Revenue Recognition Challenges on The Subscription based economy

BILLING AND REVENUE RECOGNITION CHALLENGES ON THE SUBSCRIPTION BASED ECONOMYTHURSDAY, OCTOBER 13, 2016

COPYRIGHT 2016 –SOFTRAX CORP, VINDICIA, & CBIZ MHM .ALL RIGHTS RESEREVED.

PRESENT

FEATURING

COPYRIGHT 2016 –SOFTRAX CORP, VINDICIA, & CBIZ MHM .ALL RIGHTS RESEREVED. 2

Doug Smith

VP of Customer Success

Bradford Hale

CPA

Jeff Halden

Solution Advisor

05/01/2023 3

BRADFORD HALE


Brad is a Managing Director with CBIZ MHM focused on building the firm’s attest footprint through relationships with companies facing complex technical accounting matters and growing the Accounting Advisory practice. He is the firm’s national leader in Topic 606 advisory services and is actively working on a number of implementation projects.

Bradford HaleCPA

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DOUG SMITH


Doug SmithVP of Customer

Success

Doug has over 20 years of experience in technology development and professional services in enterprise software and telecommunications. His primary areas of focus are professional services practice development and enterprise-scale integration strategy.

05/01/2023 5

JEFF HALDEN


Jeff HaldenSolution Advisor

Jeff leads Softrax’s Solution Advisory function in the West region, advising clients on revenue management issues related to Softrax Revenue Manager. He was formerly both an Auditor and Consulting partner with Ernst & Young and Capgemini, and has held multiple leadership positions with technology businesses in the Bay Area.

WEBINAR


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AGENDA


Overview of the Landscape of the Subscription Economy

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Identification of Performance Obligations and Forms of Variable Consideration

Implementation Challenges

Internal Control Considerations

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OVERVIEW OF THE LANDSCAPE OF THE SUBSCRIPTION ECONOMY

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$15 / mo x 12 mo x 10 years------------------$1800 Lifetime Value

TRADE YOUR CAR TO WATCH A MOVIE?

LOVE AND HATE SUBSCRIPTION BUSINESSES

M1 M3 M5 M7 M9M11 M13 M15 M17 M19 M21 M23

01000200030004000500060007000

New subs Renewals

Constant Marketing

Spend

Steady Growing Revenue

Inputs: Adding 400-600 subscribers per month, with monthly retention rate of 88%

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IDENTIFICATION OF PERFORMANCEOBLIGATIONS AND FORMS OF VARIABLE CONSIDERATION

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GENERAL APPLICATION CRITERIA VS STEPS

Topic 605

• Staff Accounting Bulletin (SAB) 104 establishes the “four criteria” to recognize revenue

• Persuasive evidence of an arrangement

• Delivery and performance

• Fixed or determinable sales price

• Collectability is reasonably assured12

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 to

the performance obligations in the contract.

5• Recognize revenue when (or as)

the entity satisfied a performance obligation.

Topic 606

VS


Topic 605

Multiple Deliverable Arrangements

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VS

Topic 606

Step 2: Identify the performance

obligations in the contract


STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS (TOPIC 606)• A performance obligation is a promise in a contract with a

customer to transfer to the customer:• A good or service (or bundle of goods or services) that is

distinct, or• A series of distinct goods or services that are substantially

the same and that have the same pattern of transfer to the customer.

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Goods and services are generally explicit in the contract but may be implicit


STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS• A promised good or service is considered distinct if

both of the following conditions are met:• Capable of being distinct• Distinct in the context of the contract

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Promised goods and services that are not distinct are bundled with other promised goods or services until a bundle that is distinct is identified.


STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS• When is a good or service capable of being distinct?

• The customer can benefit from the good or service on its own or in conjunction with other readily available resources:

• Use/Consumption• Sold (for more than scrap)• Generate other economic benefit

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Consideration may include if the good or service is regularly sold separately


STEP 2: IDENTIFYING PERFORMANCE OBLIGATIONS

• When is a good or service distinct within the context of the contract?

