The Securities and Exchange Commission (SEC) recently indicated its existing staff guidance on revenue recognition will be withdrawn once entities adopt the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC Topic 606). Public business entities are required to adopt the new revenue recognition standard for fiscal years beginning after Dec. 15, 2017.
On Aug. 29, 2017, the SEC issued Staff Accounting Bulletin No. 116 (SAB 116). SAB 116 modifies portions of the interpretive guidance in an effort to make the relevant interpretive guidance on revenue recognition consistent with authoritative accounting guidance and SEC rules and regulations. SAB 116 brings existing revenue recognition guidance per SAB Topic 13, Revenue Recognition, as modified by SAB 104 (SAB 13), and SAB Topic 8, Retail Companies (SAB 8), into conformity with ASC Topic 606. Prior to adoption of ASC Topic 606, registrants should continue to refer to prior Commission and staff guidance on revenue recognition topics.
SAB 13 provides the staff's views regarding then-existing general revenue recognition guidance as codified in ASC Topic 605. It identified the four general criteria for revenue recognition as follows:
- Persuasive evidence of an arrangement exists
- Delivery has occurred or services have been rendered
- The seller's price to the buyer is fixed or determinable, and
- Collectibility is reasonably assured.
ASC Topic 606 provides a single set of revenue recognition principles governing all contracts with customers and supersedes the existing revenue recognition framework in ASC Topic 605, which eliminates the need for SAB 13.
Other Changes to SEC Staff Guidance
In addition, the SEC has updated its interpretative guidance related to bill-and-hold arrangements with Commission Guidance Regarding Revenue Recognition for Bill-and-Hold Arrangements Release No. 33-10402, which had established seven criteria necessary for delivery to have occurred. The guidance will now point entities to ASC Topic 606, once adopted, which contains four criteria a bill-and-hold arrangement must meet in order for the customer to control an asset in the physical possession of the seller. These criteria are applied in addition to the general guidance on when control is transferred to a customer for performance obligations satisfied at a point in time. The four criteria are:
- The reason for the bill-and-hold arrangement must be substantive
- The product must be identified separately as belonging to the customer
- The product currently must be ready for physical transfer to the customer, and
- The entity cannot have the ability to use the product or to direct it to another customer.
SAB 8 provides the staff's views regarding presentation and disclosure issues in a retailer's financial statements. ASC Topic 606 provides guidance regarding the identification of performance obligations in a contract with a customer, presentation of revenue as a principal (on a gross basis) or as an agent (on a net basis) as well as presentation of the effects of financing in the statement of comprehensive income, which eliminates the need for the guidance in SAB 8.
As a reminder, the statements in staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission's official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.
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Published on September 26, 2017