The time has come for public companies to adopt the new revenue recognition standard. Early adopters have already given us an indication of what the audit risks will be, and they've also been the guinea pig for comments from regulators. As expected, the adoption and application of the new guidance is an item that the Securities and Exchange Commission (SEC) is paying attention to, already having sent comment letters to several early adopters. The ongoing public company adoption and comment process is important for private companies as well. The questions the SEC raised will influence how certain types of contracts are approached and the types of information that will be expected to comply with the disclosure requirements.

How Did You Determine Your Variable Consideration?

Price concessions, rebates, liquidation damages and penalty or incentive provisions will likely result in variable consideration. Entities must estimate the amount of variable consideration they expect to receive as part of the transaction price using either the expected value (probability of the provision being used by the customer) or the most likely amount (when there's two possible outcomes). Variable consideration is then reassessed at the end of each reporting period.

Regulators have shown a particular interest in how entities calculate their variable consideration estimates. The SEC questioned a solar systems company about its variable consideration and whether it appropriately reassessed its estimates.

Entities should be very clear about their choice of method and their reassessment schedule in their disclosures.

An investment group received a question about how it determined its rebates for its customers, which it did not include as a reduction in its transaction price.

Organizations that determine that their variable consideration does not affect the transaction price should have enhanced disclosures about how they reached that conclusion.

How Did You Calculate the Revenue Recognized Over Time?

Revenue is recognized over time when the entity satisfies performance obligations over time. The amount of revenue recognized will depend on the amount of control that has been transferred to the customer, which entities can determine using either an input or an output method.

The SEC wanted to know more about how the solar company handled its over time payments. It asked for additional information on how the satisfaction of performance obligations and the timing of payment affected the solar company's contract asset and liability balances. The SEC also asked the solar company to revise its future disclosures to be explicit about why it chose the method of recognizing revenue over time that it did. Entities should be very clear whether the input method or the output method was used and why.

The investment company also received comments about its subscription services, which met the requirements for a performance obligation satisfied over time and which the investment company recognized monthly. The SEC wanted more information in the company's disclosures related to remaining performance obligations or the application of optional exemptions, which in this case, meant the investment company needed to explicitly say there were no remaining performance obligations to be satisfied. If using a subscription-based service, companies should be clear about how that affects remaining performance obligations in the event regulators have additional questions.

What Amount of Disaggregated Revenue Information is Appropriate?

Public companies are also required to disclose information about revenue at a disaggregated level in order to depict how economic factors affects the nature, amount, timing and uncertainty of cash flows. This disclosure has different requirements and objectives compared to the segment disclosures that may already be included in the financial statements. An automaker received a question about this very issue and in follow-up response the SEC staff noted that the company presented information outside of its financial statements at a more disaggregated level then within the financial statements raising questions about how the company considered this other information when concluding on the appropriate level of disaggregation.

Another company received similar questions about its disaggregation of revenue and how categories were selected considering that the disaggregation excluded categories of revenue that were discussed as important in other areas of the document.

These comment letters provide important considerations for public companies as they prepare their first quarter disclosures under the new revenue recognition guidance.

Be Prepared

Early comment letters from the SEC can provide valuable insight to companies who are preparing their financial statements and required disclosures under the new standard. They are especially helpful when considering the approach to meeting the disclosure requirements in the new revenue recognition standard. Keep in mind that public companies will be required to make all of the disclosures required in each quarter's financial statements for revenue recognition and other newly adopted accounting standards. Regulators will likely be looking for detail, particularly in the first year of adoption. It is recommended to have through documentation of the contemporaneous decision making made for revenue recognition and the items included in disclosures. The analysis is best done by including all information and considerations relevant to the decision-making process, even if some of the information is not supportive of the final decisions reached.

For More Information

If you have any comments, questions, or concerns about adopting revenue recognition, please contact Mark Winiarski of MHM's professional standards group. Mark can be reached at or 816.945.5614.

Published on April 03, 2018