Making Sense Of A New Accounting Standard

Lions and tigers and bears! Oh my!

As if the station repack and ATSC 3.0 weren’t enough of a distraction, media companies are also grappling with a new revenue recognition standard, which, in general, must be adopted in the first quarter of 2018.

The objective of the Financial Accounting Standard Board’s Accounting Standards Codification Topic 606 (ASC 606) Revenue from Contracts with Customers is to make it easier for investors to compare company stocks across industries.

It’s also intended to align U.S. standards with those of international entities. For U.S. companies, the new framework replaces the transaction and industry-specific guidance codified in U.S. GAAP (Generally Accepted Accounting Principles), some of which have been around since the mid-1930s.

For example, under GAAP, accounting statements do not include revenue from advertising time bartered for network programming. An interesting side note here is that this particular guidance was written so long ago that it refers to “compensation from the network.”

FASB has not updated it to reflect today’s world in which network affiliates often pay the network for the privilege of carrying its programming.

In the new world of ASC 606, reporting entities must complete a five-step process to determine when to recognize revenue and how much to recognize at any given time. These steps are:

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 satisfies a performance obligation.

While, at first glance this all seems straightforward, there are two issues that must be managed almost simultaneously.

One involves internal changes and their potential consequences. The second is determining how to apply the five steps to the business of media.

MFM member Mark Callihan, who is an audit partner with KPMG LLP in McLean, Va., does an outstanding job of covering both of these management challenges in an article entitled The Revenue Recognition Quandary, which appears in the May-June issue of The Financial Manager (TFM), MFM’s member magazine.

In addition to changes in the timing of revenue recognition, which can have a direct impact on income statements, Callihan lists the following potential repercussions:

â–  Revisions may be needed to tax planning, covenant compliance and sales incentive plans.

â–  Sales and contracting processes may be reconsidered.

â–  IT systems may need to be updated.

â–  New estimates and judgments will be required.

â–  Accounting processes and internal controls will need to be revised.

â–  Extensive new disclosure will be required.

â–  Entities will need to communicate with stakeholders.

The other challenge is in applying the five steps themselves, particularly steps one through three: identifying the contracts; identifying the performance obligations, and determining the price.

For example, is a network affiliation agreement a contract that would require recognition of revenues or a vendor relationship? In the case of an advertising agreement, is it the insertion order which contains a request for advertising placements that may be pre-empted by the station or cancelled by the buyer, or the individual ad itself that is the contract?

Step two looks at the performance obligation.

The question is whether the promise to the customer is to provide the item or service itself, or to arrange for another party to provide it. Regarding network affiliation agreements Callihan asks, “is the nature of the affiliate’s promise to provide advertising spots or to distribute advertising and other network content through its broadcasting service?”

He also reminds readers that the new standard negates the longstanding revenue recognition exemption for barter. I would add a question about a station or group’s performance obligation under retransmission consent agreements.

In the third step, the entity must determine the transaction price factoring in the value of non-cash items. If the network affiliate concludes that its obligation is to provide advertising availabilities to the network for sale to advertisers, then it would determine the value of the network’s presold advertising in the same way it determines value for non-network barter programming.

If, however, it determines its obligation is limited to distributing pre-existing content, the affiliate will likely recognize a lower transaction price. Similar determinations will need to be made for retransmission consent, ad sales and other agreements.       

As Callihan also points out in his piece, which is currently available on the MFM website, one of the keys is industry consensus. The American Institute of Certified Public Accountants recognized the potential problems inherent in the new standard and assembled a number of industry-specific groups to tackle them. Media were not included. 

The good news is that MFM has convened a couple of different task forces to address the issues above. One of the groups has prepared recommendations for broadcast advertising and retransmission consent. Another is working through the issues for print media. However, there is clearly more work to be done and time is running out.

If you would like to be part of the conversation, I urge you to become active in MFM.As with all such topics, the final answers for each entity are best when they include the recommendations of their auditors and accounting advisors.

That being said, industry consensus will go a long way in both forming those opinions and ensuring that media industry financial statements meet the objectives of ASC 606 – to provide better information for those interested in investing in our industry.

Investors will be best served when the industry comes together on the new standard and is consistent in how it reveals “that man (or in this case, revenues) behind the curtain.”

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at[email protected] and via the association’s LinkedIn, Twitter, or Facebook sites.