2.18 Revenue Recognition | DART – Deloitte Accounting Research Tool

2.18.1 Significant Judgments

ASC 606-10-50-17 through 50-20 require entities to provide disclosures about the significant judgments they made in applying the revenue standard. The SEC staff has issued comments to registrants on their disclosures about such significant judgments and the appropriateness of conclusions they reached as a result of applying those significant judgments. The significant judgments on which the staff has commented can generally be classified into four broad categories: (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. These types of significant judgments are discussed below.

2.18.1.1 Identification of Performance Obligations

Examples of SEC Comments

You state your subscription performance obligations consist of licenses, [postcontract customer support], 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.
For contracts that require the use of certain equipment in order to receive service, please tell us the significant judgements used in determining if equipment should be considered a separate performance obligation. Please refer to ASC 606-10-25-19 through 25-22.
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.
Please provide discussion of how you determined the research and development services are distinct from [License X] pursuant to ASC 606-10-25-19. Explain how this analysis differs from the conclusions reached for [License Y and License Z].
We reference the disclosure that customer contracts generally do not include more than one performance obligation. Please tell us and revise future filings to discuss, if material, the contracts that result in more than one performance obligation. The disclosure should identify the multiple performance obligations and how you allocate and recognize revenue for each obligation.

The SEC staff has stated12 that it believes it is important for companies to provide clear and transparent disclosures regarding the identification of performance obligations and that companies are likely to receive comments from the staff if a disclosure related to such identification is unclear or appears to conflict with the guidance. In a manner consistent with this statement, many of the staff’s comments on significant judgments have raised issues related to the identification of performance obligations. These comments have included 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. In addition, 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 under ASC 606-10-25-19 through 25-22. Further, the staff has requested additional information from registrants to understand how they determined whether an option for additional goods or services was a material right.

2.18.1.2 Determination of the Transaction Price

Examples of SEC Comments

We note you estimate the variable consideration related to your sales incentive programs based on the sales terms with customers and historical experience. Please provide in future filings the qualitative and quantitative information about the significant judgments and changes in judgments that significantly affect the determination of your transaction price, as set forth in ASC 606-10-50-1(b), 50-17(b), and 50-20(a). Provide us any intended revisions and the calculations used to determine variable consideration.
We note your disclosure . . . that you earn new and renewal commissions paid by insurance carriers for the binding of insurance coverage and that these commissions are earned at a point in time upon the effective date of bound insurance coverage, as no performance obligation exists after coverage is bound. We also note disclosure in the critical audit matter . . . related to management’s estimates to constrain renewal commissions. Please clarify for us if renewal commissions represent variable consideration, are included in the transaction price and are fully constrained and revise your accounting policy disclosure in future filings to more clearly state this, if true. If not true, please more clearly tell us how you determined that renewal commissions are a separate performance obligation, why you disclose that no performance obligations exist after coverage is bound, why renewal commissions are not variable consideration, and why they should not be included in the transaction price based on the guidance in ASC 606-10-05-4 and ASC 606-10-32-5. Please include the guidance you considered and the relevant terms of the contract(s) with insurance carriers in making your accounting determinations.
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 tell us whether the consideration promised in your contracts contain a variable amount, as set forth in ASC 606-10-32-5 through 32-10, and describe for us any related accounting. Revise your disclosure in future filings to address these matters, as well. In addition, address how you considered the requirement to record a refund liability as part of your accounting.
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 certain advertising contracts have guarantees of audience member views. Please clarify if these guarantees are treated as variable consideration in determining your transaction price. Refer to ASC 606-10-32-5 and 606-10-50-20.
Revise future filings to clarify whether any of the consideration amount is variable, and, if so, whether the estimate of variable consideration is typically constrained. In addition, disclose any obligations for returns, refunds, and other similar obligations and any types of warranties and related obligations. Reference ASC 606-10-50-12.
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.
We note the statement . . . that certain product promotions including discounted products and customer incentive promotions are recorded as part of . . . incentives within operating expenses. Please describe these product promotions in greater detail. Explain to us why you are accounting for these product promotions as operating expenses, citing the applicable accounting literature. Describe to us why these product promotions are not accounted for under ASC 606 as an adjustment to the transaction price as variable consideration.

