6.5 Technology, Media, and Telecommunications
6.5.1 Technology
6.5.1.1 Capitalized Software Development Costs
Example of an SEC Comment
We note your policy disclosure regarding internally
developed software costs and that no internally
developed software costs were capitalized during the
periods presented. Please describe for us the
development process related to your internal-use
software, highlighting recently developed offerings
and added functionality, and explain why there
[were] no development costs capitalized during the
periods presented. Also, describe for us how you
apply the guidance in ASC 350-40-25 and what
consideration was given to disclosing your policies
for internal-use software development costs
particularly since your software is provided in a
software-as-a-service platform.
ASC 985-20 provides guidance on accounting for costs
incurred to purchase or internally develop software that will be sold,
leased, or marketed. Under this guidance, costs incurred to establish
technological feasibility of the software are expensed as incurred, whereas
subsequent production costs (e.g., those for testing or producing master
copies) are capitalized.
ASC 350-40 details how to (1) determine whether purchased or
internally developed software is for internal use and (2) account for costs
incurred for developing or obtaining internal-use software. Under this
guidance, costs incurred during the preliminary project and
postimplementation stages are generally expensed as incurred, while certain
costs incurred during the application development stage are capitalized.
Internal-use software is described as being “acquired, internally developed,
or modified solely to meet the entity’s internal needs” and as being
developed with no substantive plan to “market the software externally.”
Therefore, if the software is used to produce a product or is used in a
process to provide a service to the customer, but the customer is not given
the right to obtain or use the software, the related costs would be
accounted for in accordance with ASC 350-40.
The accounting for software development costs can be complex
and challenging, and the costs that are eligible for capitalization may
depend on whether the costs are accounted for in accordance with ASC 985-20
or ASC 350-40.
6.5.1.2 Costs Related to Contracts With Customers
Examples of SEC Comments
- You state that there are no new costs to obtain or fulfill incurred upon renewal unless the client signs on for additional applications, at which time costs to fulfill are minimized. Please tell us whether additional commissions are paid when clients purchase additional applications. If so, tell us whether such costs are commensurate with the initial commissions and the period of time over which you amortize commission costs related to additional purchases. Refer to ASC 340-40-35-1.
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Please tell us how you considered whether the [developer fees] are costs incurred to fulfill a contract and whether they meet the criteria for capitalization. Refer to ASC 340-40-15-3 and 40-25-5.
- Please tell us, and revise to clarify, whether sales commissions paid upon contract renewal are commensurate with the initial commissions and disclose how commissions paid for renewals are considered in the three to seven year period of benefit for the initial commission. You also disclose that renewals are amortized over the “remaining period of benefit.” Please tell us whether the period of benefit for these commissions exceeds the term of the respective customer contract and if so, explain what the remaining period of benefit represents and how your policy complies with ASC 340-40-35-1. Also refer to ASC 340-40-50-2(b).
- You disclose that you apply a practical expedient to expense sales commissions as incurred when the amortization period would have been one year or less. Please tell us whether sales commissions are earned on contract renewals and if so, how you considered those in determining the amortization period.
- You disclose that certain sales commissions associated with multi-year contracts are subject to an employee service requirement and are expensed as incurred as they are not considered incremental costs to obtain a contract. Please tell us the nature of the service requirement and how it impacted your consideration in accounting for these sales commissions. Also, tell us whether sales commissions are earned on multi-year contracts that are not subject to an employee service requirement and, if so, how you account for such commissions.
- Please tell us, and revise to clarify, whether sales commissions paid upon contract renewals are commensurate with the initial commissions and disclose how commissions paid for renewals are considered in the 8 year period for the initial commission. You also disclose that renewals are amortized over 18 months. Please tell us whether this exceeds the term of the respective customer contract and if so, explain how your policy complies with ASC 340-40-35-1. Lastly, please tell us how you determined the 4 year amortization period for add-ons. Refer to ASC 340-40-50-2(b).
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We note that you have determined that sales commissions paid on all third-party agent sales of subscriptions are direct and incremental and, therefore, meet the capitalization criteria. Clarify whether a contract exists with the subscriber at the time the commission is earned. We refer you to ASC 606-10-25-1. That is, confirm that the contract creates enforceable rights and obligations at that time. Also, clarify whether the subscription agreements have substantive termination penalties. Further, tell us whether you pay additional commissions upon contract renewals and whether those renewal commissions are commensurate with the initial commission paid. We refer you to ASC 340-40. In addition, please clarify the nature of direct mail cost and explain why such cost is considered a cost to obtain a contract.
