eei-aga spring accounting conference · narrow scope improvements and practical expedients final...

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

[email protected]

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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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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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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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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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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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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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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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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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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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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


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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


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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


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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.

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