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Revenue Recognition Control Tools

Revenue Recognition Control Tools. May 2010. Agenda. Revenue Recognition Controls - Overview CSA - Basics CSA - Fields Interpretation CSA - Revenue Decision Trees CSA - Revenue Upload CDR – Client Document Repository RRT - Revenue Reconciliation Template Available reports

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Revenue Recognition Control Tools

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  1. Revenue Recognition Control Tools May 2010

  2. Agenda • Revenue Recognition Controls - Overview • CSA - Basics • CSA - Fields Interpretation • CSA - Revenue Decision Trees • CSA - Revenue Upload • CDR – Client Document Repository • RRT - Revenue Reconciliation Template • Available reports • Summary of Errors • Enhancements 2 2

  3. Revenue Recognition Controls – Overview Revenue Recognition Controls are a critical component of our overall control environment in ensuring the accurate recording and reporting of the financial results of our business To that end, Revenue Recognition Control (RRC) tools have been developed with a focus on Agency-level controls, supported by Regional, Network, and Corporate management monitoring controls: Client Services Arrangement Form (CSA) Revenue Reconciliation Form (RRT) https://frc.interpublic.com Client Document Repository (CDR) http://e-imaging.interpublic.com/Contracts 3 3

  4. CSA BASICS IPG EMEA RMC 4 4 4

  5. Purpose of Revenue Recognition Tools: CSA CSAs have been designed to capture and maintain critical accounting related information about IPG agreements with clients (such as contracts, purchase orders, signed estimates, etc.) and the revenue streams associated with them to facilitate the consistent selection and application of the appropriate revenue recognition method(s). The tool also facilitates and documents the appropriate levels of review and approval. 5 5

  6. CSA Basics What information is captured in the CSAs? CSAs contain various information including: Client and account executive name; Description of services to be provided and the expected type of revenue streams; Form of persuasive evidence; Contract value and term of the arrangement; Existence of continuation clauses or termination provisions; and Sign-offs 6 6

  7. CSA Basics When to create a CSA? Completion of a CSA is required for all client agreements NOTE: All revenue earned by an agency for services provided shall be included in a CSA for each arrangement regardless whether services are provided to clients who are also vendors and affiliates CSAs are typically single/standalone but may be bundled (when certain criteria are met) 7 7

  8. CSA Basics When to edit a CSA After CSAs have been created, they should be periodically reviewed in order to make corrections or update information for changes regarding the arrangement However, updates should be made when changes requiring modification to the CSA take place or when the information becomes available Examples of reasons for modifying CSAs: Addition of new services (new revenue stream) or change in contract value Changes in contract terms and conditions or scope of work Changes in the form or status of persuasive evidence, for example The receipt of a formal signed contract replacing an interim agreement letter Notification of contract termination Annually RMC contract compliance sends an email to remind users to review CSAs for possible required updates 8 8

  9. CSA Basics When to edit a CSA (cont’d) Corporate Controllers issued new guidelines in late 2009 that fee changes less than 5% of total contract value do not require timely updates to the CSA Update is required if incremental fee results in contract value reaching threshold requiring additional level of review Validation errors will result when attempting to upload revenue in excess of CSA contract value NEW ENHANCEMENT (April CSAs) : New validation logic: Uploaded revenue can exceed contract value up to 5% before validation error occurs Edits to contract value (regardless of whether they are greater or less than 5% of contract value) do not require a restart of workflow Contract value increases requiring the next level of review will automatically be routed to the next level for sign off However, changes to form of persuasive evidence will still require a restart of workflow CSA User Guide and SP&P 210 will also be updated as necessary NOTE: A significant number of deficiencies were noted for lack of updating the CSA for changes – primarily relating to additional revenue streams, changes in contract value and the form of persuasive evidence. 9 9

  10. CSA Basics Role of the reviewer Ensures information included on the CSA document is complete and accurate based on the persuasive evidence provided CSAs need to be reviewed when document status is not “final” Reviewers should utilize available management and ad-hoc reports to assist them in their review (i.e. to identify CSAs with overridden revenue methodologies, CSAs not in “final” status, etc.) Ensures that adequate persuasive evidence exists Ensures revenue methodology selected is in accordance with IPG Policy Signing the CSA document is confirmation of the above 10 10