ASC 340-40 provides guidance on accounting for costs related
to an entity’s contract with a customer, including (1) incremental costs of
obtaining a contract within the scope of ASC 606 and (2) costs of fulfilling
a contract with a customer that are not within the scope of another
standard. Under ASC 340-40-25-1 and ASC 340-40-25-3, costs incurred to
obtain a contract with a customer that the entity would not have incurred
had the contract not been obtained are capitalized and recognized as an
asset, while costs of obtaining a contract that would have been incurred
regardless of whether the contract was obtained are “recognized as an
expense when incurred, unless those costs are explicitly chargeable to the
customer regardless of whether the contract is obtained.”
ASC 340-40 details how to determine (1) whether particular
costs are incurred to obtain a contract with a customer and (2) the
amortization period for such costs. Under this guidance, an entity should
consider whether such costs would have been incurred had the customer
decided that it would not enter into the contract just before the contract
was ready to be signed; if so, the costs would not be incremental to
obtaining the contract. An example of incremental costs incurred to obtain a
contract would be commission payments to employees. The accounting for
commission payments requires significant judgment when the entity has a
tiered commission structure that includes payments the entity makes upon
obtaining new contracts as well as payments the entity makes upon contract
renewals. The entity should consider whether the commission paid upon a
contract renewal is commensurate with the initial commission. This
determination will also affect the determination of the amortization period
under ASC 340-40-35-1.
6.5.1.3 Recognition of Revenue From Contracts With Customers
In the technology industry, contracts with customers
typically have multiple performance obligations. Consequently, when the SEC
staff reviews the filings of registrants in the technology industry, it may
comment on the manner in which revenue is measured and recognized in such
arrangements as well as on the related disclosures. Historically,
registrants have been asked to clarify the descriptions of promised goods or
services in an arrangement, how they determined the stand-alone selling
prices of those promised goods or services, and the timing of each element’s
delivery or performance.
6.5.1.3.1 Identification of Performance Obligations
Examples of SEC Comments
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Your revenue recognition policy disclosures indicate that technology license agreements and material supply agreements are combined as a single performance obligation and recognized over the contract term. We further note that you allocate the total contract consideration under these agreements to material sales and royalty and licensing fees on the Consolidated Statements of Income based on contract pricing. Please explain to us your basis for separating a single performance obligation into multiple line items on your income statement and within your disaggregated revenue disclosures under ASC 606-10-50-5. In doing so, ensure you tell us and clarify your disclosures to specify if you have revenue arrangements that include just material sales or just royalties and license fees.
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You state in your . . . Form 10-K that you offer specified upgrades and new license products. Please tell us how you have considered these obligations under ASC 606 and clarify if they represent separate performance obligations.
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You disclose that certain software licenses and related post-contract support are combined into a single performance obligation when ongoing services provide frequent and critical updates to maintain the continued functionality of the software. Please describe the software licenses and services you combine into a single performance obligation. Explain how you considered the guidance in ASC [606-10-25-21].
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You state that you combine intelligence dependent appliances and software licenses with the related intelligence subscription and support as a single performance obligation. Please explain further the nature of your support services and how you determined that such services are not separately identifiable from the appliance and related software. Refer to ASC 606-10-25-19 and 25-21.
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We note that during the [last completed fiscal year], the Company began shipping [devices] with features that function independently from its proprietary software subscription (“distinct [devices]”) that are recognized as a separate performance obligation in hardware revenue. We further note that when distinct [devices] are included in a contract, the hosted services performance obligation is comprised of only the Company’s proprietary software. Please help us better understand why when the distinct [devices] are included in a contract, they are recognized as a separate performance obligation from the hosted services performance obligation. We refer you to ASC 606-10-25-19 through 22.
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You disclose that your SaaS-based and PaaS-based arrangements represent a single promise to provide continuous access, a stand-ready performance obligation, to your software solutions and [the software’s] processing capabilities. You also indicate that fixed consideration under these arrangements may relate to a material right. Please tell us, and revise your disclosures to clarify, whether the material right is a separate performance obligation and if and how you have allocated consideration to this promise. Reference ASC 606-10-55-41.
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Tell us how you considered ASC 606-10-55-56(b) in assessing whether your revenue arrangement includes a software license and SaaS, and whether they are distinct from each other or could be accounted for as a combined item based on their functionality and the degree to which they affect each other. Refer to ASC 606-10-55-56(b).
