The new revenue recognition accounting standard update, ASC 606, issued by the Financial Accounting Standards Board (FASB) has caused significant disruption in the back office. Adoption of the new standard will impact people, policies, processes, and systems. For media and entertainment (M&E) entities that account for revenue under U.S. GAAP, it raises several accounting issues.
In particular, the complex arrangements between entities in the media and entertainment industry and their clients have posed difficult issues when applying ASC 606. Not only has the timing of revenue recognition changed, but entities are now required to exercise more judgment, creating an increase in financial reporting risk.
The additional judgments and estimates to focus on under the new revenue recognition standard for media companies and entertainment companies include accounting for licenses of intellectual property (IP), identifying performance obligations, evaluating whether an entity is a principal or an agent, assessing collectability and measuring non-cash consideration.
Under the standard, the new timing of revenue recognition depends on several different factors. These factors include the nature of an entity’s promise, how contractual restrictions affect the number of performance obligations and whether the contract includes a nonrefundable minimum guarantee.
ASC 606 Influence on Free Trial Periods and Subscriptions
Free trial periods and subscriptions are common in certain M&E arrangements and face the impact of the new standard. M&E entities need to ensure they have appropriate systems, policies, procedures, and internal controls in place to collect and disclose the required information.
Particularly with the emergence of COVID-19, the M&E industry has received more attention as subscriptions to magazines, newspapers, cable, and streaming services have become increasingly popular. More and more individuals are spending their days at home, causing consumer habits to shift. This has caused a huge growth in trials appearing across industries, leading to a significant growth in new subscriptions.
In these instances, a customer may receive a number of “free” months of goods or service at the beginning of an arrangement, before the paid subscription begins, or as a bonus period at the beginning or end of a paid subscription period.
In a survey conducted in May 2020 by Deloitte, the consulting and professional services firm discovered about 80% of U.S. consumers were subscribed to at least one paid streaming video service. This percentage was up from 73% in Deloitte's pre-COVID-19 survey from December 2019 - January 2020 and significantly higher than the 69% shown in Deloitte’s study from 2019, during a noticeable period of subscription fatigue.
Media and Entertainment Entities and Contracts with Customers
Companies looking to apply the ASC 606 revenue recognition standard need features that are able to handle trial scenarios to recognize revenue from contracts with customers (Topic 606). Following the new revenue recognition guidance, revenue is not recognized until an entity determines that a contract with a customer exists.
Once an entity determines that a contract exists, it is required to identify the promises in the contract. Therefore, if the entity has transferred goods/services prior to the existence of a contract, the free goods or services provided during the trial period would generally be accounted for as marketing incentives.
A few key questions that need to be assessed include:
- What is the proper revenue forecast treatment?
o Is the revenue forecast treatment over time or a point in time? What length if over time?
o Should any conditional hold be placed on the revenue forecast, so no revenue is recognized until the condition is satisfied?
o Should the revenue forecast be updated to reflect the satisfaction of a condition? If so, would this be an in-line update or a true-up update?
- What is the proper treatment for the product and service?
o Is the product and service part of a bundle? Does the product or service need to be unbundled from one item to many items?
SOFTRAX Revenue Manager has the product functionality to handle the above scenarios with out-of-the-box, end user controlled, setups and configurations that effectively automate the inspection and processing of these trial scenarios. The intelligence of the application’s logic will inspect these key setups and configurations to properly assess and act.
All the above are fundamental functions and features SOFTRAX Revenue Manager offers to handle these trial scenarios. These functions and features are all controlled by business users, and don’t require coding or customization by a technical team/user. This allows for easy creation and maintenance of these policies within the application to address the ever-changing business requirements.
For more information regarding SOFTRAX’s solutions, contact firstname.lastname@example.org to speak to a dedicated representative, or schedule a live demo for a walkthrough and demonstration of our solutions in real time, tailored to suit your needs.