SEC Comments Reflect Registrants’ Efforts to Implement ASC 606
Introduction
Calendar-year-end public business entities (PBEs) adopted the FASB’s new revenue standard
(ASC 6061) in the first quarter of 2018.2 While some companies made wholesale changes
to their financial statements, the effect of the new requirements was less significant for
others. However, all entities were affected by the standard’s new and modified quantitative
and qualitative disclosure guidance, which significantly increased the amount of information
disclosed about revenue activities and related transactions.
This Heads Up (1) provides a brief overview of the disclosure requirements for PBEs under
the new revenue standard, (2) highlights some key themes regarding the application of ASC
606 (related to accounting and disclosure requirements) that we noted in our review of
approximately 100 SEC staff comments issued to date, and (3) presents examples of those
comments. Entities may benefit from evaluating the trends we have observed in our review.
For a comprehensive discussion of the new revenue standard, see Deloitte’s A Roadmap to
Applying the New Revenue Recognition Standard (the “Revenue Roadmap”). Also see Deloitte’s
July 11, 2018, Heads Up for a more detailed discussion of the disclosure requirements under
the new revenue standard.
Key Takeaways
- Some notable themes identified through our review of SEC comments are:
- The disclosure of significant judgments, including the identification of performance obligations, the determination and allocation of the transaction price, and the identification of the measure of progress.
- The required disclosures related to performance obligations (e.g., the timing of revenue recognition and the principal-versus-agent analysis).
- The disclosures of the conclusions to capitalize contract costs and the related method of amortization.
Such themes represented, respectively, approximately 35 percent, 20 percent, and 15 percent of the total publicly available ASC 606 comments that we reviewed. - In many instances, though the written comments specifically inquired about disclosures (and requested more of them), we observed that the underlying reason for the comments was that the accounting position taken by the registrants may not have been clear to the staff upon review of the disclosures provided, or it may have been considered potentially inappropriate.
- Under ASC 605,3 common subjects of focus of the SEC staff within filing reviews included: (1) disclosures, (2) multiple element arrangements, (3) principal-versusagent considerations, and (4) revenue recognition for long-term construction-type and production-type contracts (see Deloitte’s SEC Comment Letters — Including Industry Insights). Although the terminology and guidance for these topics have changed as a result of ASC 606, the staff appears to be focusing on similar types of issues under the new revenue standard.
Significant Judgments
Disclosure Requirements
There are many significant judgments and estimates that entities must make and disclose
when they adopt the new revenue standard. ASC 606-10-50-17 through 50-20 state the
following:
- “An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in [ASC 606] that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following:
- The timing of satisfaction of performance obligations (see paragraphs 606-10-50-18 through 50-19)
- The transaction price and the amounts allocated to performance obligations (see paragraph 606-10-50-20).”
- “For performance obligations that an entity satisfies over time, an entity shall disclose both of the following:
- The methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied)
- An explanation of why the methods used provide a faithful depiction of the transfer of goods or services.”
- “For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.”
- “An entity shall disclose information about the methods, inputs, and assumptions used for all of the following:
- Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring noncash consideration
- Assessing whether an estimate of variable consideration is constrained
- Allocating the transaction price, including estimating standalone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable)
- Measuring obligations for returns, refunds, and other similar obligations.”
Feedback From the SEC
At the 13th Annual Life Sciences Accounting & Reporting Congress, held on March 21,
2017, SEC Chief Accountant Wesley Bricker stated that because no two arrangements are
identical, preparers should go beyond benchmarking to their peers’ accounting policies to
fully understand each underlying transaction so that they can apply the principles of ASC 606.
Further, he noted that preparers need to identify the pertinent facts and related judgments
that must be disclosed under the new revenue standard.
In a manner consistent with Mr. Bricker’s comments, the SEC staff appears to be focusing
on disclosures of significant judgments. To date, it appears that more than 35 percent
of the publicly available ASC 606 SEC staff comments relate to disclosures of significant
judgments. These comments can be broken into the following four broad categories,
which will be discussed in the sections below: (1) identification of performance obligations,
(2) determination of the transaction price, (3) allocation of the transaction price, and (4)
identification of a measure of progress.