  11. CSA FIELD INTERPRETATION IPG EMEA RMC 11 11 11

  12. CSAs are organized into the following 10 Sections: 1. Administration 2. CSA Information 3. IPG Role 4. Persuasive Evidence 5. Fixed or Determinable Price 6. Collectability 7. Revenue Streams 8. Comments 9. Revenue Upload- Revenue Stream Balances 10. Sign Off CSA Fields Interpretation Guidance 12 12

  13. Section 2: CSA Information CSA ID Master CSA ID CSA Description Effective Date Is there a specific End Date? Are separate fee arrangements required? Fee Arrangement End date Discontinue after December of this year? CSA Fields Interpretation Guidance 13 13

  14. Effective date: Date when the client arrangement becomes in force It is not necessarily the date the agreement was signed! Effective Date of the CSA remains the same for framework agreements even when fees and scope are negotiated annually The question “Are separate fee arrangements required?” should be answered YES. It is recommended that additional commentary be added in connection with the receipt of additional forms of PE (such as Local Participation Agreements; Local Addendum; WO’s; Annual SOW and fee arrangements; PO’s; etc.) under Section 4: Persuasive Evidence. The relevant additional PE and the framework contract should be uploaded into CDR In a bundled CSA, the Effective Date should be completed with the first day of the month when the CSA is initially created CSA Fields Interpretation Guidance 14 14

  15. End Date: The end date is when the client arrangement term expires It will normally be found in the term & termination clauses in contracts If there is no end date or term indicated and nature of services is ongoing, it implies it is an evergreen contract All non-evergreen agreements require an end date NEW ENHANCEMENT : (April) CSA signoffs will remain on the document for 3 months after the specified end date or fee arrangement end date. If there is no change to the document, and it is rolled into the 4th month, all signoffs will be removed CSAs that have used an end date of 12/31/2009 or prior will no longer have signoffs on the April documents (Proposed) Create a report that would identify CSAs where both “End Date” and “Fee arrangement end date” are blank CSA Fields Interpretation Guidance 15 15

  16. End Date (cont’d): “Revenue Recognition and Contracts Anniversary Report” can currently be reviewed to identify CSAs with expired end dates as well as those expected to expire in next 90 days (in Management Reports section of tool) NEW ENHANCEMENT: (Proposed) Add “Fee Arrangement End Date” to the report CSA Fields Interpretation Guidance 16 16

  17. Are separate fee arrangements required? In those cases where the fee is not included in the general framework arrangement or is not valid for the entire period of the arrangement, the answer to this question should be “YES”. This is common in the following situations: Framework contracts Evergreen contracts or contracts beyond 1 year duration Note: Deficiencies were noted where the question was answered NO due to the existence of a continuation clause although annual fee discussions were expected CSA Fields Interpretation Guidance 17 17

  18. Discontinue after December of this year? This refers to the ability to stop the roll forward of the CSA to the next calendar year This should be answered “YES” when there is a specified end date within that calendar year In multiple year contracts it should be answered “NO” until the final year of the contract CSA should be updated to select “YES” if contract or services have been terminated early NEW ENHANCEMENT: (April) As noted previously if a CSA is rolled 4 months past the specified “End Date” or “Fee arrangement End date” all sign offs will be removed from the document. CSA Fields Interpretation Guidance 18 18 18

  19. Discontinue after December of this year? (cont’d) NEW ENHANCEMENT (cont’d): (Proposed) Considering validation logic that would prevent ALL CSAs from rolling into 2011 Due to the number of enhancements during 2010 to ensure all CSAs are the most recent version (Proposed) Deleting the question “Discontinue after December of this year” as it is no longer needed with the question “No future revenues expected” in Section 10 as well as the above (Proposed) Enhancement NOTE: A number of deficiencies were noted in connection with rolling over CSAs inappropriately; CSA question answered incorrectly; as well as rolling over CSA with outdated decision trees that documented wrong revenue recognition method CSA Fields Interpretation Guidance 19 19 19

  20. Evergreen contracts These are contracts with no End Date In most cases the general terms and conditions will continue indefinitely but fees and scope of work need to be negotiated annually This should not be confused with an “Evergreen/Continuation” clause which gives the agency the ability to continue to bill the client at the prior year rate until such time as a new fee is negotiated Need to look closely at language to assess whether revenue can continue to be recognized CSA Fields Interpretation Guidance 20 20 20