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You disclose . . . that customer licensing arrangements include the term license, implementation services, and annual support inclusive of unspecified upgrades and enhancements, and that these promises represent one combined performance obligation because they are not distinct in the context of the contract. Please tell us how you made this determination and considered the guidance in ASC 606-10-25-21.
When a contract is identified and determined to be
within the scope of ASC 606, all promised goods and services should be
identified. ASC 606-10-25-18 provides examples of certain items that
could constitute promised goods or services in an entity’s contract with
a customer, and the entity should evaluate whether such promised goods
or services are distinct (i.e., capable of being distinct and distinct
within the context of the contract). Such promises could be implied on
the basis of business practice or explicitly stated in the contractual
agreement; however, the entity is not required to identify immaterial
promises.
ASC 606-10-25-19 states that a promised good or service
is distinct if (1) the “customer can benefit from the good or service
either on its own or together with other resources that are readily
available to the customer (that is, the good or service is capable of
being distinct)” and (2) the “entity’s promise to transfer the good or
service to the customer is separately identifiable from other promises
in the contract (that is, the promise to transfer the good or service is
distinct within the context of the contract).” If both of these criteria
are met, the entity should consider the guidance in ASC 606-10-25-14 to
determine whether the promised good or service is part of a series of
goods or services that (1) are substantially the same and (2) have the
same pattern of transfer to the customer as defined in ASC 606-10-25-15.
If the criteria in ASC 606-10-25-14 are not met, the unit of accounting
is the individual distinct good or service; alternatively, if these
criteria are met, the unit of accounting is the series of distinct goods
or services. In accordance with ASC 606-10-25-22, if the promised good
or service is not distinct, the entity should “combine that good or
service with other promised goods or services until it identifies a
bundle of goods or services that is distinct.”
Technology companies need to use significant judgment
when identifying performance obligations in a contractual agreement. For
example, multiyear license agreements typically contain the software
license as well as postcontract customer support (PCS). Under ASC 606,
an entity is required to assess whether the software license and the PCS
are each distinct; this determination could affect the identification of
performance obligations, the allocation of the arrangement’s contract
value to each performance obligation, and the timing of revenue
recognition. When combining promised goods and services into one
performance obligation, the entity should evaluate the guidance in ASC
606-10-25-20 and 25-21.
In addition, the SEC staff has issued comments on a registrant’s basis
for separating a single performance obligation into multiple line items
on the income statement and within the disaggregated revenue disclosure
under ASC 606-10-50-5.
6.5.1.3.2 Estimation of the Stand-Alone Selling Price
Examples of SEC Comments
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You indicate that you use the residual approach to estimate the standalone selling price for your software licenses since the same products are sold to different customers at a broad range of prices, which are highly variable. Please provide a comprehensive, quantitative discussion of such variability to support your conclusion.
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Please tell us the methods, inputs, and assumptions used to determine the transaction price and allocation of the transaction price for each of your performance obligations. Clarify how your existing disclosures comply with ASC 606-10-50-20.
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We note from your response . . . that you sometimes use the residual approach to estimate the standalone selling price for sales of new products, services and [X] software suite offerings. Please tell us how you met one of the criteria in ASC 606-10-32-34(c), and to the extent material please provide a comprehensive discussion to support use of the residual approach for new products, services and [X] software suite offerings.
Under ASC 606-10-32-28, an entity should allocate the
transaction price of a contract with a customer to the promised goods or
services “in an amount that depicts the amount of consideration to which
the entity expects to be entitled in exchange for transferring the
promised goods or services to the customer.” In arrangements with
multiple performance obligations, the transaction price must be
allocated to the promised goods or services on a relative stand-alone
selling price basis. To determine the stand-alone selling price of each
promised good or service, an entity considers the price at which it
would separately sell a promised good or service to a customer. The best
evidence of this separate price is the price associated with a
stand-alone sale of the promised good or service in similar
arrangements. However, in the absence of observable evidence, an entity
could use alternative approaches, including (1) the adjusted market
assessment approach, (2) the expected cost plus a margin approach, and
(3) the residual approach.
The residual approach should be used only when the
stand-alone selling price of a good or service is not directly
observable and is either highly variable or uncertain. In such cases, it
may be appropriate for an entity to use the residual approach if, for
example, the entity (1) sells the same good or service to different
customers at a broad range of prices or (2) has not yet established a
price for the good or service.