Identification of Performance Obligations
Many of the SEC staff’s comments on significant judgments relate to the identification of
performance obligations. These comments include requests for additional disclosure of
the significant judgments made in the identification of performance obligations and often
question the appropriateness of the identified performance obligations. For example, in at
least one case, the staff questioned whether maintenance, support, and warranty services
represented a single performance obligation. In addition, we observed that the staff has
focused on contracts with promises to provide multiple goods and services to a customer and
has questioned the conclusion of whether such goods and services are distinct performance
obligations in accordance with ASC 606-10-25-19 through 25-22. Examples of such comments
are excerpted below.
Examples of SEC Comments
- You state your subscription performance obligations consist of licenses, PCS, and rights to continued delivery of unspecified upgrades, major releases and patches. Please provide us with your analysis as to how you determined it was appropriate to combine these promises into one performance obligation, with reference to ASC 606-10-25-19 through 25-21.
- Please provide us the following information regarding your contracts that include a perpetual license and hosting services and revise your disclosures as appropriate:
- Clarify for us whether you have determined if the perpetual license and the hosting service are one combined performance obligation and provide us with your analysis. Reference ASC 606-10-25-21.
- If the perpetual license and the hosting service are one combined performance obligation, tell us the period of time over which you are recognizing revenue for the combined performance obligation. If this period is longer than your initial hosting period, please explain the basis for this determination.
- Tell us if you have identified the material right as a separate performance obligation. If you have combined the material right with the perpetual license and hosting service, please tell us how you made this determination. Reference ASC 606-10-55-42.
- Tell us the period of time over which you are recognizing revenue for your material right. If this period begins prior to the time the additional hosting services are provided or when the material right expires, please explain to us the basis for this determination. Reference ASC 606-10-55-42.
Determination of the Transaction Price
Another topic of significant judgment under the new revenue standard is the determination
of the transaction price, and as a result, the SEC staff has focused its attention on disclosures
about how such a determination is made, particularly those related to variable consideration.
The staff has questioned registrants on multiple types of variable consideration and requested
additional information about how, and to what extent, such consideration has been included
in the transaction price. Further, the staff has questioned whether variable consideration
was constrained and, if so, the significant judgments that went into the determination of the
constraint and when the constraint will be removed. Examples of such comments are included
below.
Examples of SEC Comments
- We note your disclosure that your solar power system sales include performance guarantees that represent a form of variable consideration and are recognized as adjustments to revenue. Please help us better understand your accounting for these potential bonus payments and/or liquidated damages. In this regard, based on your disclosure, it is unclear to us whether these amounts are included as part of your estimate of your transaction price at the outset of the arrangement and then reassessed at the end of each reporting period. Refer to ASC 606-10-32-5 through 32-10 and ASC 606-10-32-14.
- Please help us better understand how you reflect consideration in the form of a non-controlling interest as part of your transaction price. In this regard, clarify for us which amounts are included in your estimate of fair value at contract inception and why any profit associated with the noncontrolling interest is deferred. Refer to ASC 606-10-32-21 through 32-24.
- You state that you do not offer refunds, rebates, credits or other forms of variable consideration; however, you also indicate that the transaction price includes estimates of variable consideration. Please clarify the nature of the variable consideration included in your contracts. Refer to ASC 606-10-32-5 through 32-7 and ASC 606-10-50-20.
- You disclose . . . that every . . . Certified listing carries a 30-day return policy. Please tell us how you have considered this return policy in determining the transaction price in these arrangements. Refer to ASC 606-10-32-5 through 32-9.
- Please provide us with your analysis regarding payments made to partners. Describe in detail the nature of these payments and further clarify when payments are classified as marketing expenses and when payments are recognized as a reduction in revenue. Refer to ASC 606-10-32-25 and 26.
- We note you constrain estimates of variable consideration. Please explain to us the judgments used in assessing whether an estimate of variable consideration is constrained. In this regard, describe to us the factors that resulted in the constraint of variable consideration and how the constraint will be resolved. In addition, tell us how you considered ASC 606-10-50-17 and 50-20 related to disclosures of significant judgments used in determining the transaction price.
- In your Product Revenue disclosure . . . you indicate that you estimate variable consideration using the most likely method. Please tell us why it is appropriate to apply this method rather than the expected value method. See ASC 606-10-32-8. In addition, tell us where you have made the disclosure specified in ASC 606-10-50-12b or your consideration for providing this disclosure.