• The promise to transfer the good or service to the customer is separately identifiable from other promises in the contract

• A good or service may not be distinct when:• It is an input used to produce a combined output specified by

the customer• It significantly modifies or customizes another promise in the

contract (or vice versa)

• It is highly interdependent or interrelated with other promises in the contract.

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PERFORMANCE OBLIGATIONS COMMON TO THE SUBSCRIPTION INDUSTRYB2B• Subscription license• Implementation services• Maintenance• Customer support• System upgrades• Renewal/Customer options• Hardware 18


B2C• Subscription license• Maintenance• Customer support• Renewal/Customer options

SOFTRAX REVENUE MANAGERMANAGING PERFORMANCE OBLIGATIONS UNDER ASC 606

• Separate Performance Obligations• Automate the process of separating/creating POBs and/or

‘carving’ out a specific POB from others• POB creation can be completely automated via pre-defined

templates or dynamically created upon import if they consistently differ

• Allocate Contract Price to Performance Obligations• Automate the allocation of the contract price to the POBs

based on the relative Standalone Selling Price• ‘Parent’ item/bundle may retain or distribute all of its relative

value• Establish Revenue Recognition rules and apply to

Performance Obligations• Automate the process of forecasting and recognizing revenue,

assigning Disclosures and GL accounts, etc.

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FORMS OF VARIABLE CONSIDERATION COMMON TO THE SUBSCRIPTION INDUSTRY

• Consideration may be variable in nature or contingent on future events, examples include:

• Discounts• Rebates• Refunds• Credits• Incentives


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INTERNAL CONTROL CONSIDERATIONS

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CONTROL ENVIRONMENT & RISK ASSESSMENT Control Environment

• Demonstrates tone at the top• Exercises oversight

responsibility• Establishes structure,

authority, and responsibility• Maintains an effective internal

audit function• Demonstrates commitment to

competence 22

Risk Assessment• Identifies and mitigates risk• Considers the potential for

fraud• Assesses the risk of meeting

the company’s objectives


INFORMATION AND COMMUNICATION & MONITORING • Information & Communication

• Gathers the appropriate information to make judgments and satisfy disclosure requirements

• Retains data for reliable restatement

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• Monitoring• Selects, develops, and

performs ongoing evaluations of internal control

• Evaluates and communicates deficiencies in internal control in a timely manner


CONTROL ACTIVITIES: STEP #1

• Identifying contracts that meet the criteria under Topic 606• Reassessing arrangements not initially meeting the criteria• Assessing management’s and the customer’s ability to perform• Ensuring payments terms are properly considered• Assessing the collectability criterion• Evaluating whether to combine contracts• Evaluating contract modifications

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CONTROL ACTIVITIES: STEP #2

• Identifying both explicit and implicit performance obligations• Evaluating whether a promised good or service is distinct• Evaluating whether a series of promised goods or services

should be treated as a single performance obligation

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CONTROL ACTIVITIES: STEP #3• Estimating the transaction price, particularly any form of variable

consideration• If valuation experts are utilized, assessing their competence and

objectivity• Evaluating whether any portion of variable consideration should

be constrained• Determining the fair value of noncash consideration• Identifying and measuring whether there is a significant financing

component in the contract• Determining the accounting for consideration payable to a

customer

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CONTROL ACTIVITIES: STEPS #4 AND #5•Step #4

• Estimating standalone selling price, including maximizing observable inputs

• Determining the appropriate transaction price allocation, including variable consideration and discounts 27

• Step #5• Determining whether

performance obligations are satisfied at a point in time or over time

• Measuring progress toward satisfaction of a performance obligation measured over time

• Recognizing revenue only when or as control is transferred to a customer


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IMPLEMENTATION CHALLENGES04


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CONTACT US

COPYRIGHT 2016 –SOFTRAX CORP, VINDICIA, & CBIZ MHM .ALL RIGHTS RESEREVED. 30

Doug Smith Bradford Hale

Jeff Halden

[email protected]

[email protected]

[email protected]

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QUESTIONS


?

CONTACT US

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[email protected]

[email protected]

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THANK YOU


Economy & Finance

Revenue Recognition Challenges on The Subscription based economy