2020 BKD Telecommunications Accounting Seminar
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2020 BKD Telecommunications Accounting Seminar
Revenue Recognition in the Telecom World August 13, 2020
To Receive CPE Credit › Individuals • Participate in entire webinar • Answer polls when they are provided › Groups • Group leader is the person who registered & logged on to the webinar • Answer polls when they are provided • Complete group attendance form • Group leader sign bottom of form • Submit group attendance form to training@bkd.com within 24 hours of webinar › If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar
Presenters
Jessica Richter, CPA, CITP, CISA®
Partner
jrichter@bkd.com
Eric Babler, CPA
Director
ebabler@bkd.comOur Goals for Today Refresh our understanding of ASC 606 Understand the effects on various telecoms that have implemented ASC 606 Learn what the potential future effects on operations may be for telecoms
ASC 606 Refresher
Creating a One-Stop Shop for
Revenue Literature
Current Guidance New Principle
Real Estate – General – Revenue Recognition
General Recognition
Construction- & Production-Type Contracts
Concepts
Real Estate – Retail Land – Revenue
Real Estate Sales (Subtopic 360-20)
Contractors – Construction Revenue
Recognition (Subtopic 976-605)
Industry-Specific Guidance
Software (Subtopic 985-605)
Persuasive evidence of The transfer of a
an arrangement exists promised good or
(Subtopic 910-605)
(Subtopic 970-605)
(Subtopic 605-35)
service determines when
Recognition
Delivery has occurred or revenue is recognized &
services have been occurs when (or as) the
rendered customer obtains control
of the asset. Transfer
can be made either at a
Price is fixed or
determinable point in time or over time
Collectibility is reasonably
assuredScope › Contracts with customers, except • Lease contracts • Insurance contracts • Financial instruments • Certain guarantees (other than product warranties) • Certain nonmonetary exchanges
The Five-Step Model
• Identify contract(s) with customer
Step 1
• Identify performance obligations
Step 2
• Determine transaction price
Step 3
• Allocate transaction price to performance
Step 4 obligations
• Recognize revenue when (or as) performance
Step 5 obligation is satisfiedStep 1 – Identify Contract(s) with
Customer
› Contract = “agreement between two or more parties that
creates enforceable rights & obligations” & meets the
following criteria
• Commercial substance
• Approval & commitment by all parties
• Identifiable rights, obligations, & payment terms
• Collectibility threshold
Step 1: Step 2: Step 3: Step 4:
Step 5:
Identify Identify Determine Allocate
Recognize
Contract(s) Performance Transaction Transaction
Revenue
with Customer Obligations Price PriceStep 2 – Identify Performance
Obligations
› Performance obligation
• Promise to transfer goods/services to customer
• Can be explicitly identified in contract or implied by customary
business practices
• One contract could equal one or many performance obligations
• Significant judgment may be required
Step 1: Step 2: Step 3: Step 4:
Step 5:
Identify Identify Determine Allocate
Recognize
Contract(s) Performance Transaction Transaction
Revenue
with Customer Obligations Price PriceStep 3 – Determine Transaction Price
› Transaction price = amount of consideration entity expects to be
entitled to (after collectibility threshold is met)
• Variable consideration
• Revenue constraint
• Significant financing component
• Noncash consideration
• Consideration payable to a customer
Step 1: Step 2: Step 3: Step 4:
Identify Step 5:
Identify Determine Allocate
Contract(s) Recognize
Performance Transaction Transaction
with Customer Revenue
Obligations Price PriceStep 4 – Allocate Transaction Price to