Another topic of significant judgment under the revenue standard is the determination of the transaction price, which may include questions about how registrants took consideration paid to a customer into account when determining the transaction price. As a result, the SEC staff has focused 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. In addition, 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 [ASC 606] that significantly affect the determination of [the transaction price].”

2.18.1.2.1 Sales- or Usage-Based Royalty Exception for Licenses of Intellectual Property

Example of an SEC Comment

Tell us if you believe these arrangements contain a functional license of intellectual property and if this is the predominant item to which royalties relate.

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 the transaction price, stating that revenue from a sales- or usage-based royalty related to a license of intellectual property 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 intellectual property is “the predominant item to which the royalty relates.” 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 intellectual property is combined with other goods and services and whether, in such arrangements, the license of intellectual property is “the predominant item to which the royalty relates.”

2.18.1.3 Allocation of the Transaction Price

Examples of SEC Comments

As it relates to step 4 in ASC 606, tell us how you allocate transaction price to multiple performance obligations, if applicable.
We note your disclosures here . . . . Please revise to disclose the nature of the infrastructure arrangements, types of services performed, typical terms and contract length, and the specific performance obligations included. To the extent the arrangements include more than one performance obligation, disclose how the transaction price is allocated and how the estimated standalone selling price for each is determined. Lastly, clarify what methods are used to recognize revenue, e.g. output or input methods, and why the methods used provide a faithful depiction of the transfer of goods or services. Refer to ASC 606-10-50-12 and 50-18.
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.
For wagering contracts that include complimentary products and services and/or a loyalty program, please tell us why you do not allocate the transaction price between these incentives and gaming revenues on a proportionate basis. Refer to ASC 606-10-32-31.

SEC staff comments on significant judgments have also addressed the allocation of the transaction price. The staff has asked registrants to expand their disclosures about the significant judgments they have made, including the “methods, inputs, and assumptions” inherent in the allocation process. For example, the staff has requested that registrants enhance their disclosures to clarify (1) that a performance obligation represents a series and (2) 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 the application of the residual approach as well as how the registrants considered a range of transactions in determining the stand-alone selling price.

2.18.1.4 Identification of a Measure of Progress

Examples of SEC Comments

You state that . . . [revenue related to various services is] recognized over the life of the contract term. Please revise to clarify when you invoice your customers for such services. . . . Lastly, revise to clarify the methods used to recognize revenue for services that are transferred over time. Refer to ASC 606-10-50-18(a).
[F]or those contracts that do meet the over time recognition criteria please tell us and disclose the nature of the input method you will use to recognize revenue as you produce the specified units. Also, disclose why this method provides a faithful depiction of the transfer of the goods. See ASC 606-10-50-18.
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.

For performance obligations satisfied over time, the SEC staff has reminded registrants to satisfy the requirements of ASC 606-10-50-18 to disclose (1) the “methods used to recognize revenue” and (2) an “explanation of why the methods used provide a faithful depiction of the transfer of goods or services.”

2.18.2 Performance Obligations

In addition to the comments discussed above related to the significant judgments inherent in the identification of performance obligations, the SEC staff has issued comments on certain accounting and disclosure requirements related to the identified performance obligations.

ASC 606-10-50-12 requires entities to disclose information about their performance obligations in contracts with customers. The SEC staff’s comments to registrants on the accounting and disclosures required can be categorized at a high level into four primary areas of focus: (1) timing of revenue recognition; (2) significant payment terms; (3) significant financing components; and (4) the nature of goods and services, including principal-versus-agent considerations. These topics are discussed in the next sections.

