1. | “What We Do” - Professional Marketing and Communications Services |
2. | Linking “What We Do” to the Client Arrangements and Addressing the Accounting Literature and our Accounting Policy - Application of the Five Step Model |
A. | A contract is an agreement that creates enforceable rights and obligations (ASC 606-10- 25-20). |
• | The MSA and SOW together represent the client contract and establish the enforceable rights and obligations of the parties. |
• | Fees and the related level of Agency effort are included in the SOW as an appendix to the MSA. |
• | The MSA and SOW are cancelable by either party on 90 days’ notice without penalty and all MSAs provide that the Agency is entitled to all fees for services performed through the cancellation date. The MSA and SOW do not contain cancellation penalties and terminations for convenience, though infrequent, can and do occur. |
• | An SOW can be for short-term projects (90 days or less) or long-term assignments (up to one year). |
• | Every SOW is separately negotiated with the client by the performing Agency and our Agencies execute and perform tens of thousands of SOWs per year. |
• | A staffing plan, which is included in the SOW, translates the SOW into the agreed-upon level of effort by staff function needed to perform the requested services. As with other professional services firms, both the Agency and the client monitor the amount of time incurred against the staffing plan. |
• | The Agency’s rate card is then applied to the forecasted aggregate hours by function from the staffing plan to arrive at the resulting fee. |
• | Some client arrangements include performance incentives that can be both qualitative and quantitative. |
• | In certain markets and on an infrequent basis, commission structures are used in client arrangements. |
B. | Optional Services |
• | A new and distinct SOW is prepared for the new services under the terms and conditions of the MSA and the additional services are priced at the standalone selling price (see Items E and F below). |
• | Optional purchases are therefore treated as a separate contract and not a contract modification for accounting purposes (discussed in item F below). |
C. | Multi Agency Engagements |
D. | Multi Discipline Engagements |
E. | Combining Contracts - ASC 606-10-25-9 |
• | The contracts are negotiated as a package with a single commercial objective. |
• | The consideration to be paid on one contract depends on the price or performance of the other contract. |
• | The goods or services promised in the contracts are a single performance obligation (ASC-606-10-14 through 22). |
• | Each Agency negotiates a separate SOW for its services and the SOW is not negotiated as part of a package with another Agency. |
• | The consideration paid to each Agency is separate and distinct and there are no pricing or performance interdependencies with any other Agency SOW. |
• | The goods and services promised by each Agency are separate performance obligations. In a multi-agency arrangement, each Agency has its own functional discipline that is different from the other performing Agency. |
F. | Contract Modifications - ASC 606-10-25-10 through 13 |
• | The scope of the contract increases because of additional goods and services that are distinct. |
• | The price of the contract increases by an amount that reflects the stand-alone selling prices of the additional goods and services. |
A. | The performance obligations are the promised goods and services in the contract that will be transferred to the client (ASC 606-10-25-16). |
• | The SOW is the agreed-upon level of effort expressed in FTEs and staff classification for the engagement. The promise to the client is the level of effort to provide and integrate the advisory and consulting services. |
B. | For Creative Advertising Services, the integration of the collective effort of the FTEs results in the execution of creative ideas that extend across the client’s marketing organization, brands and products including, incidental production efforts and output that are not distinct in the context of the contract (ASC 606-10-25-21). |
• | The core of a creative assignment is to provide the client with a strategic marketing plan and creative idea that can be used throughout the client’s marketing and sales organization and across all types of media. Our engagements are highly collaborative with the client and the client is kept well-informed of progress-to-date. Therefore, the client is receiving and consuming our services as the SOW is completed. All output produced requires the integration of the Agency’s collective effort (i.e.; the marketing strategy and creative idea). |
• | The SOW is a promise to provide advisory and consulting services at an agreed-upon level of effort by Agency personnel at an agreed-upon rate per hour to accomplish the entire assignment. [***]. |
• | The Agency may or may not be asked to provide advisory and consulting services related to the production of the commercial spots which is performed by third-party production companies. The MSA provides that the Agency will be compensated for the level of effort expended to date in the event of cancellation by the client, [***]. |
C. | Other Considerations - Creative Services |
• | The client is involved throughout the creative process. |
• | [***]. |
