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EEI-AGA SpringAccounting Conference
Revenue Recognition
May 16, 2016
www.pwc.com/us
New Orleans, LA
PwC
With you today:
Name Contact
Ashley Schwake
PwC U.S. Power and Utilities
Assurance Manager
[email protected](262) 573-6034
www.pwc.com/us/utilities
Katherine Schultz
Tucson Electric Power
Accounting Research Manager
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Agenda
• Basics of the standard• Industry focus areas• Task force update• Implementation
Revenue from contractswith customers
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Basics of the standard
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Basics of the standard
Impacts
• Standard could significantly change howmost entities recognize revenue
• Standard is intended to be principle based
• Will remove or relocate existing industryspecific guidance
• Expanded qualitative and quantitativedisclosures (annual and interim)
• Transition Resource Group
• AICPA industry working group
Core principle is thatrevenue recognitiondepicts transfer ofcontrol to customer inan amount that reflectsconsideration to whichentity expects to beentitled
Achieve a single,comprehensive revenuerecognition model
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Basics of the standard
GAAP - public GAAP - non-public IFRS
EffectiveDate
Annual and interimperiods beginning after
December 15, 2017(2018 calendar year)
Annual periodsbeginning after
December 15, 2018(2019 calendar year)
Periods beginningon or after
January 1, 2018
Earlyadoptionpermitted?
Yes
(2017 calendar year)
Yes
(2017 calendar year)
Yes
Method ofadoption
All companies may adopt the standard under either the:
• Retrospective approach, or
• Modified retrospective approach (practical expedient)
For non-public entities, effective forinterim reporting periods beginningDecember 15, 2019. May early adopt
for interim periods, beginning one yearafter the first annual period adopted.
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Basics of the standard
Five step model
1: Identify the contract(s) with a customer
2: Identify the performance obligations in the contract
3: Determine the transaction price
4: Allocate the transaction price
5: Recognize when (or as) the performance obligation is satisfied
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Summary of standard setting activitiesStatus of FASB’s agenda on revenue
Standard Status Impact on P&U sector
Deferral ofeffective date
Final – ASU 2015-14 • High (but don’t delay implementationefforts!!)
Identifying performanceobligations and licenses
Final – ASU 2016-10 • Performance obligations (moderate)
• Licenses (low)
Principle versusagent considerations
Final – ASU 2016-08 • Low
Narrow scopeimprovements andpractical expedients
Final – ASU 2016-12 • Collectibility (high)
• Noncash consideration (low)
• Presentation of salestaxes (moderate)
• Transition expedients (moderate)
Technical corrections andimprovements
ED expected in Q2 2016 • Low
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Industry focus areas
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Industry focus areas
Step 1 –Identify thecontract witha customer
• Are sales to regulated customers within the scopeof the new standard?
• Are contributions in aid of construction withinthe scope of the standard?
• How should revenue from sales to hardship customersbe recognized if collectibility is not probable?
• How to apply the contract modification guidance toblend and extend and other common contractualarrangements?
Industry issues
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Yes No
Standard indicates “Contracts can bewritten, oral, or implied by anentity’s customary businesspractices.” (ASC 606-10-25-2)
Sales by utilities under their “regular”tariffs are not a contract with thecustomer but arise from a contractwith the regulator
Expectation for future delivery ofpower, gas, or water is present, even ifthe customer is not obligated toconsume any of the goods or servicesprovided by the utility, which mayindicate a contract exists
FASB concluded that alternativerevenue programs are contractsbetween an entity and a regulator ofutilities, not a contract between theentity and a customer within the scopeof the revenue standard; sales byutilities under regular tariffs are nodifferent
Industry focus areasIs there a contract with a regulated retail customer?
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Industry focus areasContributions in aid of construction (CIAC)
• Three “views” currently being debated:
View A View B View C
CIAC is “out of scope” CIAC is “in scope”;performance obligationrepresents stand-readyobligation to serve customerover the life of the asset
CIAC is “in scope”;construction of assetrepresents theperformance obligationin the contract
• Potential impact to the balance sheet and income statement
• Challenges of implementing if “in scope”
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AICPA Task Forceagenda item
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Industry focus areasCollectibility
Step 1 (Identify the Contract) of ASU 606 (606-10-25-1) stipulates that an entitywill only apply the revenue guidance to contracts when it is “probable” that theentity will collect substantially all of the consideration it is entitled to inexchange for the goods or services it transfers to the customer
Key considerations
• Application of the “portfolio approach”
• Constraint on recognition if required to provide additional goods/services
• Price concessions
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AICPA Task Forceagenda item
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Industry focus areasAccounting for contract modifications - flowchart
Is the contract modificationapproved?
Does the modification only affect thetransaction price?
Does the modification add distinctgoods or services?
Does the contract price increase byan amount that reflects the
standalone selling price of thedistinct goods or services?