Separate Performance Obligations
› Allocate based on relative standalone selling prices of separate
performance obligations
• Observable price when sold separately (best evidence); otherwise, estimate
based on
o Adjusted market assessment
o Cost plus margin
o Residual value – only if highly variable or uncertain
Step 1: Step 2: Step 3: Step 4:
Identify Determine Allocate Step 5:
Identify
Contract(s) Transaction Transaction Recognize
Performance
with Customer Price Price Revenue
ObligationsStep 5 – Recognize Revenue When (or as)
Performance Obligations Are Satisfied
› Revenue recognized when (or as) control of good/service is
transferred to customer
› Transfer of control occurs when customer has ability to direct use
of, & receive benefits from, good/service
› Can be recognized over time or at a point in time, depending on
how performance obligations are
Step 1: Step 2: Step 3: Step 4:
Identify Determine Step 5:
Identify Allocate
Contract(s) Transaction Recognize
Performance Transaction
with Customer Price Revenue
Obligations PriceOverview of Transition Methods
› Full retrospective method
• Restate all prior years presented in the financials as if ASC 606 was in
place
› Modified retrospective method
• Recognize the cumulative effect of initially applying the new revenue
recognition guidance as an adjustment to the opening balance of
retained earnings as of the date of adoption, e.g.,1/1/2019
• Chosen by majority of companiesEffects of Implementation
Effects of Transition on Telecoms
› Overview – transition – example
• Telephone and Data Systems, Inc. (TDS)
ASC 606 Cumulative adjustment to retained earnings (in millions of dollars)
Cumulative
Cumulative Adjustment as
Adjustment to a % of
Retained Operating Operating
Earnings Revenue Revenue
TDS 164 5,109 3.21%
U.S. Cellular 175 3,967 4.41%
Non-Wireless Related (11) 1,142 -0.96%
Amounts from annual reports
http://s1.q4cdn.com/183458318/files/doc_financials/annual/2019/USM-PDF-AR-2018.pdf
https://s22.q4cdn.com/412964029/files/doc_financials/annual/2018/18-41220-1_343935_client.pdfEffects of Transition on Telecoms
› Overview – transition
• ILEC, CLEC, broadband (wired & wireless), video
o Most impacts were related to movement of revenues between line items on the income
statement
• Allocation of bundle discounts
o Very few had a retained earnings adjustment
• No change in the timing of the revenues
o Some had changes due to promotions for free installations with a contract of a certain
lengthEffects of Transition on Telecoms
› Overview – transition
• Cellular
o Frequently had a retained earnings adjustment
o Changed the timing of revenue & expense recognition
• Primarily related to free/discounted phones with contract
• Timing of recognition of commission expense
o Changed line items where revenue was recognizedSignificant Areas Affected › Allocation of discounts › Upfront payments made by customers › Commissions paid to employees › Directory revenue & expense
Allocation of Discounts
› Requirements
• If the sum of the standalone selling prices of a bundle of services
exceeds the consideration, then the discount is generally allocated
proportionately to all performance obligations in the contractAllocation of Discounts › The guidance does state that if there is evidence that the entire discount relates to only one or more, but not all performance obligations, the discount is not allocated proportionately to all performance obligations in the contract • The bar is high • We have not seen many companies meet the requirements
Allocation of Discounts
› Issue
• Most telecoms arbitrarily recorded whole discount to internet (highest
margin service)
Fixed discount of $15 when taking three services – INCORRECT
