Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments

Sylvia E. Alicea, Professional Accounting Fellow, Office of the Chief Accountant

Dec. 5, 2016

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.

Introduction

Good morning. I would like to share some observations related to consultations OCA has received on the new revenue standard (Topic 606),[1] including my views on the definition of a "contract" and application of the contract combination guidance. I'd also like to provide a reminder on transition disclosures and an update on the future of Staff Accounting Bulletin (SAB) Topic 13.[2]

Implementation activities

OCA's Accounting Group is organized topically, and we have a nine-person Revenue Team that focuses not only on current GAAP consultations and evaluating our guidance for necessary updates, but also executes on OCA's revenue implementation strategy. I am the current lead of our Revenue Team. Our work is a very collaborative effort. In addition to the observations I provide today, you will also hear from Ruth regarding additional revenue matters.

Our team strategy includes four primary activities. First, we continue to actively monitor implementation efforts, including implementation questions discussed by the TRG and AICPA Industry Task Forces, among others, and we continue to meet with various members of the profession, including accounting firms, registrants and the FASB staff. Our objective is to understand the nature and volume of implementation questions, including areas of potential diversity and the types of judgments being made when resolving those questions. Second, as Wes mentioned in his remarks, with the progression of implementation efforts to company-specific finalization of accounting positions, OCA has begun to provide views on consultations received to date, and we continue to stand ready to consult with registrants, as needed, to advance their implementation efforts. Third, we are curating the results of our active monitoring and consultations in an effort to create institutional knowledge through contemporaneous documentation of our judgments. Fourth, we are collaborating with other divisions and offices to design and deliver training to support the education of the Commission's staff responsible for reviewing and enforcing registrants' financial reporting.

Let's move on to a couple of consultations that OCA has received on the new revenue standard.

New revenue standard — Definition of a "contract"

Some companies use a loss leader pricing strategy in which a good is sold at a price that is intended to "lead" to the subsequent sale of other goods or services. Typically, those subsequent sales will result in higher volumes or greater profits, or perhaps both. This type of business arrangement was the subject of a recent consultation with OCA. One important accounting question for this type of arrangement is — can future anticipated contracts for the subsequent sale of goods or services be considered part of the existing revenue arrangement?

I observe that the definition of a contract in Topic 606[3] encompasses enforceable rights and obligations. While a future contract might appear to be likely or even compelled economically or by regulation, in my view it would be inappropriate to account for a contract before the contract exists with both enforceable rights and obligations.

New revenue standard — contract combination

Next, I'll share some observations related to the contract combination guidance. I observe that the guidance in Topic 606 explicitly limits which contracts should be combined.[4] In the consultation that OCA evaluated, the registrant had two contracts that were entered into at the same time and met some of the criteria for contract combination[5] because they were: (i) negotiated between all parties with a single commercial objective; and (ii) were priced interdependently such that consideration paid under one contract was dependent on the price in the other contract. However, the contracts did not meet the requirement in Topic 606 to be with the same customer or related parties of the customer.[6] Therefore, OCA objected to the registrant's extension of the contract combination guidance beyond those parties.

Reminder about transition disclosures

Some of you may already be aware of the SEC staff announcement[7] at the EITF meeting in September regarding additional qualitative disclosures registrants are expected to provide about the impact that certain recently issued accounting standards (Accounting Standard Updates or "ASUs") will have on a registrant's financial statements when those standards will be adopted in a future period (in accordance with SAB Topic 11.M).[8] Because the staff believes both quantitative and qualitative disclosure about those standards is important to investors, I think the message is worth repeating and I'd like to further expand on it.

Consistent with SAB Topic 11.M, if a registrant does not know or cannot reasonably estimate the impact that adoption is expected to have, then in addition to making a statement to that effect, the registrant should consider making additional qualitative disclosures to assist the reader in assessing the significance of the impact that the ASUs will have when adopted.

In this regard, the SEC staff expects the additional disclosures to include a description of the effect of the accounting policies the registrant expects to apply, if determined, and a comparison to the registrant's current accounting policies. An example of this type of disclosure might include a statement that the registrant expects the timing of revenue recognition to be accelerated because it anticipates that license revenue will be recognized at a point in time, rather than over time, which is its current practice. A registrant should also describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. For example, a registrant might provide a statement that it has completed an initial assessment, but has yet to determine its accounting policy for capitalization of costs to obtain a contract.

While the scope of the recent SEC staff announcement was designed for the new revenue, credit impairment and leases standards (and any related amendments), in my view, the incremental qualitative disclosures would be helpful to investors regardless of whether the registrant applies US GAAP or IFRS.

I'd like to offer a few additional points before moving on to my final topic. First, I believe a registrant should not be reluctant to disclose reasonably estimable quantitative information merely because the ultimate impact of adoption may differ, since that information may be relevant to investors even while lacking complete certainty. Second, I would encourage a registrant to disclose known or reasonably estimable quantitative information even if it's only for a subset of the registrant's arrangements — for example, one product category or revenue stream (accompanied by the appropriate disclosure, of course) — rather than waiting until all of the impacts are known. Third, these disclosures should be consistent with other information provided to the Audit Committee and investors, and they should be subject to effective internal control over financial reporting. As management completes portions of its implementation plan and develops an assessment of the anticipated impact, effective internal control should be designed and implemented to timely identify disclosure content and ensure that appropriately informative disclosure is made.

Update on other SEC staff guidance

Finally, OCA has received a number of questions regarding the future of certain revenue-related SEC staff guidance — in particular, SAB Topic 13.[9] SAB Topic 13 will continue to apply to registrants prior to their adoption of the new revenue standard so it will continue to be relevant until all registrants have completed their transition. New guidance will be provided, as needed. However, when OCA evaluates implementation-related consultations under U.S. GAAP, our starting point is the new revenue standard (and any subsequent amendments) as issued by the Financial Accounting Standards Board (FASB). Therefore, I believe registrants should also apply that model (as opposed to SAB Topic 13) when evaluating their revenue arrangements for adoption of Topic 606.

Conclusion

Thank you for your kind attention. I hope you enjoy the remainder of the conference.