Account for modification as aseparate contract
Yes
No change to accounting untilmodification approvedNo
No
Yes
Yes
Are the remaining goods or servicesdistinct?Yes
Account for modification through acumulative catch-up adjustment
No
No
Account for modificationprospectivelyNo
Yes
*Figure 2-1 ofPwC’s 2014 Guidefor revenue from
contracts withcustomers
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Industry focus areas
Step 2 –Identify theperformanceobligations inthe contract
• Does a power purchase agreement for the sale ofenergy, capacity, and RECs contain multipleperformance obligations?
• Do elements on a customer’s bill (e.g., transmission,distribution, basic service) represent separate anddistinct performance obligations?
• Are promises distinct within the context of thecontract?
Industry issues
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Industry focus areasExample: PPA for sale of energy and RECs
Background:Solar Power (“Solar”) sells electricity and RECs to Power Buyer (“Buyer”)pursuant to a three year PPA. Solar concluded that each element of thisagreement is within the scope of the new standard.
Control of the electricity transfers to Buyer upon delivery of the electricity.Control of the RECs transfers upon the completion of the transfer of RECsfrom Solar’s account to Buyer’s account, which happens in the month followingthe month in which the associated electricity is delivered. Solar and Buyerfrequently execute contracts for the purchase and sale of electricity and RECson a standalone basis.
Analysis:Solar should evaluate whether or not the sale of energy and RECs representseparate performance obligations.
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Industry focus areasExample: Contract to design and build a water system
Background:Water Builder Co. (“Builder”) enters into a contract to design and build awater system for Customer Co. (“Customer”). Builder is responsible for theoverall management of the project and identifies various goods and servicesthat are provided, including architectural design, site preparation, and watersystem construction. Builder regularly sells these goods and servicesindividually to customers.
Analysis:The bundle of goods and services would likely be combined into a singleperformance obligation. The promised goods and services are capable ofbeing distinct; however, the goods and services are not distinct within thecontext of the contract because they are not separately identifiable fromother promises in the contract.
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Industry focus areas
Step 3 –Determine thetransactionprice
• How do you consider variability in the contractprice/quantity when determining the transactionprice – variable consideration vs. optionalpurchases?
• How should performance bonuses and other similarforms of variable consideration be reflected in thetransaction price?
Step 4 – Allocatethe transactionprice
• How do you allocate transaction price to eachperformance obligation (i.e., PPA with energy,capacity, and RECs)
Step 5 –Recognizerevenue
• When does control of a commodity transfer tothe customer – over time or at a point in time?
• If control transfers over time, how should progresstoward complete satisfaction be measured?
Industry issues
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Industry focus areasVariable consideration vs. optional purchases
Key focus area for the Power & Utilities AICPA Task Force (in the context of“requirements contracts”)
Optional purchases Variable consideration
• Customer has a right to choose topurchase additional goodsor services
• Each is a separate purchase decision
• Prior to customer’s exercise of theoption, the vendor is not obligatedto provide those goods or servicesand the customer is not obligated topay for those goods or services
• The contract obligates the vendor totransfer promised goods or services
• The ultimate quantity of good orservices is not known and is outsidethe control of the vendorand customer
• Customer is obligated to pay foreach good or service transferred
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AICPA Task Forceagenda item
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Industry focus areasExample: Service contract with performance incentives
Background:Utilities Services, Inc. has a ten year service arrangement with Rosemary Gasand Electric, under which it is responsible for the operations and maintenanceof a power generation facility. Utilities Services, Inc. receives a service fee of $1million annually, subject to escalation based on CPI. There is also an annualperformance bonus of up to $150,000 issued if certain conditions /performance metrics are met.
Scenario 1: The bonus is based entirely upon achievement of certain objectivemeasures (e.g., boiler availability) and is not subject to qualitative assessment.
Scenario 2: The bonus is based upon a combination of (1) the quantitativemeasures described in Scenario 1 above and (2) more subjective measures(client satisfaction, community involvement, etc.).
Analysis:In both scenarios, Utilities Services, Inc. should evaluate how much, if any, ofthe variable consideration should be included in its transaction price.
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Task force update
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Focus Areas Considerations Status
Tariff-basedsales
• Scope clarification• Carve out of alternative
revenue programs
• Task force consensus that tariff-basedsales are in scope
• RRWG and FinREC agreed with taskforce consensus
• Next step is public exposure
Blend-and-extend contractmodifications
• Does a B&E modificationrepresent a newagreement or a separateextension?
• If a separate extension, isa financing elementpresent?
• Task force did not reach consensus onB&E treatment
• Issue was elevated to the FASB staff fora Technical Inquiry
• FASB staff believes both views can besupported
Step vs. StripPricing
• Can same performanceresult in differentrevenue profiles?
• Task force consensus that differentrevenue profiles can be supported
• RRWG agreed – next step FinREC
P&U Industry Task ForceImplementation Update as of March 2016
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Focus Areas Considerations Status
Variableconsideration
• Dealing with variousforms of price andvolume variability
• Application of theconstraint guidance
• General view that many forms of pricevariability can be linked to discretedelivery of power
• Task force considering implications ofNovember TRG discussions on optionalpurchases
PartialTerminations
• Timing of P&L –Immediate or overremaining term?