2.18.2.1 Timing of Revenue Recognition

Examples of SEC Comments

Pursuant to ASC 606-10-50-12(a), please revise your revenue recognition policy to specifically define when the customer obtains control over a product and the performance obligation has been satisfied. In your response, provide us with your proposed disclosure revisions.
We note your revenue recognition disclosures related to [performance] obligations . . . . Please explain to us the specific nature of the arrangements and transactions involved and the specific accounting guidance followed, including how you applied or considered the repurchase agreement guidance in ASC 606-10-55- 66 through -78. In doing so, clarify if you account for any arrangements with . . . rental companies as leases or financing arrangements due to repurchase agreements and provide us with illustrative journal entries to assist our understanding.
We note within your response to [a previously issued comment] that you recognize upfront payments to customers without contractual volume guarantees as a reduction of revenue at the time of the commitment to make the payment. Please tell us in further detail how you determined such accounting treatment was more appropriate than recognizing the reduction of revenue as the related goods are transferred to customers. In doing so, ensure you explain the underlying economic reasons for the payments, your history of recovering the payments, including your history of renewals and average customer lives, whether the payments secure an exclusivity agreement with customers or provide other contractual assurances, whether the payments are expected to recur with the same customer, and whether the related supply contracts have specified lives.
We note your disclosure that the Company recognizes revenue from sales of [Product X] upon shipment to the customer. Please explain to us if the customer you refer to in your disclosures in [the footnotes] is the same as the end users described [in the business section]. We also note your disclosure . . . that the majority of your products are sold through your channel partners, distributors, and resellers. In this regard, if revenue recognition process is not complete at the time the channel partner takes delivery of the shipment, identify the nature of any remaining obligations, or risks or rewards that have not yet transferred to the channel partner at the time they accept delivery of the shipments. Refer to guidance in ASC 606-10- 25-30 and ASC 606-10-50-12.
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.
We note your disclosure that revenue for [original equipment manufacturer (OEM)] serial production contracts requiring customization is generally recognized at a point in time. Please explain to us why you believe these contracts do not meet the criteria for over time recognition, specifically the criteria that they have no alternative use and you have enforceable right of payment. See guidance at ASC 606-10-25-27.
[T]ell us whether the nature of the [software-as-a-service (SaaS)] arrangement is a) a promise to provide access to the SaaS or b) a promise to provide a specified amount of services and in either case, why revenue recognition at a point in time (absent contractually stated ongoing service obligations) would be appropriate. Refer to your basis in the accounting literature.
We note that you recognize construction contract revenues “when the work is complete and the customer has approved the work” rather [than] when control of the construction work is transferred to your customers. Tell us and disclose, in accordance with ASC 606-10-50-19, the significant judgements made in evaluating when your customers obtain control of your construction projects.
Revise to provide all material disclosures required by ASC 606-10-50-12 and ASC 606-10-50-18 through -19 regarding your performance obligations. In doing so, specify when you satisfy your performance obligations, such as upon shipment and delivery, and disclose the significant judgments made in evaluating when customers obtain control of your goods or services. In regards to the “custom” and “tailored” products . . . , clarify why they do not qualify for over time revenue recognition under ASC 606-10-25-7(c).

One of the key considerations related to the timing of revenue recognition under the 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 (1) the identification of the appropriate point in time at which to recognize revenue and (2) the application of the repurchase guidance in ASC 606-10-55-66 through 55-78.

2.18.2.2 Significant Payment Terms

Examples of SEC Comments

Revise to provide more robust discussion of your revenue recognition policies as it relates to significant payment terms, obligations for returns, and the existence of warranties or related obligations for each type of revenue. Reference ASC 606-10-50-12.
Revise to disclose significant payment terms for sales of mileage credits to credit card companies, hotels, and car rental agencies pursuant to ASC 606-10-50-12(b).
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.

ASC 606-10-50-12(b) requires an entity to disclose 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 . . . ).” As a result, the SEC staff has requested that registrants disclose significant payment terms such as those described in ASC 606-10-50-12(b).

2.18.2.3 Significant Financing Components

Examples of SEC Comments

Given that the majority of your revenue is generated from long-term contracts, please provide us with your analysis on if they contain a significant financing component. If a material portion of your contracts contain a significant financing component, please revise to disclose this information pursuant to ASC 606-10-50-12(b). If you relied upon the practical expedient based pursuant to ASC 606-10-32-18, disclose this pursuant to ASC 606-10-50-22 and confirm the timing between progress payments and transfer of control and payment was not expected to exceed one year.
Your . . . contracts do not include a significant financing component because the primary [purpose] 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.