The SEC staff focuses on how registrants in the
technology industry allocate consideration to promised goods or services
in arrangements with customers that involve multiple performance
obligations, and the staff may request additional information about the
factors, inputs, and assumptions used to determine the stand-alone
selling price of each promised good or service. The application of these
factors, inputs, and assumptions requires judgment, particularly in the
evaluation of promised goods or services that are not sold on a
stand-alone basis.
For example, suppose that an entity does not sell
software licenses on a stand-alone basis but instead sells term-based
licenses in bundles that include both a right-to-use software license
and PCS. To establish the stand-alone selling prices of the software
license and the PCS, the entity must first determine whether the
software license and the PCS are each capable of being distinct and
distinct within the context of the contract. If the entity determines
that the software license and the PCS meet both of these criteria, it
should then consider observable data points if they exist. In addition,
when the entity is establishing the stand-alone selling prices of the
software license and PCS, it may be appropriate for the entity to
consider (1) the value relationship between the PCS and the software
license if PCS is typically priced as a percentage of the license fee,
(2) the economic life of the entity’s software, and (3) the renewal
rates of the entity’s customers.
6.5.1.3.3 Timing of Revenue Recognition
Examples of SEC Comments
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You state that you expect to recognize approximately [X]% of the $[Y] billion contracted but unsatisfied performance obligations, excluding non-cancelable commitments, as revenue over the next 12 months. Please revise future filings to disclose when the remaining [Z]% will be recognized on a quantitative basis using time bands that would be most appropriate for the duration of the remaining performance obligations or by providing qualitative information. Refer to ASC 606-10-50-13.
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We note your disclosure that for a significant . . . customer, due to a change in contract terms, you began recognizing revenue under a bill and hold arrangement . . . . Your disclosure indicates, under this arrangement, control transfers over time during the [X] process; however, it is not clear to us when you recognize revenue under the bill and hold arrangement. If you recognize revenue under this arrangement “during the [X] process,” please more fully explain to us how you determined your policy is appropriate. In this regard, to the extent the only change in this arrangement was related to the customer's ability to request and agree to purchase product to be delivered at a later date, although it may be appropriate to recognize such revenue prior to shipment, it is not clear to us why it would be appropriate to recognize such revenue prior to completion of [Y] testing and products being separately identified as belonging to the customer and ready for shipment, absent other changes in contract terms. Please clarify or revise.
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You state that on-premise revenue is recognized upon delivery and transfer of control of the underlying license to the customer. Please clarify whether your reference to “the customer” means a channel partner such as reseller, distributor or system integrator, or end-user customer. Also, tell us how you determine when the customer has obtained control. Refer to ASC 606-10-25-30 and 606-10-50-19.
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Please help us better understand the nature of services associated with setup fees, including whether they are recurring or one-time. If material, please revise your future filings to describe the timing of revenue recognition associated with these fees. Please refer to ASC 606-10-50-18 and 50-19.
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Please tell us what consideration was given in disclosing the measure of progress of each type of service revenue and how each method depicted your performance in transferring control of goods or services promised to a customer. We refer you to ASC 606-10-25-31 and 25-33.
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We note that a majority of your SaaS subscription revenues are satisfied over time with certain SaaS performance obligations satisfied at a point in time. Please clarify the nature of the services that are satisfied at a point in time and what consideration was given to disaggregating revenue from contracts with customers into categories that depict how the nature and timing of revenue and cash flows are affected by economic factors. We refer you to ASC 606-10-50-5 and 55-91(f).
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[T]ell us whether the nature of the 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.
ASC 606-10-25-23 requires an entity to “recognize
revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service (that is, an asset) to a
customer.” The satisfaction of a performance obligation is determined by
the transfer of control of an asset to a customer. ASC 606-10-25-25
states, in part, that “[c]ontrol of an asset refers to the ability to
direct the use of, and obtain substantially all of the remaining
benefits from, the asset. Control includes the ability to prevent other
entities from directing the use of, and obtaining the benefits from, an
asset.” If control is transferred over time, revenue will be recognized
over time in a manner that depicts the entity’s performance in
transferring control of the promised good or service. If control is
transferred at a point in time, revenue will be recognized at that
point.
For an entity to recognize revenue over time, one of the
following criteria in ASC 606-10-25-27 must be met:
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“The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.”
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“The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.”
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“The entity’s performance does not create an asset with an alternative use to the entity . . . , and the entity has an enforceable right to payment for performance completed to date.”
If any one of these criteria is met, an entity should
recognize revenue over time by using a method that depicts the pattern
of transfer of control to the customer. ASC 606-10-25-33 indicates that
input or output methods are appropriate methods of measuring progress
when revenue is recognized over time.