• Issue to be elevated to RRWG
Bundledarrangements(e.g. PPAs)
• Identification of separateperformance obligations
• Allocation of transactionprice
• Timing of revenue(customer control)
• Task force analysis in progress• Focus on items that do not transfer to
customer contemporaneously• Consideration of level of integration of
products/services• Separate analysis of RECs and capacity
P&U Industry Task ForceImplementation Update as of March 2016
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Focus Areas Considerations Status
Sales of RECs • Eligible to be accountedfor as a series?
• Transfer of control upongeneration of electricityor certification?
• Task force analysis in progress• Focus on ability to control REC prior to
certification• Consideration of customer acceptance
clauses
Sales ofCapacity
• Stand ready = service• Application of the series
guidance• Time-based measure of
progress
• Task force analysis in progress• Focus on series guidance and ability to
apply invoice practical expedient
Contributionsin aid ofconstruction
• Revenue vs. offset toPP&E
• Task force analysis in progress• Consideration of non-P&U contracts
with setup charges
P&U Industry Task ForceImplementation Update as of March 2016
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Focus Areas Considerations Status
Application ofseries guidanceto storablecommodities
• Consideration of“immediateconsumption” criterion
• Issue has been elevated to the FASBstaff
Collectability –Sales to lowcredit qualitycustomers
• Ability to socializecredit losses throughrates
• Price concession?
• Added to TF agenda at March meeting• Issue paper being developed
AlternativeRevenuePrograms
• Presentation of revenuewhen billed throughtariff
• Added to TF agenda at March meeting• Issue paper being developed
Sales of non-financial assets
• Replacing real estatesale rules
• Partial sales – unit ofaccount?
• Active FASB project on asset vs.business expected to address unit ofaccount question
• Task force may not address
P&U Industry Task ForceImplementation Update as of March 2016
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Implementation
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ImplementationFull or modified retrospective approach to transition
A public U.S. GAAP example
Assumed adoptiondate = Jan 1, 2018
2016 2017 2018
Option 1 –Fullretrospective
Newstandard
Cumulative effectat Jan 1, 2016
Newstandard
Newstandard
Option 2 –Modifiedretrospective
Old GAAP Old GAAP
Cumulative effectat Jan 1, 2018
Newstandard
DiscloseOld GAAP
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Both adoptionapproaches willrequire new data.Early identificationand capture of newdata needs will likelysave time and moneyand will allow forflexibility indeterminingpreferred adoptionapproach
Both adoptionapproaches willrequire new data.Early identificationand capture of newdata needs will likelysave time and moneyand will allow forflexibility indeterminingpreferred adoptionapproach
Both fullretrospective andmodifiedretrospectiveapproach may resultin “lost revenue”and “additionalcapitalized costs”upon transition
Both fullretrospective andmodifiedretrospectiveapproach may resultin “lost revenue”and “additionalcapitalized costs”upon transition
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Standard includes an expanded definition of a public entity.
Considerations for public entities
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Public entities that choose the full retrospective approach may elect not torecast periods prior to 2016 for their selected financial data tables
Staff Accounting Bulletin (SAB) Topic 11.M requires disclosure of the effectsof recently issued accounting standards
Disclosures are expected to evolve as more information about the effects are known(including the chosen transition method)
2014 2015 2017
Final revenuestandard
Prior periods presented
2018
Effective
Modified retrospectiveapplication date (public
entity)
2016
Retrospective applicationdate (public entity)
SEC five-year table
SAB Topic 11.M (SAB 74)
2019
Modifiedretrospectiveapplication date(nonpublic entity)
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Implementation challengesSome challenges will be well known and defined, some may be lessobvious
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Adoption date and transitionmethods
Technology – enableror additional cost?
Impact on processesand controls
Interim SAB 74disclosures (andcontrols)
Sales tax – possibleapportionmentissues
Contract originationand contract fulfilmentcosts
Conclusions on leaseassessment may affectassessment under revenuerecognition guidance
Developing forecastsand annual operatingplans
Obtaining necessaryhistorical data, especiallyfor long-term arrangements
US GAAP vs IFRSconclusions
Increased use ofjudgements and resultingdisclosure requirements
Evaluating contractmodifications
Project governance andoversight
Standardization ofassessment &consistency on aglobal basis
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ImplementationTop 5 recommendations
Reporting entities should also consider whether there is benefit toimplementing the new revenue and leasing standards together
1. Project planning
- People, systems and processes
2. Contract governance considerations
- Data gathering
- Risk ranking
3. Information technology enhancements
4. Internal controls
5. Commence evidence gathering activities around key judgments
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Questions?
Thank you
© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopersInternational Limited, each member firm of which is a separate legal entity.