FASB casts a wide net. FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”), the revenue-recognition standard modified by the Financial Accounting Standards Board for use beginning in 2018, requires reporting entities to make and disclose numerous important judgments and estimates on revenue. The SEC staff has issued some 400 comments on the first-quarter 2018 financial statements submitted by calendar-year public companies. Accounting professionals Bailey Walsh, Eric Knachel, and Rob Moynihan evaluated the comments for useful trends and notable themes. They divide the comments into four general categories: (1) identifying performance obligations; (2) determining transaction prices; (3) allocating transaction prices; and (4) identifying progress measures.
Go beyond simple identification. SEC staff generally seeks more disclosure of the judgments reporting entities made while identifying their performance obligations. In the first category of comment, the staff frequently asks if the identified obligations were appropriate. For example, the comments question whether certain promises to customers constituted a single performance obligation or separate ones. Those in question were promises to provide maintenance, customer support, and warranties, the authors note, as well as to provide more than one good or service.
Show more than the bare bones of pricing. The authors’ second general category of comments covers how the reporting entity had set a deal price. The SEC staff asks for more information on how—and to what degree—prices included variable consideration, whether this consideration was constrained, what judgments went into ascertaining the constraint, and when the constraint would be eliminated. A third category—comments on allocating a deal price—seek more disclosure to indicate which performance obligations were actually a series and to show the system for allocating consideration to each discrete good or service within a series. The fourth category is comments on identifying measures of progress, reminding reporting entities that they must reveal their methods for recognizing revenue and explain why their methods accurately describe their transfers of goods and services.
Set forth performance obligations. Some staff comments address how companies made their disclosures for the new quantitative or qualitative requirements in ASC 606. The timing for revenue recognition, for example, depends on whether the company fulfilled an obligation at a particular moment in time (e.g., at shipping, at delivery, upon completion of services rendered) or over time. Reporting entities had to explain if and how they decided their contracts lacked a major financing component and to disclose if—as ASC 606 allows—they opted not to recognize such a component when no more than one year had elapsed between transferring goods or services and receiving payment. The authors also highlight comments on disclosure of the nature of goods or services to be transferred and any agreements to serve as agent for another party’s transfers.
Breakdown of contract costs, revenue, and balances. Other areas covered in staff comments include contract costs, with requests for more disclosure on which method the company chose for amortizing the incremental costs of obtaining a contract and on whether the period of amortization and that of the contract’s benefit to the company were correlated. The authors cite comments on the adequacy of the categories in which companies presented disaggregated revenue data, particularly whether the categories were suitable in light of their business models and were showing how economic factors impacted their revenue and cash flow. The staff requested more information on how reporters had derived contract balances and when they anticipated recognizing sums they had recorded as deferred revenue.
Abstracted from: The New Revenue Standard—A Look At SEC Feedback In Year 1
By: Bailey Walsh, Eric Knachel, and Rob Moynihan
Deloitte & Touche LLP
Vol. 26, No. 4, Pgs. 1-13