Further, ASC 606-10-55-65 and 55-65A provide an exception to the inclusion of certain
sales- or usage-based royalties in the determination of transaction price, stating that revenue
from a sales- or usage-based royalty related to a license of intellectual property (IP) should
be recognized at the later of when (1) the “subsequent sale or usage occurs” or (2) the
“performance obligation to which some or all of the sales-based or usage-based royalty has
been allocated has been satisfied (or partially satisfied),” provided that the license of IP is “the
predominant item to which the royalty relates.” We observed that the SEC staff has questioned
the application of ASC 606-10-55-65 to certain sales- or usage-based royalty arrangements
in which the license of IP is combined with other goods and services and whether, in such
arrangements, the license of IP is “the predominant item to which the royalty relates.”
Allocation of the Transaction Price
Another focus of the SEC staff’s comments on significant judgments relates to the allocation
of the transaction price. The staff has asked registrants to expand their disclosures about
the significant judgments, including the “methods, inputs, and assumptions” inherent in
the allocation process. For example, the staff has requested that registrants enhance their
disclosures to clarify that a performance obligation represents a series and the method used
to allocate consideration to each distinct good or service in the series. In addition, the staff
has questioned how registrants determined the stand-alone selling price of a good or service,
including how the registrants considered a range of transactions in determining the standalone
selling price. Examples of such comments are included below.
Examples of SEC Comments
- We note . . . that your contracts satisfy the allocation requirements in ASC 606-10-32-40. In future filings, please expand your disclosure of the nature of your performance obligation to clarify that your performance obligation is a series and how you allocate variable consideration to each distinct service in the series.
- Please tell us why the standalone selling price of software is typically estimated using the residual approach and how you met one of the criteria in ASC 606-10-32-34(c). To the extent you have determined the selling price for your software is highly variable; please provide a comprehensive, quantitative discussion of such variability to support your conclusions.
- We note the minimum and maximum amounts; however, it is unclear to us how you considered transactions within this range. Please provide us with more details of your analysis. In this regard, please tell us whether a significant number of transactions fell within a smaller portion of this range. Reference ASC 606-10-32-34(c).
- Please disclose the methods, inputs and assumptions used to allocate the transaction service fee charged to the car dealer to the identified performance obligations. Refer to ASC 606-10-50-20c.
Identification of a Measure of Progress
For performance obligations satisfied over time, the SEC staff has reminded registrants to
satisfy the requirements in ASC 606-10-50-18 to disclose: (1) “the methods used to recognize
revenue” and (2) “[a]n explanation of why the methods used provide a faithful depiction of the
transfer of goods or services.” An example of such a comment is referenced below.
Example of an SEC Comment
Revise future filings to disclose why for performance obligations that you satisfy over time the
method used provides a faithful depiction of the transfer of goods or services. Refer to ASC
606-10-50-18.
Performance Obligations
Disclosure Requirements
The new revenue standard introduces various quantitative and qualitative requirements
related to performance obligations. Under ASC 606-10-50-12, an entity must disclose the
following:
- “When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement.”
- “The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 606-10-32-11 through 32-13).”
- “The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent).”
- “Obligations for returns, refunds, and other similar obligations.”
- “Types of warranties and related obligations.”
In addition, under ASC 606-10-50-12A, an entity must disclose:
- “[R]evenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).”
Feedback From the SEC
In addition to comments related to the significant judgments inherent in the identification of
performance obligations as discussed above, the SEC staff has also issued comments related
to certain disclosure requirements (under ASC 606-10-50-12) for the identified performance
obligations. These comments can be categorized into four primary topics: (1) timing of
revenue recognition, (2) significant payment terms, (3) significant financing components, and
(4) principal-versus-agent considerations. These topics are discussed below.
Timing of Revenue Recognition
One of the key considerations related to the timing of revenue recognition under the new
revenue standard is whether a performance obligation is satisfied at a point in time or over
time. For instance, in a scenario in which a registrant is constructing an asset for a customer
by using the customer’s specifications, the SEC staff has questioned how the registrant
considered the criteria in ASC 606-10-25-27 through 25-29 in determining whether revenue
should be recognized at a point in time or over time. Further, the staff has issued comments related to the identification of the appropriate point in time at which to recognize revenue.
Below is an example of such a comment.