Standalone Selling Discount Discount Allocated Selling
Price Percentage Allocation Price
Local $18.00 0% $ - $ 18.00
Long distance $10.95 0% $ - $ 10.95
Internet $69.95 100% $ (15.00) $ 54.95
Video $99.95 0% $ - $ 99.95
Set-Top Box $5.95 0% $ - $ 5.95
$204.80 $ (15.00) $ 189.80Allocation of Discounts
Fixed discount of $15 when taking three services – CORRECT
› Effects
• Increase in internet revenue Standalone Selling Discount Discount Allocated Selling
Price Percentage Allocation Price
• Decrease in
Local $18.00 9% $ (1.32) $ 16.68
o Video revenue
o Local service revenue Long distance $10.95 5% $ (0.80) $ 10.15
o Other revenues Internet $69.95 34% $ (5.12) $ 64.83
• Re-imagining the bundle Video $99.95 49% $ (7.32) $ 92.63
• Consolidating bundles Set-Top Box $5.95 3% $ (0.44) $ 5.51
• Moving away from bundles $204.80 $ (15.00) $ 189.80Upfront Payments Made by Customers
– Activation & Installation
› Issues
• Many contracts include nonrefundable upfront fees that are paid at or
near contract inception
• Must assess whether the fee relates to the transfer of a promised good
or service to the customer
• Fees administrative in nature are not separate performance obligations
• Activities that improve the telecom’s network do not transfer a good or
service to the customerUpfront Payments Made by Customers
– Activation & Installation
› Effects
• Installation fee may need to be recognized over time
o Deferred revenue recognized over the life of the contract
• Most companies have determined these charges to be administrative in
nature
• May include a truck roll, but most times de minimis to the customer
• For most companies, this revenue is not material to the financial
statementsUpfront Payments Made by Customers
– Installation Fees Waived
Annual Internet Service Revenue
Customer Contract Term Monthly Fee Total Days 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Total
Customer A 6/1/2020 6/1/2023 $ 69.95 1,095 $ 489.65 $ 839.40 $ 839.40 $ 839.40 $ 3,007.85
Customer B 3/1/2020 3/1/2023 $ 69.95 1,095 $ 699.50 $ 839.40 $ 839.40 $ 839.40 $ 3,217.70
Customer C 2/1/2020 2/1/2023 $ 69.95 1,096 $ 769.45 $ 839.40 $ 839.40 $ 839.40 $ 3,287.65
Customer D 1/1/2020 1/1/2023 $ 69.95 1,096 $ 839.40 $ 839.40 $ 839.40 $ 839.40 $ 3,357.60
Customer E 4/1/2020 4/1/2023 $ 69.95 1,095 $ 629.55 $ 839.40 $ 839.40 $ 839.40 $ 3,147.75
Customer F 5/1/2020 5/1/2023 $ 69.95 1,095 $ 489.65 $ 839.40 $ 839.40 $ 839.40 $ 3,007.85
Customer G 8/1/2020 8/1/2023 $ 69.95 1,095 $ 349.75 $ 839.40 $ 839.40 $ 839.40 $ 2,867.95
Customer H 9/1/2020 9/1/2023 $ 69.95 1,095 $ 279.80 $ 839.40 $ 839.40 $ 839.40 $ 2,798.00
$ 559.60 $ 4,546.75 $ 6,715.20 $ 6,715.20 $ 6,715.20 $ 24,692.35Upfront Payments Made by Customers
– Installation Fees Waived
Install Discount
Customer Contract Term Install Fee Total Days 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Total
Customer A 6/1/2020 6/1/2023 $ (150.00) 1,095 $ (29.18) $ (50.00) $ (50.00) $ (20.82) $ (150.00)
Customer B 3/1/2020 3/1/2023 $ (150.00) 1,095 $ (41.78) $ (50.00) $ (50.00) $ (8.22) $ (150.00)
Customer C 2/1/2020 2/1/2023 $ (150.00) 1,096 $ (45.71) $ (49.95) $ (49.95) $ (4.38) $ (150.00)
Customer D 1/1/2020 1/1/2023 $ (150.00) 1,096 $ (49.95) $ (49.95) $ (49.95) $ (0.14) $ (150.00)
Customer E 4/1/2020 4/1/2023 $ (150.00) 1,095 $ (37.53) $ (50.00) $ (50.00) $ (12.47) $ (150.00)
Customer F 5/1/2020 5/1/2023 $ (150.00) 1,095 $ (33.42) $ (50.00) $ (50.00) $ (16.58) $ (150.00)
Customer G 8/1/2020 8/1/2023 $ (150.00) 1,095 $ (20.82) $ (50.00) $ (50.00) $ (29.18) $ (150.00)
Customer H 9/1/2020 9/1/2023 $ (150.00) 1,095 $ (16.58) $ (50.00) $ (50.00) $ (33.42) $ (150.00)
$ (1,200.00) $ (274.98) $ (399.91) $ (399.91) $ (125.20) $ (1,200.00)Upfront Payments Made by Customers