ASC 606-10-50-12(b) requires an entity to disclose “whether the contract has a significant financing component.” Consequently, the SEC staff has 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.

2.18.2.4 Nature of Goods or Services, Including Principal-Versus-Agent Considerations

Examples of SEC Comments

Please provide us with your analysis of principal versus agent considerations under ASC 606 for [Arrangement A] and [Arrangement B] separately. Refer to ASC 606-10-25-25 and ASC 606-10-55-36 through 55-40. In your response, please tell us who your customers are and what the specified goods or services are in each contract with the customer(s).
We note your disclosure that revenue from e-commerce partners is recognized on a gross basis before the deduction of partner incentive and fees. Please revise to disclose the nature of these arrangements, clarify whether you have direct billing arrangements with the end consumer, and describe the basis for your accounting treatment conclusion, if material.
We note from . . . your . . . Form 10-K (Competition) that you provide transportation services to third-party logistics providers that determine both the mode of transportation and the carrier. Please tell us the nature of these arrangements in further detail and explain to us whether you are the principal or agent pursuant to ASC 606-10-55-36 through 55-39. Further, to the extent these arrangements are material, disclose whether you present revenues earned from third-party logistics providers on a gross or net basis pursuant to ASC 606-10-50-12(c).
We note your description of various goods and services related to your cruise offerings, which may include round-trip airfare and pre-cruise hotel packages. Provide us with your analysis regarding how you determined gross reporting for pre-cruise and post-cruise services was appropriate pursuant to ASC 606-10-55-36 through 39. Please specifically address how you considered the definition of control and how you are directing any third party providers.
Your disclosure indicates that transaction fees collected from your customers are recognized as revenue on a gross basis because you are the principal in respect of processing payments. Please describe the services provided by each party involved in the payment processing transaction and tell us how you determined you control each service before it is transferred to the customer. Reference ASC 606-10-55-36 through 40.
We note your disclosure that when more than one party is involved in providing services to a customer, you generally act as the principal and report revenue on a gross basis. Please tell us which arrangements involve third parties and tell us how you determined you control each service before it is transferred to the customer. In addition, we note your disclosure . . . regarding agent commissions. Please help us understand the nature of these agent services. Reference ASC 606-10-55-36 through 40.
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.

For each identified performance obligation, registrants are required by ASC 606-10-50-12(c) to disclose 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).” The SEC staff has often referred to ASC 606-10-50-12 when commenting that the registrant should provide greater detail of the nature of the goods or services that the registrant has promised to transfer. Further, the staff has asked registrants to 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 that 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 this Topic that significantly affect the determination of the amount and timing of revenue from contracts with customers.”

2.18.3 Contract Costs

Examples of SEC Comments

Please tell us and revise to disclose whether commissions are earned on . . . subscription renewals. If so, disclose whether they are commensurate with the commissions earned on the initial contract and how you account for such commissions. Refer to ASC 340-40-35-1 and 340-40-50.
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.
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).
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.

Under the revenue standard and in accordance with ASC 340-40, entities capitalize certain costs associated with obtaining or fulfilling a revenue contract (“contract costs”). ASC 340-40-50-1 through 50-3 require disclosures about such costs. Consequently, the SEC staff has asked registrants to provide additional disclosures about their capitalization of contract costs and the related period of amortization. Specifically, the SEC staff has requested additional disclosure about (1) the method being used to amortize the capitalized costs and (2) how the selected amortization period correlates with the period of benefit. Further, when additional commissions are paid upon renewal, the staff has questioned (1) whether such commissions are commensurate with the initial commissions and (2) how such renewals are considered in the amortization period.

