requirements
• Provides a more robust framework for addressing revenue issues
• Improves comparability of revenue recognition practices across entities, industries, and
jurisdictions, and capital markets
Who will be affected?
• Any company that either enters into contracts with customers to transfer goods or services or
enters into contracts for the transfer of nonfinancial assets (unless those contracts are within
the scope of another standard)
• Consumers
© MorganFranklin Consulting, LLC. All Rights Reserved.

Who is Impacted in Your Organization
Who will be affected?
The New Revenue Standard is broad sweeping – significant effects not just limited to
Accounting
Other functional areas include:
Corporate Leadership & BOD
• Ensuring proper project governance and stakeholder alignment
FP&A
• Forecasting revenue and commissions and fulfillment cost amortization
• Communicating guidance/outlook
Human Resources
• Evaluating performance measurement and compensation methods
Contracts & Legal
• Examining standard contract language/provisions
• Ensuring proper contract documentation exists
Information Technology
• Ensuring systems support new revenue recognition requirements
• Supporting additional data capture efforts
• Implementing new systems as deemed necessary
Pricing
• Ensuring there is support for standalone sales prices at the proper level of
deliverable
Customer Delivery Organizations
• Measuring contract performance – determining when performance obligations are
fulfilled
Investors Relations and Analysts
• Messaging the effects so stockholders, analysts, and external stakeholders have
the most useful information to make informed decisions

Implementation Timeline
Privately-held companies – fiscal year beginning after December 15, 2018 and quarterly
periods within that fiscal year or the following fiscal year
Public companies - effective fiscal year beginning after December 15, 2017 and quarterly
periods within that fiscal year

Implementing the New Revenue Standard

MorganFranklin’s Adoption Methodology
8
✓ Initial contract analysis
✓ Training
✓ Business impact assessment
✓ Discussions with external auditor
✓ Detailed project plan
✓ IT system use cases
✓ Transition method analysis
✓ Identifying the PMO
✓ Financial reporting assessment
Key Planning Activities Key Implementation Activities
✓ Project & change management
✓ IT deep dive assessment & design
✓ Full contract analysis & beginning retained
earnings adjustment
✓ Sales-based compensation assessment &
modeling
✓ Financial reporting assessment
✓ Process & system implementation
✓ Internal controls optimization
✓ Pro forma financial modeling
Understand
Be smart.
Plan
Be strategic.
Evaluate
Own the
process.
Mobilize
Be tactical.
Implement
Be engaged.

Identify the Project Management Office
While Accounting and Financial Reporting will take a leadership role in the implementation of the new standard,
competing priorities, including business as usual responsibilities, often limit the availability of Accounting and
Financial Reporting team members to lead this large-scale, cross-functional, and transformational initiative. As
such, many organizations implement a dedicated PMO to serve as the adoption enabler.
Key Responsibilities
 Orchestrate the execution of a strategic, tactical,
and efficient adoption
 Eliminate stress on internal resources and act as a
liaison
 Identify opportunities to implement strategic
changes beyond compliance
 Educate key stakeholders on the applicable
impacts of the new standard
 Ensure compliance with accounting and reporting
requirements
Value
 Foresight
 Governance
 Communication
 Risk and issue mitigation
 Control
 Change management

Roles and Responsibilities
Project Role Responsibilities
Executive Sponsor
and Adoption Leader
• General oversight of the project
• Communicate with the BOD
• Communicate with internal management
• Work directly with Workstream Leads to ensure progress
Steering Committee
Member
• Attend Steering Committee Meetings and provide feedback/approval on program-level decisions
• Review Project Status Reports and deliverables and provide feedback as appropriate
• Resolve project-level or escalated issues and risks
• Resolve project-level or escalated scope change requests
Project Manager • Run day-to-day operations of the project
• Coordinate efforts across all workstreams
• Manage the project plan, issues, risks and scope
• Project Status Reports & conduct regular Workstream Lead meetings
• Conduct Steering Committee review meetings
• Manage project deliverables quality
• Manage resource plan / budget
Workstream Lead • Run day-to-day operations of workstream
• Manage scope, schedule and budget of workstream
• Escalate risk and issues as needed
• Provide weekly summary report of workstream performance
• Manage project deliverables quality
• Conduct regular workstream team meetings