– Installation Fees Waived
Revised Annual Revenue
Customer Contract Term Monthly Fee Total Days 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Total
Customer A 6/1/2020 6/1/2023 $ 69.95 1,095 $ 460.47 $ 789.40 $ 789.40 $ 818.58 $ 2,857.85
Customer B 3/1/2020 3/1/2023 $ 69.95 1,095 $ 657.72 $ 789.40 $ 789.40 $ 831.18 $ 3,067.70
Customer C 2/1/2020 2/1/2023 $ 69.95 1,096 $ 723.74 $ 789.45 $ 789.45 $ 835.02 $ 3,137.65
Customer D 1/1/2020 1/1/2023 $ 69.95 1,096 $ 789.45 $ 789.45 $ 789.45 $ 839.26 $ 3,207.60
Customer E 4/1/2020 4/1/2023 $ 69.95 1,095 $ 592.02 $ 789.40 $ 789.40 $ 826.93 $ 2,997.75
Customer F 5/1/2020 5/1/2023 $ 69.95 1,095 $ 456.23 $ 789.40 $ 789.40 $ 822.82 $ 2,857.85
Customer G 8/1/2020 8/1/2023 $ 69.95 1,095 $ 328.93 $ 789.40 $ 789.40 $ 810.22 $ 2,717.95
Customer H 9/1/2020 9/1/2023 $ 69.95 1,095 $ 263.22 $ 789.40 $ 789.40 $ 805.98 $ 2,648.00
$ 559.60 $ 4,271.77 $ 6,315.29 $ 6,315.29 $ 6,590.00 $ 23,492.35Commissions Paid to Employees
› Issues
• Companies may pay a commission to personnel for new customer sign-
ups.
• Sales commission meet the criteria for recognition as an asset as a cost
to obtain a contract which is then recognized as expense over the life of
the contract with the customer.
o Contract may not have a specific life & you will have to determine average life of the
customerCommissions Paid to Employees
› Effects
• Few companies pay employees commissions, mostly larger ones
• Amortize expense over contract term or customer life
• Expenses are spread out over the contract life rather than being
recognized all upfront when paidCommissions Paid to Employees
Expense
Employee Contract Term Commission Total Days 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 12/31/2026 Total
Employee A 6/1/2020 6/1/2025 $ 5,000.00 1,826 $ 583.24 $ 999.45 $ 999.45 $ 999.45 $ 999.45 $ 418.95 $ - $ 5,000.00
Employee B 3/1/2020 3/1/2026 $ 2,500.00 2,191 $ 348.01 $ 416.48 $ 416.48 $ 416.48 $ 416.48 $ 416.48 $ 69.60 $ 2,500.00
Employee C 2/1/2020 2/1/2023 $ 3,000.00 1,096 $ 914.23 $ 999.09 $ 999.09 $ 87.59 $ - $ - $ - $ 3,000.00
Employee A 1/1/2020 1/1/2024 $ 1,500.00 1,461 $ 374.74 $ 374.74 $ 374.74 $ 375.77 $ - $ - $ - $ 1,500.00
Employee B 4/1/2020 4/1/2024 $ 4,000.00 1,461 $ 750.17 $ 999.32 $ 999.32 $ 999.32 $ 251.88 $ - $ - $ 4,000.00
Employee C 5/1/2020 5/1/2026 $ 3,500.00 2,191 $ 389.78 $ 583.07 $ 583.07 $ 583.07 $ 583.07 $ 583.07 $ 194.89 $ 3,500.00
Employee A 8/1/2020 8/1/2025 $ 2,000.00 1,826 $ 166.48 $ 399.78 $ 399.78 $ 399.78 $ 399.78 $ 234.39 $ - $ 2,000.00
Employee B 9/1/2020 9/1/2026 $ 1,000.00 2,191 $ 55.23 $ 166.59 $ 166.59 $ 166.59 $ 166.59 $ 166.59 $ 111.82 $ 1,000.00
$ 22,500.00 $ 3,581.89 $ 4,938.51 $ 4,938.51 $ 4,028.04 $ 2,817.25 $ 1,819.47 $ 376.31 $ 22,500.00Amortization of Revenue & Expenses
› Issue
• Amortize revenue & expenses on a systematic basis, consistent with the
pattern of transfer of the service
o Over length of the contract
o No contract, use judgment to calculate average customer term
• Churn = customers who churned/beginning customers
• Lifetime = one/churn
› Effect
• Change in timing of recognitionAmortization of Revenue & Expenses
Customer Term as Reported Term as Reported
Company Customer Type contracts? on 10-Q - 9/30/2018 on 10-Q - 3/31/2019
Mediacom Residential No 36 months 36 months
Business Yes 1 to 10 years 1 to 10 years
CenturyLink Residential Yes 30 months 30 months
Business Yes 1 to 5 years 1 to 5 years
TDS Residential Not Reported Not Reported 14 to 60 months
Business Not Reported Not Reported 14 to 60 months
Frontier Residential Not Reported 3.8 years 3.8 years
Business Not Reported 3.8 years 3.8 years
Charter Residential No 6 months 6 months
Small Business No 6 months 6 months
Enterprise Yes 2 to 7 years 2 to 7 years