Example of an SEC Comment
For sales made through your indirect distribution channels, please clarify whether the performance
obligation of providing software licenses is satisfied upon shipment or when the software is made
available for download, to your indirect distribution partners or to the end user. Tell us how you
considered the guidance in ASC 606-10-25-30 and ASC 606-10-55-58C in determining the point in
time at which you recognize revenue and disclose any significant judgements made in evaluating
when control is transferred. Refer to ASC 606-10-50-19.
Significant Payment Terms
The SEC staff has requested that registrants disclose significant payment terms (e.g., when
payment typically is due, whether the consideration amount is variable, and whether the
variable consideration is typically constrained). An example of such a request is reproduced
below.
Example of an SEC Comment
Please tell us how you considered and complied with the disclosures requirement outlined in
ASC 606-10-50-12 (b) with respect to significant payment terms.
Significant Financing Components
The SEC staff has also issued comments requesting that registrants clarify how they reached
the conclusion that their contracts did not include a significant financing component, as well
as requesting future disclosure if a registrant elected the practical expedient in ASC 606-10-32-18 that permits an entity not to recognize a significant financing component if the time
between the transfer of a good or service and payment is one year or less. An example of the
former type of comment is excerpted below.
Example of an SEC Comment
Your . . . contracts do not include a significant financing component because the primary purposes
of your invoicing terms is to provide customers with simplified and predictable ways of purchasing
your products and services, not to receive financing. [Y]ou disclose your . . . contracts entitle you to
receive advance payment at the beginning of the contract but you do not typically consider this to
be a significant financing component. Please explain to us how you determined that the payment
terms of your contracts do not contain a significant financing component under ASC 606-10-32-15
through 32-18. Address how you concluded that the difference between the promised amount of
consideration and the cash selling price is proportional to the reasons for that difference.
Principal-Versus-Agent Considerations
For each identified performance obligation, registrants are required by ASC 606-10-50-12(c)
to disclose “any performance obligations to arrange for another party to transfer goods or
services (that is, if the entity is acting as an agent).” The SEC staff has requested that registrants
clarify whether they are presenting revenue on a gross or net basis and to explain how the
conclusion to report revenue on a gross or net basis was reached. There are many significant
judgments registrants have to make in reaching a conclusion about whether they are principals
or agents. As a result, the staff has stated that registrants should be mindful of the requirement
in ASC 606-10-50-17 to “disclose the judgments, and changes in the judgments, made in
applying the guidance in [the new revenue standard] that significantly affect the determination
of the amount and timing of revenue from contracts with customers.” An example of a
comment related to principal-versus-agent considerations is excerpted below.
Example of an SEC Comment
Please explain to us the process by which interchange fees are earned and explain [your] role in
the payment processing system. Tell us whether a portion of the interchange fee received by the
company is remitted to a third party. If so, tell us whether revenue from these fees is presented
net or gross of the amounts remitted to the third party and explain how you arrived at that
determination.
Contract Costs
Disclosure Requirements
Under the new revenue standard and in accordance with ASC 340-40,4 entities capitalize
certain costs associated with obtaining5 and fulfilling a revenue contract. These costs are
subsequently amortized. Accordingly, entities are required to disclose:
- The judgments used to determine the amount of costs incurred to obtain and fulfill a contract.
- The method used to determine amortization for each reporting period.
- The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract, by asset category.
- The amortization and impairment loss recognized in the reporting period.
Feedback From the SEC
Nearly 15 percent of the SEC staff’s publicly available comments on ASC 606 relate to the
accounting or disclosure requirements for contract costs. Though we noted instances in
which the staff requested that registrants provide additional information in their disclosures
about the costs they are capitalizing in accordance with ASC 340-40, the majority of the
staff’s comments related to the incremental costs to obtain a contract represent requests for
additional disclosure about (1) the method being used to amortize the capitalized costs and
(2) how the selected amortization period correlates to the period of benefit. We also observed
that the staff has questioned when additional commissions are paid upon renewal (1) whether
such commissions are commensurate with the initial commissions and (2) how such renewals
are considered in the amortization period. Examples of comments on the amortization of
costs to obtain a contract are excerpted below.
Examples of SEC Comments
- It appears that a portion of your sales commissions is expensed upon delivery of the software license and a portion related to services is deferred. If so, please revise to clarify how your amortization expense reflects the transfer of the license and services to your customer. Refer to ASC 340-40-35-1 and 340-40-50-2(b).