Understanding the New Revenue Standard and
Potential Organizational Impacts

The Five Step Model
The core principle of the guidance
is that a company should
recognize revenue to depict the
transfer of promised goods or
services to customers in an
amount that reflects the
consideration to which the
company expects to be entitled in
exchange for those goods or
services.
1 Identify the Contract with the Customer
2 Identify the Performance Obligations
3 Determine the Transaction Price
4 Allocate the Transaction Price
5 Recognize Revenue

Step 1: Identify the Contract with a Customer
collection is probable
Includes rights to
goods or services and
payment terms can be
identified
it has commercial
substance
it is approved and the
parties are committed
to their obligations
A contract
exists if…

Step 1: Key Impacts
Implementation Strategy:
• Review historical collection challenges,
credit approval procedures and payment
terms to determine scope of collectability
change impact
• Review contracting and modification
process to determine documentation gaps
and additional information needed
In-Practice:
• Many companies are adding or relying on
up-front collection terms in agreements and
credit card authorization forms with
customers to prove collectability
Other Functional Areas Impacted:
• Legal
• Sales
• IT
• Collections
Most Common Impacts:
• Improved customer agreement
documentation and storage procedures
• Implement upfront collectability
assessment to ensure revenue can be
recognized
• Changes to processes for documenting,
identifying and tracking contract
modifications and combinations
• A contract (or a part of a contract) that
can be terminated by the customer for
convenience without substantive penalty
is month-to-month.

Step 2: Identify the Performance Obligation
Performance obligations = units of accounting or elements
A performance obligation is a promise to transfer either:
• A good or service (or a bundle of goods or services) that is distinct
• Capable of being distinct and
• Distinct within the context of the contract
• A series of distinct goods or services that are substantially the same and are transferred over
time (for example, each month of a continuous service)
Sometimes performance obligations are not goods or services
• Warranties that provide a service in addition to assuring compliance with agreed-upon
specifications
• Discounts on future purchases

Step 2: Key Impacts
• Hold conversations with sales and legal
teams to identify implied and customary
business practices that could create
additional performance obligations
• Assess needed updates to process and
information technology based on the
results
In-Practice:
• ASC 606 is not intended to create
additional performance obligations.
However, many companies are finding
they have different elements under the
new model
• Many executives are using the new
standard as an opportunity to push
through operational improvements to the
quote to cash process
• Legal
• Sales
• IT
• Increased standardization of customer
agreements to create efficiencies in identifying
the performance obligation
• Education of sales team on the impact of
“extras” given to customers (whether or not
they are documented in the agreement)
• Improved contract review processes to identify
additional performance obligations that require
accounting treatment
• Updates to CRM and Revenue Recognition
systems to track additional performance
obligations identified
• Additional performance obligations may create
changes in revenue recognition patterns (ie:
Software revenue recognition)
• FP&A
• Pricing
• Customer Delivery

Step 3: Determine the Transaction Price
Generally, come up with the total price for the contract.
Fixed consideration
+/- Variable consideration
+/- Significant financing components
+ Noncash consideration
- Consideration payable to a customer
+ Reimbursements of out-of-pocket (pass-through) costs
- Amounts collected on behalf of third parties (such as sales tax)*
* Under US GAAP, there is an accounting election to exclude all sales, use, and value added taxes

Step 3: Key Impacts Implementation Strategy:
• Understand historical data
availability to assist in the
estimation of variable
consideration and forecasting of
revenue
• Assess needed updates to
process and information
technology
In-Practice:
• Estimating variable consideration
is a judgment that will be subject
to audit scrutiny. The availability
and reliability of the related data
will be important for timely
recognition
• Sales
• IT
• FP&A
• Revenue may be recognized sooner for
agreements with variable consideration
components
• Out-of pocket expense reimbursements
• Procedure changes to better identify,
monitor and track performance and
forecast variable revenues

Step 4: Allocate the Transaction Price
Allocate the transaction price (Step 3) to each distinct performance obligation
(Step 2) based on the relative standalone selling prices
Standalone Selling Price
• The price an entity would sell a good or service separately to a customer
• The best evidence is when an entity sells the good or service separately in
similar circumstances to similar customers
• Price lists may be standalone selling price but cannot be presumed to be

Step 4: Key Impacts
• Assess historical data availability to
use in the development and support of
standalone selling price and
transaction price allocation
methodologies
information technology
In-Practice:
• Companies that utilize custom pricing
experience challenges establishing
standalone selling price and
developing processes to allocate the
transaction price in agreements with
multiple performance obligations
• Pricing
• IT
• FP&A
• Sales
Most Common Impact:
• Improved processes and
procedures around pricing and
the creation of standard price lists
• Changes to revenue recognition
systems to enable transaction
price allocation based on SSP
• Transaction price allocation can
create changes in revenue
recognition patterns that impact
revenue forecasting abilities