However, ASC 606-10-25-30 indicates that when a
performance obligation is not satisfied over time, revenue related to
the performance obligation should be recognized at the point in time at
which the performance obligation is satisfied. This is typically the
case when an entity sells perpetual and term-based software
licenses.
The SEC staff has asked registrants to explain changes in the timing of
revenue recognition as a result of contract modifications. In addition,
the SEC staff has asked registrants to disclose the remaining percentage
of revenue that will be recognized on a quantitative basis by using time
bands in accordance with ASC 606-10-50-13.
6.5.1.4 Disclosures About Non-GAAP Measures and Key Metrics in MD&A
Examples of SEC Comments
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You state that your trailing 12-month dollar-based net retention rate was above [X]% as of [the end of the second quarter of fiscal year 4 and fiscal year 3]. Please provide us with the actual dollar-based net retention rate for each of the last three fiscal years and to date in [fiscal year 4]. Also, revise to disclose the specific percentage for each period presented and to the extent this measure varied significantly from period-to-period, include a discussion of the reasons for such change. In this regard, we refer you to [a comment in your previous response letter] where you indicated that “if and when the Company’s dollar-based net retention is below [Y]%, which is a level higher than the vast majority of its peer group, it would plan to disclose such metric on a period-specific basis, consistent with its peers that report a similar metric below such level.”
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We note that the calculation of annualized recurring subscriptions and usage revenue . . . includes platform usage charges for all . . . customers (subject to minimum billings threshold for a period of at least six consecutive months). Please tell us what usage charges you are referring to here and revise to clarify whether certain usage fees are excluded from this measure. In this regard, your revenue recognition policy refers to [Service A] and [Service B] usage fees. Also, [Subsidiary A’s] policy referenced variable usage fees for blocks of additional minutes and other items systematically purchased in excess of plan limits. Refer to SEC Release No. 33-10751.
- In the highlight section, you present non-GAAP organic revenue growth, adjusted EBIT margin growth and adjusted EPS growth without also presenting the change in the comparable GAAP measures. Your presentation appears to give greater prominence to the non-GAAP measures, which is inconsistent with the Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. Please revise your future earnings releases to comply with that guidance.
- Your revised disclosure . . . indicates that the Daily Active User growth was relatively flat in the latter part of the quarter . . . . Expand your disclosure to explain the factors that impacted your user growth rate during this period. . . . You state . . . that in the past you relied on third-party analytics to calculate your metrics and that your metrics may not be comparable to prior periods. To understand comparability among periods, revise to disclose when you shifted to using internally generated analytics, particularly Daily Active Users.
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We note that you discontinued disclosing net revenue retention rates in your . . . Forms 10-Q. Please explain to us why you removed this metric, including why you determined that it was no longer useful to an investor. Refer to Item 303 of Regulation S-K and SEC Release 33-10751.
- We note that you adjust the income tax provision to reflect the expected cash taxes to be paid in your calculation of Non-GAAP adjusted net income. Your income tax adjustment is inconsistent with Question 102.11 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016. Please revise the tax adjustment in future filings to reflect the current and deferred tax expense commensurate with the non-GAAP measure of profitability.
- We note that you present forward looking non-GAAP measures for various financial line-items without providing the reconciliation to the most directly comparable GAAP financial measure or the statement that providing such reconciliation requires unreasonable efforts. Refer to Item 10(e)(1)(i)(B) of Regulation S-K and the guidance in Question 102.10 of the Compliance and Disclosure Interpretations on Non-GAAP Financial Measures and revise your future filings to provide the required information.
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You disclose that annual run rate (“ARR”) . . . is an operating metric used to measure the health of your subscription business as it captures expected subscription and support cash generation from customers. We also note that subscription revenue includes on-premises term-based license revenue, for which revenue is recognized at a point-in-time. Please address the following:
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Clarify how this measure is calculated. Specifically address how the up-front revenue received from term licenses is factored into your ARR calculation and provide examples to help explain such calculations. Clarify whether you annualize revenue recognized or invoiced amounts.
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Tell us the length of a typical subscription contract term and explain how you consider contract renewals in your ARR calculations.
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Explain how multi-year contracts are factored into your calculations and tell us the amount of revenue recognized from multi-year contracts for each period presented and the typical terms of such arrangements.
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Explain how any software exchanges, additions to current customer subscriptions, and new customer subscriptions acquired are factored into your calculation. Please provide an example to explain these calculations.