- Please tell us, and revise to clarify if appropriate, whether additional sales commissions are paid upon contract renewal and, if so, whether such amounts are commensurate with the initial commissions. Please also disclose how commissions paid for renewals are considered in your five year period of benefit for the initial commission. Finally, please disclose the period of time over which you amortize commission costs related to contract renewals[.] Refer to ASC 340-40-35-1 and 340-40-50-2(b).
- Please revise to disclose the method by which you amortize the initial commission costs over the five-year period of benefit. Refer to ASC 340-40-50-2.
- You disclose that deferred commissions paid upon the acquisition of an initial contract and any subsequent renewals are amortized over an estimated period of benefit based upon the weighted-average term of contracts and related product and service delivery periods. Please explain further what you mean by the “weighted average term of contracts and related product and service delivery periods.” In addition, please clarify how you are accounting for commissions paid on renewals. Refer to ASC 340-40-50-2.
Disaggregation of Revenue
Disclosure Requirements
Under the new revenue standard, an entity is required by ASC 606-10-50-5 and 50-6 to
disaggregate revenue for disclosure purposes into categories as follows:
- The categories must depict how revenue and cash flows are affected by economic factors.
- The disclosures must contain sufficient information to convey the relationship between disaggregated revenue and each disclosed segment’s revenue information.
As discussed in paragraph BC336 of ASU 2014-09,6 “because the most useful disaggregation
of revenue depends on various entity-specific or industry-specific factors, the Boards
decided that Topic 606 should not prescribe any specific factor to be used as the basis for
disaggregating revenue from contracts with customers.” Instead, ASC 606-10-55-91 provides
examples of categories that may be appropriate for an entity’s disclosures in the financial
statements, such as type of good or service, geographical region, market or type of customer,
type of contract, contract duration, timing of transfer of the good or service, or sales channels.
When selecting the types of categories for disaggregated revenue, an entity should consider
how and where it has communicated information about revenue for various purposes,
including (1) disclosures outside the financial statements, (2) information regularly reviewed
by the chief operating decision maker for evaluating the financial performance of operating
segments, and (3) other information that is similar to the types of information identified in
(1) and (2) and that is used by the entity or users of its financial statements for evaluating its
financial performance or making decisions about resource allocation.
Feedback From the SEC
The SEC staff has issued comments asking registrants to clarify how they determined that the
categories in which they present disaggregated revenue information were sufficient. The staff
has reminded registrants that they should consider information disclosed outside the financial
statements, such as that in earnings calls and investor presentations, in their assessment of
which categories to present. Further, the staff has questioned whether the selected categories
are appropriate given the registrants’ business model and whether the categories depict
how revenue and cash flows are affected by economic factors. Comments on disaggregation
constituted approximately 5 percent of the total publicly available ASC 606 comments.
Examples of such comments are included below.
Examples of SEC Comments
- We note your presentation of disaggregated revenue by major source. . . . With respect to the disclosure requirements of ASC 606-10-50-5, please tell us how you considered the guidance in paragraphs ASC 606-10-55-89 through 55-91 in selecting the appropriate categories to use to disaggregate revenue.
- You present “vehicles, parts, and accessories” as a major source of revenue. Please explain to us why the aggregation of revenue from “parts and accessories” with revenue from “vehicles” is appropriate pursuant to ASC 606-10-50-5. We note from your disclosures that parts and accessories appear to be subject to return from customers, whereas this does not appear to be the case for vehicles. It also appears these categories may have other different characteristics, such as type of good, pricing and dollar magnitude of contribution to margins.
- We note you provide other information outside your financial statements regarding the nature,
amount, timing, and uncertainty of revenue and cash flows arising from your contracts with
customers, including but not limited to:
- Monthly sales reports which include unit sales by brand, by vehicle type, and between retail and fleet sales. These reports also include a discussion of underlying trends for key vehicles and some information on transaction prices.
- A Strategic Update . . . which includes a discussion of plans to shift allocation of capital from cars to SUVs and trucks and to expand electric vehicles revenue opportunities.
- An earnings call . . . which includes a discussion of the strong performance of commercial vehicles as well as consumers moving away from passenger cars and into utilities and trucks and your increasing investments in these areas as a result.