• | The client may request Optional Services. Often production coordination services are an Optional Service that may or may not involve the Agency. Agency involvement in Optional Services results in a separate SOW (i.e., a separate contract), including out-of-pocket costs and pass-through costs. Pass-through costs are third-party vendor costs that are pre-approved by the client, coordinated by the Agency, and are required to be billed to the client without mark-up. |
• | The client typically hires the services of a third-party cost consultant to oversee Agency and other third-party vendors (production companies, talent vendors, research companies, etc.). |
D. | For Strategic Media Planning and Buying Services, the incorporation of the collective level of effort of the FTEs results in a comprehensive media plan and the related execution of the plan through the buying process. The Strategic Media Planning and Buying services occur in close proximity throughout the contract period and are not individually distinct or separable in the context of the contract (ASC 606-10-25-21). |
• | Strategic media planning and buying assignments involve the integration of a client’s marketing communications strategy with a media execution strategy designed to optimize its media investment (the money it spends with third-party media suppliers/owners to get its message to the consumer). The planning and buying components are not discrete as the process is dynamic and iterative, and in the case of digital media, the planning and buying can be modified in real time. |
• | Similar to all our arrangements, the SOW is a promise to provide advisory and consulting and media buying execution services for an agreed-upon level of effort by Agency personnel at an established rate per hour to accomplish the entire assignment. At the time the SOW is prepared there isn’t a clear allocation of the client’s media budget. |
• | In some markets, the fee structure in the SOW is based on a commission expressed as a percentage of the client’s total media expenditure. |
• | A media assignment can be short-term (90 days) or long-term (up to one year). For long term assignments the client’s media investment is made in tranches throughout the period and each tranche involves a planning and buying process, or phase, as they occur in close proximity. That is, it is not the case that the planning is done in the early phase and the buying is done in the later phase. |
E. | Other Considerations - Strategic Media Buying Services |
• | Client establishes a rigid process that the Agency must follow prior to executing each media buy. |
• | Estimate of costs for each media buy is made and provided to the client for approval through the use of insertion orders (IOs). |
• | The Agency is acting as an agent for a disclosed principal (the client) in markets that recognize the agency relationship. |
• | In other markets the Agency contracts with media vendors on a “pay when paid” basis, effectively disclosing to the vendor that the client is the principal in the transaction. |
• | The Agency is required to bill the client at vendor cost. |
• | The Agency’s fee for the buying effort is included in the SOW. |
• | When media is bought by the client through an affiliated Agency, the client must agree to a separate or amended SOW that allows for media purchases by an affiliated Agency. The amount to be charged to the client by the affiliated Agency is approved by the client (and the actual cost of the media to the affiliated Agency is not required to be disclosed to the client), resulting in revenue to the affiliated Agency (see Principal vs Agent - Media Buying Services). |
F. | Step 2 - Summary |
• | The entity does not provide a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output for which the client has contracted. In other words, the entity is not using the goods or services as an input to produce or deliver the combined output specified by the client. |
• | The goods or services do not significantly modify or customize another good or service promised in the contract. |
• | The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract. For example, the fact that a client could decide to not purchase the good or service without significantly affecting the other promised goods or services in the contract might indicate that the good or service is not highly dependent on, or highly interrelated with, those other promised goods or services. |
• | Since the unit of account is the SOW, or alternatively, the time and effort to be expended by our staff, the basis for the allocation of the transaction price is the staffing plan (ASC 606-10-25-21). |
• | When using proportional revenue recognition, we effectively allocate the transaction price based on inputs. The level of effort input is equal to the hours incurred. We allocate the transaction price to the performance obligation based on the total projected level of effort by staff function. |
• | In multi-discipline engagements with one SOW, which occurs infrequently, the scope for each service discipline is based on the respective staffing plan and each is treated and accounted for as a separate performance obligation. We allocate the transaction price to each of these performance obligations based on the relative proportion of hours and level of effort reflected in the staffing plan for each service discipline which reflects the relative selling price. |