  21. Case: 1 Contract reads: “The contract will become effective (either earlier or later) when it is fully signed by Client and Agency”. “The contract expires on December 31, 2011, unless terminated earlier by either party”. “Client will pay Agency 8% commission on net media spend for the provision of media services as described under clause 5” Note: Contract is signed by the agency on December 1, 2009 and by the client on January 1, 2010. QUESTIONS What is the effective date? Is the contract evergreen? Is there a termination date? Do we need a separate annual fee arrangement? Will it discontinue after December this year? 21 21

  22. Case 1 22 22

  23. Section 2: CSA Information – (cont’d) (i) Client Name Group Name / Additional Client Detail Ultimate Parent Name Services To Be Provided Primary Secondary Other Is this abundled CSA? CSA Fields Interpretation Guidance 23 23 23

  24. “Bundled” CSA Generally, jobs can be “bundled” together as a single CSA if the following criteria is met: All jobs have appropriate Persuasive Evidence as well as the following: Individual jobs have a total value of less than $250,000 and All jobs are for the same client (and each job has a separate arrangement / project statement)or The jobs are for different clients but all jobs use the same revenue recognition method In situations when an agency has a large number of small Jobs that are not covered by a “master services agreement” or “framework contract”,then these Jobs can be combined (“bundled”) together into one or more bundled CSAs Agreements for which a revenue stream will be overridden should not be included in a ‘bundle’ with agreements where the revenue stream will not be overridden (i.e. a PP contract overridden to SL should not be bundled with agreements that SL is valid without an override) CSA Fields Interpretation Guidance 24 24

  25. “Bundled” CSA (cont´d.) Bundled CSAs have too often become a dumping ground to meet “compliance” with CSA requirements without considering the appropriateness of the bundle NEW ENHANCEMENT: (Proposed) The aggregate contract values be subjected to the threshold reviews by Regional, Network and Corporate management, as appropriate (i.e. delete “bundle” question) (Proposed) Embedding an excel template to track each agreement in the bundle The template will include the “key” questions for revenue recognition The questions will need to answered when an agreement is added to the bundle as well as each quarter NOTE: A number of deficiencies were noted for improper bundling primarily for values in excess of $250,000 and different clients with different revenue recognition methods CSA Fields Interpretation Guidance 25 25

  26. Creation of a “Bundled” CSA Created in the same manner as other CSAs with the following exceptions: The field, Effective Date, will be the first day of the month the CSA is initially created Answer to the question, “Is this a bundled CSA?” is YES The fields regarding the appropriate signatures of the arrangement in Section 4, are left blank Note: These fields are disabled when there is a “YES” to question “Is this a bundled CSA?” The field, Contract Value, in Section 5 should be completed with an estimate The level of review required currently remains at the local controller level CSA Fields Interpretation Guidance 26 26

  27. Case: 2 Contract reads “This Contract is effective on January 1, 2010 and shall remain in force until terminated by any party. This Contract sets up the general work conditions between the parties. For each of the Services listed on Annex I the parties will agree upon a separate Project Agreement (PA) for which the general conditions of this Contract are applicable. If any terms of this Contract are in conflict with any terms of the specific PA, the terms of this Contract shall govern, unless explicitly set forth otherwise in the specific Project Agreement”. Note: Client and Agency sign a PA for each of the services and each PA is below 250K USD, the sum of all PAs are over 250KUSD . All PAs are covered by the terms and conditions of the Contract. QUESTIONS Is this a Bundled CSA? 27 27

  28. Case 2 28

  29. Section 2: CSA Information – (cont’d) (ii) Is there an Evergreen Clause and Continuation Clause that allows you to recognize revenue? Is proof of acceptance required? Form of Evidence Is proof of delivery required? Form of Evidence: April enhancement: Are there significant deliverables noted in the contract? Is there a reconciliation or periodic reporting requirement? April enhancement: The response to this question will be compared to decision tree to ensure consistency Is there a requirement for periodic reconciliation or periodic reporting of hours? Is there a true up or settlement requirement? April enhancement: The response to this question will be compared to decision tree to ensure consistency Needs to be an independent question (not a drop down based on previous question) Is this a requirement for information purposes only? April enhancement: This question has been deleted CSA Fields Interpretation Guidance 29 29

  30. Section 2: CSA Information – (cont’d) (ii) Is there a termination clause indicating the agency is entitled to a portion of the revenue? Or does local law support this agency claim? Proposed: Rewording to read “Does the agreement contain a termination clause?” (Y/N) If Yes: Is revenue earned based on days past? (Y/N) If No: Is revenue earned based on hours worked? (Y/N) Validate the answer to these questions to the answers in the decision trees for Fee based PP and Fee based SL CSA Fields Interpretation Guidance 30 30