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Clarify whether ARR reflects any actual or anticipated reductions of revenue due to contract non-renewals or cancellations, and discuss any limitations present as a result.
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Revise to describe how ARR differs from GAAP revenue and specifically address the timing of revenue recognition related to the license performance obligation. Additionally, please consider disclosing any of the above information to the extent material.
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Within MD&A, registrants in the technology industry
often use non-GAAP measures and key metrics to convey additional relevant
information to investors.
The metrics used may differ significantly among such
registrants given the different service offerings provided. Metrics commonly
used in the industry include (1) number of “likes,” (2) revenue per user,
(3) daily or monthly active users, (4) retention rates, (5) annual recurring
revenue or annual run rate, and (6) weighted-average duration of
contracts.
The SEC staff has questioned registrants in the industry
when (1) certain metrics are not explained in MD&A, (2) changes are not
appropriately quantified, and (3) it is unclear whether metrics represent
key performance indicators. Accordingly, the staff may ask registrants to
provide a detailed quantitative and qualitative discussion and analysis of
the impact of changes in their key metrics disclosed in MD&A.
Because of the vast volume of the metrics used, the SEC
staff has been concerned that (1) metrics may not be presented with
appropriate context and (2) the link between registrants’ key metrics and
their income and future profitability may not be clear. Registrants should
review their metrics to ensure that the metrics are clearly defined, portray
a balanced discussion, and remain relevant. For additional considerations
related to non-GAAP measures and certain financial or operating metrics, see
Section
3.4.
In addition, the SEC staff has asked registrants in the technology industry
to use metrics to (1) quantify components of overall changes in financial
statement line items and (2) enhance their analysis of the underlying
factors that cause such changes or the reasons for the components affecting
the overall changes (including an analysis of changes at the segment level).
The staff has commented that in addition to discussing how volume and
product mix affect their results of operations, registrants in the
technology industry should consider explaining other potential influences,
such as pricing changes, acquisitions, new contracts, inflation, and foreign
exchange rates. For additional considerations related to MD&A, see
Section 3.1.
6.5.2 Telecommunications
The SEC staff has provided comments to registrants in the
telecommunications industry on the application of ASC 606, the revenue
standard.
6.5.2.1 Revenue Recognition
Examples of SEC Comments
- Please tell us the nature of the specific goods and services that you consider separate performance obligations, particularly as it relates to video entertainment, legacy voice and data as well as strategic services. Please refer to ASC 606-10-50-12.
- Please clarify the nature of the equipment and services for which you recognize revenue on a gross basis and those for which you recognize revenue on a net basis. In addition, provide us with a comprehensive analysis regarding how you concluded you were the principal or agent in the related arrangements. Please refer to ASC 606-10-50-12(c) and ASC 606-10-55-36 through 55-40.
- 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 identify the specific products and/or services transferred to your customers within your distribution and affiliate agreements. Tell us if you have combined any products and/or services for purposes of determining your performance obligations. . . . Please also describe the judgements used in determining both the timing of satisfaction and amounts allocated to each performance obligation. Refer to ASC 606-10-50-12 and 606-10-50-17.
The SEC staff has asked registrants in the
telecommunications industry to expand or clarify their disclosures related
to revenue recognition under ASC 606. For example, the staff has asked
registrants in the industry to provide details about their compliance with
the revenue standard’s expanded disclosure requirements. The staff has
indicated that such registrants must provide more comprehensive information
related to the significant judgments that affect the amount of revenue
recognized and the timing of revenue recognition.
As the telecommunications industry continues to evolve and
new products are introduced, registrants in the industry must consider
updating their disclosures about the significant judgments that may affect
revenue recognition, including judgments related to performance obligations,
transaction prices, and costs of obtaining a contract with a customer. For
example, various service and equipment offerings that wireless operators
make available to subscribers through multiple distribution channels can
affect factors such as the allocation of transaction prices, the timing of
satisfaction of performance obligations, and the determination of whether
the reporting entity is acting as a principal or as an agent. The
conclusions reached may be matters of judgment that can have significant
implications for revenue recognition and disclosures under the revenue
standard. Changes in judgments made in the application of the standard may
require registrants to provide additional disclosures that clarify
comparability for investors. As registrants’ businesses and offerings
evolve, their new business practices are likely to draw further SEC staff
scrutiny if their relevant revenue recognition policies and considerations
are not clearly disclosed.
For information about other revenue-related considerations,
see Section
2.18.