2.18.4 Disaggregation of Revenue

Examples of SEC Comments

We note your revenue policy for [Product A] and [Product B] which state[s] that you recognize revenues at a point in time and over time utilizing the input method depending on the terms of the contract. Please tell us your consideration of disclosing the revenues recognized by each method. Refer to ASC 606-10-55-89 through 91. In addition, please revise your disclosures in future filings to provide the disclosures required by ASC 606-10-50-18b.
You state advertising revenue is not further disaggregated. It appears advertising revenue consists of amounts recognized as either a principal or an agent. Please tell us why you do not disaggregate advertising revenue on this basis.
We note that you have changed the level of disaggregation of revenue from five product lines . . . to four product lines . . . . Please explain to us why you believe it is no longer useful to disclose [Product Line A and Product Line B], or any other product lines, but instead combine them into the [X] line item. As part of your response, please consider the guidance in ASC 606-10-55-89 through 55-91.
We note your disclosures that “a substantial majority” of your revenues is derived from . . . contracts accounted for as a single performance obligation and that “a significant amount” of your revenue is derived from contracts to provide multiple distinct goods where the goods are accounted for as separate performance obligations. We further note your accounting policy disclosures regarding revenues recognized at a point-in time and over-time. Please clarify for us how you derive the product and service categories presented on the face of your statements of operations. In doing so, explain whether or not your product revenues are all recognized at a point-in-time or if it also consists of over-time revenues. Also clarify if contract revenues accounted for as a single performance obligation are allocated between product and services and, if so, explain the methodology used.
Please expand to disclose how revenue is recognized from manufacturing services and the total amount or percentage of consolidated sales. Also, we note you provide disaggregated revenue information by geographic location, by sales channel, as well as by reportable segment, and revenue by product sales versus product development agreements. We note from your recent earnings call transcripts, you discuss revenue by end market . . . along with type of revenue product sales, such as [Product A, Product B, and Product C]. Additionally, your earnings release furnished on Form 8-K . . . includes three prominent bullets at the top of the release that disclose revenue for [certain products] and the change in revenue for [Product A]. Please tell us the consideration given to further expanding your revenue disaggregation disclosures to also present revenue along the aforementioned lines. Your response should address ASC 606-10-55-89 through 55-91, as well as ASC 280-10-50-40.
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.
Please tell us what consideration you gave to disaggregating revenue by type of customer and timing of revenue recognition. Refer to ASC 606-10-55-91c and f.
We note that you disaggregate revenue attributable to [line of business A] and [line of business B] in response to ASC 606-10-50-5. To help us better understand the basis for your presentation, please provide us the financial information (1) used to prepare the Fourth Quarter [Fiscal Year X] Earnings Call presentation and (2) provided to your chief operating decision maker to evaluate your 4th quarter and annual [fiscal year X] results. In addition, please identify for us the unprofitable lines of business in which exiting was initiated, as referred to [in your filing].
We understand from your disclosures . . . that in addition to sales and installations of . . . systems, you also provide services in managing systems for your . . . customers; and we see that . . . you refer to revenues from commercial . . . services and for systems operations and maintenance.

However, in [a footnote] you limit your disaggregation of revenue to the categories of [line of business A], [line of business B] and [line of business C]. Tell us the reasons you have not differentiated between revenues from the sales of products, and revenues from the provision of services, either in the Statements of Operations, or in the disaggregation of revenues that is required by FASB ASC 606-10-50-5.

ASC 606-10-50-5 requires disaggregation of “revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.” ASC 606-10-55-91 states that categories that may be appropriate for an entity’s disclosures in the financial statements include (1) “[t]ype of good or service,” (2) “[g]eographical region,” (3) “[m]arket or type of customer,” (4) “[t]ype of contract,” (5) “[c]ontract duration,” (6) “[t]iming of transfer of goods or services,” and (7) “[s]ales channels.”

The SEC staff has issued comments to registrants asking them to clarify how they determined the categories in which to present disaggregated revenue information. It has reminded registrants that when assessing which categories are appropriate, they should consider information disclosed outside of the financial statements, such as in earnings calls and investor presentations. The SEC staff has also compared a registrant’s level of disclosure with categories that the registrant publicly discussed elsewhere and has asked the registrant to consider whether further disaggregation of revenue is appropriate. In addition, the staff has questioned whether a registrant’s selected categories are appropriate given the registrant’s business model and whether the categories depict how revenue and cash flows are affected by economic factors. Further, the staff has questioned how to derive the product and service categories presented on the face of statements of operations from what has been disclosed in the footnotes.