• | Our engagements are client-specific and highly collaborative and, typically the client receives and consumes the benefits from our performance as the SOW progresses. In addition, we do not create an asset with an alternative use to us, or by other clients of ours and our contracts provide for payment for all services performed to date in the event of cancellation. |
• | In long-term fixed fee arrangements where the fee does not increase or decrease based on actual hours expended, we conclude we have a stand-ready obligation because we provide a constant level of similar services over the term of the contract (ASC 606-10-25-14). Accordingly, we recognize revenue on a straight-line basis (ASC 606-10-55-184 through 186). |
• | For most other long-term contracts and our short-term projects with arrangements where the fee can increase or decrease based on actual hours expended, we recognize revenue by measuring the progress towards completion (proportional performance) using inputs/hours (ASC 606-10-25-31). When we recognize revenue over time, by using the proportional performance revenue recognition approach, we allocate the transaction price to the performance obligation based on the level of effort reflected in the staffing plan, adjusted for actual hours worked and hours expected to complete. Absent unusual terms, it effectively has the same result as if we identified separate performance obligations within the SOW (hours by staff function), rather than treating each SOW as the performance obligation. |
• | While we have the obligation to provide certain services, we do not have the right to payment for services unless the client authorizes the individual media purchases by approving the insertion order and until it is probable that the media will be run, including when it is not subject to cancellation by the client or the vendor. |
• | ASC 606-10-25-1(e) includes a probable assessment of collectability as one of the criteria that must be met to conclude that the contract with the customer is valid and enforceable. |
• | In a commission arrangement, collectability is only certain when the media has run, or is probable of being run because the cancellation period has lapsed; therefore, the Agency does not have an enforceable right to payment until that point. |
• | In addition, when applying the constraint on revenue provision (ASC 606-10- 32-12), we are not permitted to recognize revenue until it is probable that the media will be run, including when it is not subject to cancellation by the client or the vendor, because that is the point in time when it will not result in a significant reversal of cumulative revenue recognized. |
• | In certain commission-based contracts, the commission percentage we earn is tiered or scaled based on the total media expenditures by the client over the life of the contract. Although clients provide an estimate of their expected media expenditures over the term of the contract so that appropriate resources can be assigned, there is no contractual commitment made by the client that requires all or any of the media expenditure estimates to be met. In circumstances where the commission scale is applied on a cumulative basis over the contract period, we treat this as variable consideration and in accordance with ASC 606-10-32-5, we estimate the probable revenue amount based on the final tier or scale expected to be achieved during the contract period. And to determine the transaction price we apply the expected final percentage to each discrete media buy and revenue is recognized when it is probable that the media will be run, including when it is not subject to cancellation by the client or the vendor. |
3. | Linking “What We Do” to the Client Arrangement and Addressing the Accounting Literature and our Accounting Policy - Principal vs Agent |
• | To determine the nature of the promise, the company should (ASC 606-10-55-36A): |
• | Identify the goods and services which could be provided by another party, and |
• | Assess whether it controls (ASC 606-10-25-25) each good or service before they are transferred to the customer. |
• | Primary indicators of control are (ASC 606-10-55-39): |
• | The company is responsible for fulfilling the promise to provide the specified good or service. |
• | The company has inventory risk before the good or service is transferred to the customer. |
• | The company has discretion in establishing the price for the good or service. Establishing the price that the customer pays for the specified good or service may indicate that the entity can direct the use of that good or service and obtain substantially all the remaining benefits. However, an agent can have discretion in establishing prices in some cases. For example, an agent may have some flexibility in setting prices to generate additional revenue from its service of arranging for goods or services to be provided by other parties to customers. |
• | The initial SOW may or may not include FTEs in the staffing plan for us to perform coordination services related to the third-party effort. However, the decision to proceed with the production of a commercial and incur the associated costs, is made by the client at a later date and reflected in a separate SOW. |
• | If the client chooses to proceed, the production and delivery of the commercial/advertisement is covered by a separate SOW and treated as a separate contract and performance obligation. Our Agency will then provide coordination services to the client throughout the third-party production process. |