Information from September 30, 2018 10-Q as reported on https://www.sec.gov/edgar/searchedgar/companysearch.html
Information from March 31, 2019 10-Q as reported on https://www.sec.gov/edgar/searchedgar/companysearch.htmlDirectory Revenue & Expense
› Issue
• Companies should record revenue & expense when physical directory
is published
• Change from current practice
• Digital or online directory
o No change from current practiceDirectory Revenue & Expense
› Effect
• Revenue & expense recorded in month of publication
• Monthly & quarterly reporting obligations requiring GAAP financials are
impacted
• For most companies, revenue & expenses not material to the financial
statementsFuture Considerations
Future Considerations › Recent effective date update › Collaborative effort › Ongoing evaluation › Conversations with consultants
Effective Date Update
› Recently issued ASU 2020-05 postponed effective dates as
follows
• The delay is only effective if the entities have not yet issued or made
available for issuance their financial statementsEffective Date Update
› Delay does NOT impact ASU 2018-08, Not-for-Profit Entities:
Clarifying the Scope and the Accounting for Contributions
Received and Contributions Made
› Delay of ASC 606 implementation is NOT required
• With ASC 842, Leases coming, it might make a lot of sense to get ASC
606 done now
› Early adoption is encouragedCollaborative Effort
› Management will want to work closely with accounting
department to understand & champion accounting & reporting
requirements
› Requires collaboration across departments
• Marketing to assess new service & product offerings
o Discounts, bundles, other promotions
• Plant to assess activation & installation charges
• Human resources to assess commission pay structureOngoing Evaluation
› Effort doesn’t stop once the standard has been adopted
› Evaluation of current & future discounts/promotions offered to
customers
• Any change in price
• Any change in discounts
• Any change is service/product offerings
• Any concessions
o For example: free install for some customersOngoing Evaluation › Future changes in activation & installation charges › Changes to or addition of commissions to employees › Changes in directory revenue & expenses • Publication date change • Physical to digital directory
Conversations with Consultants
› Discuss accounting changes with
• External accounting firm
o To understand accounting & reporting requirements
o Effect on any loan covenants
o Don’t let the accounting of a decision drive the decision
• Cost consultants
o To understand any changes in timing of revenue & expense recognition
o To understand any new assets & liabilities on the balance sheetSummary
› Implementation & ongoing compliance with ASC 606 is a complex
process that requires
• Collaboration with multiple departments at the company
• Good documentation around the five-step model
• Strong communication with various stakeholders
o Board
o Consultants
o Owners
o Regulators
o LendersQuestions?
Continuing Professional Education
(CPE) Credit
BKD, LLP is registered with the National Association of State Boards
of Accountancy (NASBA) as a sponsor of continuing professional
education on the National Registry of CPE Sponsors. State boards of
accountancy have final authority on the acceptance of individual
courses for CPE credit. Complaints regarding registered sponsors
may be submitted to the National Registry of CPE Sponsors through
its website: www.nasbaregistry.orgCPE Credit › CPE credit may be awarded upon verification of participant attendance › For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com
Thank You! The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered
You can also read