2.18.5 Contract Balances

Examples of SEC Comments

We note that you report significant balances for deferred revenues and customer deposits.

Please expand your disclosures to include the accounting policy that you follow in distinguishing between amounts that are classified as deferred revenues and amounts that are classified as customer deposits to comply with FASB ASC 235-10-50-1.

Please also disclose the revenue amounts recognized each period that were included in the contract liability balance at the beginning of the period to comply with FASB ASC 606-10-50-8(b); and any obligations for refunds pursuant to FASB ASC 606-10-50-12(d).
Please explain to us how you determined it is appropriate to present contract assets (Unbilled revenue) in the same financial statement line item as accounts receivable here and on your consolidated balance sheets. Please address what the contract assets specifically relate to and tell us if the related consideration is conditional on anything other than the passage of time. Refer to ASC 606-10-45-1 through 45-4.
Please revise your disclosures to explain the typical billing and payment terms under your contracts and how the differences in timing of revenue recognition and invoicing your customers impact any contract assets or contract liabilities recorded. Further, to the extent material, please disclose the amounts of contract assets and liabilities and the amount of revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period. Refer to ASC 606-10-50-8 and 50-9.
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.
Refer to ASC 606-10-50-8 through 15. Please tell us how you have considered shipments in transit at period-end as contract liabilities and remaining performance obligations. In this regard, if you recognize revenue in both segments based on time based metrics as stated in [your] note, it would appear that a portion of revenue for all in-transit shipments would qualify as remaining performance obligations and contract assets/liabilities.
Please revise to disclose in all future filings the amount of revenue recognized in the reported period that was included in the contract liability balance at the beginning of the period. Refer to ASC 606-10-50-8(b).

ASC 606-10-50-8 through 50-10 require an entity to disclose (1) the “opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed”; (2) “[r]evenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period”; (3) an explanation of (a) “how the timing of satisfaction of [the entity’s] performance obligations [is related] to the typical timing of payment” and (b) “the effect that those factors have on the contract asset and the contract liability balances”; and (4) “an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period” (including qualitative and quantitative information). The SEC staff has issued comments to registrants asking them to include additional information in their disclosures about how contract balances are derived.

2.18.6 Remaining Performance Obligations

Examples of SEC Comments

We note you expect to recognize the majority of your remaining performance obligations over a period from two to 10 years. Please revise to breakdown this amount, either quantitatively or qualitatively, into smaller time bands that better indicate the timing of revenue recognition. Also, consider disclosing how much you expect to recognize in the next 12-months. Refer to ASC 606-10-50-13.
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 . . . you state that you sell product to your largest customer, representing [X]% 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.
Please tell us and disclose the transaction price allocated to the performance obligations that are unsatisfied . . . and explain when you expect to recognize such amount. Refer to ASC 606-10-50-13. This would appear to include amounts referred to as Other Backlog as provided in the Form 8-K furnished . . . . If you are applying the practical expedient in 606-10-50-14 please tell us and disclose. Refer to 606-10-50-15.
Revise to include the amount of remaining performance obligations as of the end of the reporting period and an explanation of when you expect to recognize such amounts as revenue, on a quantitative basis or by using qualitative information. Refer to ASC 606-10-50-13.

ASC 606-10-50-13 through 50-15 require entities to provide information about the transaction price allocated to the remaining performance obligations. As a result, the SEC staff has asked registrants how they satisfied the disclosure requirements of ASC 606-10-50-13 through 50-15. For example, the staff has asked registrants how they complied with the guidance in ASC 606-10-50-13(b) that requires an entity to disclose when it expects to recognize amounts recorded as deferred revenue. In addition, the staff has asked registrants to break down the amount of revenue being recognized for the remaining performance obligations, either quantitatively or qualitatively, into time bands indicating the timing of revenue recognition in accordance with ASC 606-10-50-13(b).

Other Deloitte Resources

Roadmap, Revenue Recognition