Perspectives

The new revenue standard — A look at SEC feedback in year 1 

Calendar-year-end public business entities (PBEs) adopted the FASB’s new revenue standard (ASC 606) in the first quarter of 2018. While some companies made wholesale changes to their financial statements, the effect of the new requirements was less significant for others. However, all entities were affected by the standard’s new and modified quantitative and qualitative disclosure guidance, which significantly increased the amount of information disclosed about revenue activities and related transactions.

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Introduction

This Heads Up (1) provides a brief overview of the disclosure requirements for PBEs under the new revenue standard, (2) highlights some key themes regarding the application of ASC 606 (related to accounting and disclosure requirements) that we noted in our review of approximately 400 SEC staff comments issued to date, and (3) presents examples of those comments. Entities may benefit from evaluating the trends we have observed in our review as they continue to refine the information they disclose. For a comprehensive discussion of the new revenue standard, see Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard (“Revenue Roadmap”). Also see Deloitte’s July 11, 2018, Heads Up for a more detailed discussion of the disclosure requirements under the new revenue standard and related disclosure trends identified. For an overview of the SEC staff’s comment letter review process, see Deloitte’s A Roadmap to SEC Comment Letter Considerations, Including Industry Insights (“SEC Comment Letter Roadmap”).

Key Takeaways

  • Some notable themes identified through our review of SEC comments are:
    • The disclosure of significant judgments, including the identification of performance obligations, the determination and allocation of the transaction price, and the identification of the measure of progress.
    • The required disclosures related to performance obligations (e.g., the timing of revenue recognition and the principal-versus-agent analysis). 
    • The disclosures of the conclusions to capitalize contract costs and the related method of amortization.

Such themes represented, respectively, approximately 40 percent, 20 percent, and 10 percent of the total publicly available ASC 606 comments that we reviewed.  

  • In many instances, though the written comments specifically inquired about disclosures (and requested more of them), we observed that the underlying reason for the comments was that the accounting position taken by the registrants may not have been clear to the SEC staff upon review of the disclosures provided, or it may have been considered potentially inappropriate.
  • On the basis of our review to date, we noted that registrants in the consumer and industrial products industry (which includes consumer products; retail, wholesale, and distribution; automotive; transportation, hospitality, and services; and industrial products and construction) received approximately 45 percent of SEC staff comments, with registrants in the technology, media, and telecommunications (TMT) industry receiving approximately 35 percent. Further, registrants in the life sciences and health care industry and the financial services industry each accounted for approximately 10 percent of the comments issued, while registrants in the energy and resources industry received less than 5 percent. Within certain aspects of ASC 606, we observed that comments were concentrated in particular industries, as discussed below.
  • Under ASC 605, common subjects of focus of the SEC staff within filing reviews included: (1) disclosures, (2) multiple-element arrangements, (3) principal-versus-agent considerations, and (4) revenue recognition for long-term construction-type and production-type contracts (see Deloitte’s SEC Comment Letter Roadmap). Although the terminology and guidance for these topics have changed as a result of ASC 606, the staff appears to be focusing on similar types of issues under the new revenue standard. 

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Volume 26, Issue 4 | March 28, 2019

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Heads Up newsletter is a periodic newsletter that analyzes important accounting developments, such as new FASB and IASB pronouncements or exposure drafts.

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