• | The client requires a rigid process that requires that we present bids from third-party production companies to the client for approval of the winning bidder. |
• | Once production begins, all costs are required to be billed to the client at the vendor cost without markup by the Agency. |
• | All critical decisions related to the vendor’s efforts must involve the client and the client’s cost consultant and ultimately, must be approved by the client. |
• | Production of the commercial/advertisement is the responsibility of the third-party production company and the client. We do not control the production services provided by the third-party, nor do we direct the creative process for the commercial that is delivered to the client. The director controls the creative process and the third-party production company hires the director. |
• | Our involvement in the process is to provide advice and consultation on consistency between the content of the commercial and the creative marketing idea and strategy, as well as coordination services as a consultant. In the separate commercial production SOW, the client specifies the amount of any incremental out-of-pocket costs, such as travel costs incurred by our Agency that they will reimburse. |
• | A portion of the Agency fee may be applied to production coordination services if required, as well as any creative support services, if any are needed. |
• | The creative idea is that of the Agency, but the intellectual property (IP) is owned by the client. The commercial is directed and delivered by the third-party production company. |
• | Our Agencies do not have the capability to produce a commercial without third-party production companies. This is not a line of business we are in, as we do not own large scale (Tier 1) production or post-production facilities. |
• | An asset of another entity that it then transfers to the customer. The third-party production company does not transfer the asset to the Agency. |
• | The right to a service to be provided by the other party, which the entity can direct the other party to provide to the customer. The Agency does not direct the activities of the third-party production company, it provides advice and consultation. |
• | A good or service from another entity that it then combines with other goods or services in providing the specified good or service to the customer. The Agency does not combine the third-party production company services with its services. The Agency provides limited services to the third-party production company. |
• | The fulfillment and acceptability of the services is the responsibility of the production company, not our Agency. |
• | Our Agency does not have general inventory risk as it does not purchase, or commit to purchase, third-party production services to produce the commercial prior to having an agreement in place with the client. |
• | Our Agency does not have discretion in establishing the price for the specified goods or services. The price of the production services is determined by the production company and the price is approved by the client. |
• | In media buying, we arrange, on behalf of the client, to purchase media from media vendors in all applicable media channels. |
• | All insertion orders (purchase orders) to buy media require client approval and are cancelable by the client until at or around the time the media is scheduled to run. |
• | We do not have sole discretion regarding the media that is purchased. |
• | With respect to the media buying process, we act as a conduit for the transaction. We do not take control of the media vendor’s asset (ASC 606-10-8-37A). The client approves all media purchases which are required to be billed to them at vendor prices without any markup. |
• | Our agreements with the media vendors stipulate that we are not required to pay the vendor until and to the extent we receive payment from the client - “pay when paid”. This occurs in two ways: |
• | In the U.S. and other markets, we contract for the media as an agent for a disclosed principal. |
• | In other markets where the agency relationship in not legally recognized, a “pay when paid” provision is included in the arrangement with the media vendor. |
• | We considered ASC 606-10-25-25 and concluded that we do not control the media provided by the third-party media vendor, nor do we have sole discretion regarding the media that is purchased. Additionally, the media vendor or the client can pre-empt or cancel the media buy prior to media being run. We do not combine our services with the media vendor as our services are separate and distinct from their services (ASC 606-10-55-37A). |
• | In addition, applying the criteria in ASC 606-10-55-39, we concluded we are acting as an agent with respect to the media purchases because: |
• | Our Agency does not control the media vendor; |
• | The fulfillment and acceptability of the services is the responsibility of the media vendor, not our Agency; |
• | Our Agency does not have general inventory risk as it does not purchase, or commit to purchase, media prior to having an agreement in place with the client; and |
• | Our Agency does not have discretion in establishing the price for the specified goods or services because the price of the media is determined by the media vendor and the price is approved by the client. |