Given the information cited above, it appears other information about your automotive segment’s revenue (beyond geographical information) is used by the company and users of your financial statements to evaluate your financial performance or to make resource allocation decisions. In this regard, please tell us how you considered the presentation and use of such information pursuant to ASC 606-10-55-90(c) when determining the appropriate disaggregated revenue categories that depict how the nature, amount, timing and uncertainty of cash flows are affected by economic factors and in the context of meeting the overall disclosure objective of ASC 606-10-50-1.
Contract Balances
Disclosure Requirements
Under the new revenue standard, in accordance with ASC 606-10-50-8 through 50-10,
companies must disclose the following information about contract balances:
- Opening and closing balances (receivables, contract assets, and contract liabilities) from contracts with customers, if not otherwise separately presented or disclosed.
- The amount of revenue recognized in the reporting period from the beginning contract liability balance.
- An explanation of significant changes in contract balances during the reporting period (by using quantitative and qualitative information).
- An explanation of “how the timing of satisfaction of [the entity’s] performance obligations . . . relates to the typical timing of payment . . . and the effect that those factors have on the contract asset and the contract liability balances.”7
Feedback From the SEC
The SEC staff has issued comments to registrants asking them to include additional
information in their disclosures about how contract balances are derived. Examples of these
comments are reproduced below.
Examples of SEC Comments
- Tell us your significant payment terms and how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contract asset and liability balances. Disclose the information required by ASC 606-10-50-9 and 50-12(b)[8] in future filings.
- You disclose that there are circumstances where customer incentives issued may exceed the reduction of revenue recorded over the contract term, and result in a recorded contract asset. Please provide examples of the types of incentives that would drive the generation of these contract assets and describe how those incentives would exceed the reduction of revenue over the contract term.
Remaining Performance Obligations
Disclosure Requirements
ASC 606-10-50-13 requires an entity to disclose the following about its remaining performance
obligations:
- “The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period.”
- “An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with [the requirement above], which the entity shall disclose in either of the following ways:
- On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
- By using qualitative information.”
Several practical expedients are available for the disclosure of remaining performance
obligations (see Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard for
details). Under ASC 606-10-50-15, if an entity elects to apply the practical expedients related
to the disclosure of remaining performance obligations, it is required to disclose which of the
practical expedients it is applying as well as certain other qualitative information.
Feedback From the SEC
We observed instances in which the SEC staff questioned how registrants have complied with
the disclosure requirements of ASC 606-10-50-13 through 50-15 regarding information about
remaining performance obligations. For instance, the staff has questioned how companies
have complied with the requirement of ASC 606-10-50-13(b) to disclose when the registrant
expects to recognize amounts recorded as deferred revenue. An example of such a comment
is excerpted below.
Example of an SEC Comment
Please tell us how you considered the requirements in ASC 606-10-50-13 to 50-15 to disclose
information about remaining performance obligations or application of optional exemptions. In
that regard, we note that in your Form 10-K for the period ended December 31, 2017 you state
that you sell product to your largest customer, representing 22% of total sales for the year, under a
long-term contract. You further state that for your other customers you typically sell to them under
contracts with one to two year terms.
Practical Expedients
Entities can elect to use a number of practical expedients as part of adopting the new revenue
standard. Many are from ASU 2014-09, and others were added in subsequent ASUs, including
ASU 2016-10,9 ASU 2016-12,10 and ASU 2016-20.11See Deloitte’s A Roadmap to Applying the
New Revenue Recognition Standard for further discussion of the practical expedients available
to registrants.
Disclosure Requirements
Entities are generally required to disclose and explain the practical expedients they used
under the new revenue guidance. Although the standard does not dictate where they should
present these disclosures, entities typically include them in their “Significant Accounting
Policies” disclosure or in a separate revenue note to the financial statements.
Feedback From the SEC
We observed instances in which the SEC staff requested that registrants clarify and update
their disclosures about whether they applied certain of the practical expedients (e.g., those
related to sales taxes and shipping and handling costs) permitted by the new revenue
standard.
Transition
The new revenue standard provides a choice between two methods of transition: (1) the
“full retrospective method” and (2) the “modified retrospective method.” Under the full
retrospective method, the new revenue standard would be applied on a retrospective basis
to all prior periods presented in accordance with the guidance on accounting changes in
ASC 250.12 On the other hand, under the modified retrospective method, the new revenue
standard would be applied retrospectively with a recorded cumulative adjustment to opening
retained earnings in the year of adoption.