  31. Section 2: CSA Information CSA Fields Interpretation Guidance Section 2: CSA Information 31 31

  32. Evergreen & Continuation clause An Evergreen or Continuation Clause is a clause in contracts longer than a year that indicates that the current period’s fee and/or billing can continue into the future or until such time that a new fee is negotiated An Evergreen Clause is NOT an Evergreen Contract but may be included in one The answer should be YESforEvergreen Contracts (indefinite period) or multiple year contracts where the compensation scheme is settled for the entire life of the agreement (e.g. Commission Revenue) NEW ENHANCEMENT: (April) The question will read “Is there a Continuation Clause?” If YES a TEXT BOX will be available to include the key terms of the clause from the contract. The clause will need to interpreted as to whether revenue recognition is appropriate CSA Fields Interpretation Guidance 32 32

  33. Evergreen & Continuation clause (cont’d) Revenue can generally continue to be recognized for agreements where the fees need to be negotiated annually BUT the continuation clause indicates that although a new fee is being negotiated, thefee has a minimum guarantee or that the subsequent period compensation will not be less than the previous compensation Contracts with continuation clauses should be discussed with the Regional Controller, Network Controllers and/or IPG Chief Accountant to determine whether revenue can be recognized CSA Fields Interpretation Guidance 33 33

  34. Is proof of acceptance required? Contractual clauses that require a formal ‘client acceptance’ of our services are presumed to be of such importance to the client that the Agency should defer revenue until the client acceptance is received Ability to invoice client may be contingent on acceptance of our services / deliverables Examples: “Client is required to sign off on each individual deliverable listed in the statement of work.” SUBSTANTIVE “Client shall not be required to pay any fees until client’s acceptance of such services or deliverables.” SUBSTANTIVE “Client will accept or reject each deliverable within 5 business days of delivery.” SUBSTANTIVE “Client has the right to review and approve the website to assure that all deliverables satisfactorily meet the requirements of client for the website.” NONSUBSTANTIVE CSA Fields Interpretation Guidance 34

  35. CSA Fields Interpretation Guidance NEW ENHANCEMENT: (April) The question will read:“Does the agreement contain language indicating client acceptance of deliverables?” If YES, a new question asks: “Is acceptance substantive?” YES – a text box will be available to describe form of acceptance client will provide NO – a text box will be available to describe why we have concluded it is not substantive The response to this question will be compared to the decision tree to ensure consistency in answers. If different, a validation error will result. 35

  36. CSA Fields Interpretation Guidance Example of Acceptance: “Any and all references to “Acceptance of Deliverables” as noted in Section 5.3 of the Master Vendor Agreement and as further referred to in the individual Statements of Work refer solely to the approval of deliverables in conjunction with the ordinary conduct of business.  As part of the ordinary conduct of business, approval of deliverables is performed throughout the creative, production and execution processes and is not required to be formally documented.    As is stated in the Master Vendor Agreement, “if vendor fails to correct any deliverables within ten (10) business days after receiving notice of correction, Client, at its discretion may either reject the deliverables or work with Vendor to reach a mutually acceptable resolution.” This statement is purposely not tied to the payment of Agency fees.

  37. Section 4 : Persuasive Evidence Form of Agreement/Persuasive Evidence- CDR & Attachments Is Evidence Written? Explain how client relationship is supported Have appropriate signatures been obtained for this agreement ? CSA Fields Interpretation Guidance 37 37

  38. Section 4 : Persuasive Evidence CSA Fields Interpretation Guidance 38 38

  39. Section 4 : Persuasive Evidence Is Persuasive Evidence Written? Answer should be YES if the agency has an appropriate type of written PE that supports revenue recognition (such as a contract, interim agreement, signed Cost Estimate (CE), PO’s, emails) based on the circumstances and customary business practice with that client In the rare occasion the answer is NO, then this CSA is listed in the Management Report “Revenue Recognized Without Written Evidence” and needs to be reviewed and approved by Regional Controller’s team CSA Fields Interpretation Guidance 39 39

  40. Section 4 : Persuasive Evidence NEW ENHANCEMENT: (Proposed) Re-order questions in Section 4 to first ask “Is form of PE written” “NO” results in a validation error “YES” results in question: “Is form of PE final?“ (Y/N) “Yes”: Select form from drop down box “No” : “Is this an interim agreement?” (Y/N) “YES”: Select form of agreement from drop down box Note: Deficiencies were noted where persuasive evidence obtained was not sufficient – revenue recognized without acceptable PE; wrong type of PE documented in CSA; fees not fixed in interim arrangement; recognized revenue based on POs however still negotiating final contract CSA Fields Interpretation Guidance 40 40