Step 5: Recognize Revenue
Revenue is recognized as/when the performance obligation is satisfied.
• Recognize over time if:
− Customer consumes the benefits as the company performs (many service contracts)
− Company performance creates or enhances a customer-controlled asset, or
− No alternative use and the vendor has an enforceable right to payment for performance
completed to date
• Recognize at a point in time in any other case
• Measurement of progress:
− Just one measure per performance obligation
− Reflect the transfer of control to the customer; control - ability to direct the use of and obtain
substantially all of the remaining benefits (cash inflows or savings)
• As a practical expedient, may recognize revenue as billed in certain situations –
typically, contracts with a fixed fee per unit and an unknown number of uniform units;
other conditions apply

Step 5: Key Impacts
• Assess needed updates to process
and information technology
• Assess needed updates to key
metrics derived from revenue
In-Practice:
• Many companies find that they
need to separate the revenue
recognition process from the billing
process
• Many companies find that they
revise when to begin revenue
recognition and how they measure
revenue recognition progress
• IT
• FP&A
• Updates to CRM and Revenue
Recognition systems
• Improved processes and procedures
around revenue launch and
measurements of progress
• Changes to the measurement of
progress may require system and
procedures updates
• Changes in revenue recognition
patterns will require adjustments to
forecasts

Capitalized Costs: Commissions and Fulfillment Costs
Certain costs will need to be deferred and amortized over the contract period, including expected renewals:
• Costs to obtain a contract – only incremental and directly attributable costs (commissions/bonuses)
• Costs to fulfill a contract – direct costs related to future performance;
o Generate or enhance resources that will be used to satisfy or continue to satisfy performance
obligations in the future
• IT
• FP&A
• Human Resources
• Implementation of time tracking systems and
processes for employees to assign time to
specific projects
• Implementation of commission systems to better
facilitate capitalization and amortization of
commissions
• Revision of commission programs to generate
preferred financial statement impact
• Changes to the timing and recognition of payroll
and commission costs
systems based on accounting needs
In-Practice:
• Many executives are using this as an
opportunity to push through time tracking
requirements to help better manage the
business
• Most systems are good at either time tracking
or project management. To find both in one will
often times require a custom built solution
• Most companies would benefit from an
automated commissions system. However,
commissions accounting can be done manually

Controls over Adoption of ASC 606
• Evaluate:
© MorganFranklin Consulting, LLC. All Rights Reserved. 24
Risk Control
The company does not have a plan on
how to implement the new standard
across the company.
Management performs an analysis over the impact of ASC
606 by defining the implementation requirements and
creating a transition plan to incorporate the changes across
the business.
Current IT systems, reporting and process
do not support the execution plan
Management performs a deep dive assessment on data,
systems, reporting and process to support the detailed
implementation plan.
Employees affected by the new revenue
recognition requirements do not have the
proper knowledge on the changes made
to comply with the new standard.
Management implements training requirements to
educate and train staff on the new revenue recognition
standard.
The proposed system updates do not
support the new revenue recognition
standard.
Management approves the design and implements the
required system updates to support the revenue
recognition requirements under the new standard.
Understand
Be smart.
Plan
Be strategic.
Evaluate
Own the
process.
Mobilize
Be tactical.
Implement
Be engaged.

Controls after Implementation
I believe the implementation of the new revenue standard provides an
opportunity to be proactive and improve the design and operation of
management review controls that may exist within a company’s revenue
recognition process, including with reference to the various estimates and
judgments that the new revenue standard may require… It will be important
to specify: (i) the objective of management’s review, (ii) the frequency and
granularity with which management’s review is performed, and (iii) the
specific thresholds for investigating deviations from expectations as well as
how those expectations are developed. It will also be important to consider the
interactions between the review control and other controls, including controls
over the reliability of the information used to perform the review.”
- James V. Schnurr, Chief Accountant, SEC Office of the Chief Accountant;
March 22, 2016
© MorganFranklin Consulting, LLC. All Rights Reserved. 25

QUESTIONS www.Promapp.com
www.morganfranklin.com

Jordan Scheiderer
Director
Accounting & Transaction Services
jordan.scheiderer@morganfranklin.com
Justine Jacob
Senior Manager
Accounting & Transaction Services
justine.jacob@morganfranklin.com

Prepare for the asc 606 revenue standard

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