Disclosure Requirements
Entities applying the modified retrospective method are required under ASC 606-10-65-1(i)(1) and (2) to disclose the amount by which each financial statement line item is
affected by the application of the new revenue standard in the current period, as well as an
explanation of the reasons for any significant changes. In addition, under ASC 606-10-65-1(h),
entities applying the modified retrospective method are required to disclose “whether [they
have] applied this guidance to all contracts at the date of initial application or only to contracts
that are not completed at the date of initial application.”
Under both the full retrospective and modified retrospective methods, entities must disclose
whether they have applied any of the transition practical expedients provided for in ASC
606-10-65-1(f), as well as a qualitative assessment (to the extent reasonably possible) of the
estimated impact of applying each of the practical expedients.
Under ASC 606-10-65-1(e), an entity that elects to use the full retrospective method is
required to, among other things, disclose the effect of the changes on any prior periods that
have been retrospectively adjusted.
Feedback From the SEC
The SEC staff has asked registrants to provide further clarification regarding the effect of the
new revenue standard upon transition. In addition, the staff has issued comments requesting
clarification about whether registrants have adopted the new revenue standard and has
reminded them that SEC Regulation S-X, Rule 10-01,13 requires them to provide both interim
and annual disclosures in the financial statements issued in the first year of adoption of a new
accounting standard. Examples of such comments are included below.
Examples of SEC Comments
- You disclose the increase in total automotive debt at June 30, 2017 from December 31, 2016 is due in part to an increase in local debt in international markets, including the impact of the adoption of ASC 606. Please explain to us how the adoption of ASC 606 contributed to the increase in local debt in international markets.
- Please tell us whether the adoption of ASC 606 on January 1, 2018 impacted your accounting for grant awards and revise your disclosure accordingly. In your response, please explain how you considered the guidance in ASC 606-10-05-4 in determining the appropriate accounting for such awards.
Thinking Ahead
The adoption of the new revenue standard has led to a noticeable increase in the amount and
type of information entities have disclosed about revenue activities and related transactions.
Although we observed some consistency in their disclosures, companies’ interpretations of the
requirements and the amount of information to disclose have varied. However, in a manner
consistent with Mr. Bricker’s statement discussed above, we caution entities to avoid simply
benchmarking to peers and to fully understand each underlying transaction when applying
the new revenue standard. That said, we expect diversity in practice to lessen as more
entities adopt the standard and as entities evaluate their peers’ filings. Further, as accounting
standard setters clarify guidance and regulators issue more comments, entities will continue
to refine their accounting for revenue and the information they disclose.
Footnotes
1
FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers.
2
PBEs reporting under U.S. GAAP are required to adopt the new revenue standard for annual reporting periods (including interim
reporting periods within those annual periods) beginning after December 15, 2017. Early adoption was permitted as of reporting
periods (including interim periods) beginning after December 15, 2016. For non-PBEs, the new revenue standard is effective for
annual periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after
December 15, 2019. Early adoption is also permitted for non-PBEs.
3
FASB Accounting Standards Codification Topic 605, Revenue Recognition.
4
FASB Accounting Standards Codification Subtopic 340-40, Other Assets and Deferred Costs: Contracts With Customers.
5
Entities may elect to use the practical expedient in ASC 340-40-25-4, which permits them to expense incremental costs of obtaining
a contract if such costs will be amortized over a period of one year or less (see Deloitte’s A Roadmap to Applying the New Revenue
Recognition Standard for more information).
6
FASB Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606).
7
Quoted from ASC 606-10-50-9.
[8]
Note that ASC 606-10-50-9 discusses how the timing of the satisfaction of an entity’s performance obligations is related to the typical
timing of payment and the effect such timing has on the contract asset and the contract liability balances. ASC 606-10-50-12(b)
discusses significant payment terms (e.g., when payment typically is due, whether the contract has a significant financing component,
whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained).
9
FASB Accounting Standards Update No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance
Obligations and Licensing.
10
FASB Accounting Standards Update No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients.
11
FASB Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With
Customers.
12
FASB Accounting Standards Codification Topic 250, Accounting Changes and Error Corrections.
13
SEC Regulation S-X, Rule 10-01, “Interim Financial Statements.”