  41. Section 5 : Fixed or determinable Price Contract Value Agency External/Shared revenue Deferred revenue Does the agreement contain a guarantee or other commitment which may affect the earnings? How is the Price Fixed or Determinable Parties signatures CSA Fields Interpretation Guidance 41 41

  42. Section 5 : Fixed or determinable Price CSA Fields Interpretation Guidance 42 42

  43. Contract Value Contract value should never be left blank or marked “zero”. Should enter the annual revenue per client arrangement or the best estimate available In the case of multi-year contracts, the contract value is for the entire period (per client arrangement or best estimate) Section 5: Contract value + Shared revenue + Deferred revenue must be equal or higher than the amount in Section 9: Fee based revenue + Commission based revenue + Studio + Client incentive/bonus + Deferred, otherwise a validation error appears Should the agreed annual revenue or the best estimate change during the year the Contract Value needs to be amended On Intercompany agreements if the Lead Agency has information for the total Contract Value, they should report that amount  If not, the lead agency should report only its portion The affiliates should report only their portion of revenue in any case CSA Fields Interpretation Guidance 43 43

  44. Deferred revenue The Deferred Revenue box should be used to identify the amount of prior year contract revenuethat has been carried over to the current year as a result of being deferred This box represents the balance of deferred revenue as of December 31st of the previous year related to the particular client service arrangement The amount deferred from the prior year should remain fixed in the Deferred Revenue box in Section 5during the whole current year and the fact that the revenue has been recognized throughout the current year is reflected only in the Section 9: Revenue Stream Balances (reducing the amount of deferred revenue in the Balance Sheet Part and at the same time recording the respective revenue in the P&L Part of this Section) The sum of Contract Value and Deferred revenue must exceed or equal the Actual revenue recognized in the Section 9 Note: Improper use of Deferred Revenue Box of the CSA triggers a validation error CSA Fields Interpretation Guidance 44 44

  45. Does the agreement contain a guarantee or other commitment which may affect the timing of revenue? A question has been added to Section 5 of the CSA form as follows: “Does the agreement contain a guarantee or commitment which the agency is contractually required to deliver to the client such as a price savings guarantee, Target Audience Rating Points (TARP), other Key Performance Indicators (KPIs), or other qualitative or quantitative commitment which may affect the earnings of the base fee or base commission?” The following review and sign offs are required when applicable: ≥ USD 500,000 – Agency’s Network Controller’s Group and Regional Controller’s Group ≥ USD 1,000,000 – Corporate Controller or Chief Accountant CSA Fields Interpretation Guidance 45 45

  46. Revenue Streams • Section 7: Revenue Streams • Revenue recognition types in a CSA • Decision trees: question and answers for each Revenue Recognition Accounting Methodology. • Override of a revenue stream • NEW ENHANCEMENT: • (April) Certain responses in the Fee Based - SL and Fee Based - PP trees will be validated against responses in Section 2 • (Proposed) Adding a new decision tree which would focus on PP – output basis • (Proposed) Deleting / renaming / reworking the Milestone decision tree 46 46 46

  47. Revenue Streams Section 7: Revenue Streams 47 47 47

  48. Revenue types Additional revenue stream as a result of additional work To add a Revenue stream in Section 7 the user has to selectfrom the drop down menuone or more revenuestreams and then respond to a set of questions about the arrangement with the client that are specific to that revenue type The objective is to validate the selection of the Revenue stream or determine that a different revenue type would be more appropriate Note that at least one revenue stream needs to be confirmed or overridden to validate a CSA Exception: If the additional/new revenue stream will result in total revenues of 5% or less of the current contract value, documentation supporting the revenue method that is being followed may be maintained outside the CSA tool. These revenue streams should be closely monitored to ensure that the amount does not exceed the 5% threshold. If the amount exceeds the 5% threshold, the CSA document must be revised to include the additional revenue stream(s) 48 48 48

  49. Override Decision Trees • Guidance (advice about revenue stream to select) • Override Results (when a CSA can be overridden) • Rationale for Override (explanation provided) • Management Report in the FRC main page 49 49 49

  50. Override Decision Trees 50 50 50

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