Regulatory staff to focus on quality of disclosures about revenue recognition in year-end filings

As public companies submit their 2017 10-K filings to the Securities and Exchange Commission (SEC), the agency is carefully reviewing companies’ disclosures about their transition to the new revenue recognition accounting standard.

The SEC staff’s focus on the disclosures about the accounting change comes as public companies finalize implementation of the standard, which became effective in January 2018.

“Revenue recognition is the topic that we’ve talked about a number of years. That conversation was in a forward-looking, anticipatory context. This is the last year we will be anticipating. When we are together next year, we will have had the effects of the new standard built into the primary financial statements,” SEC Chief Accountant Wesley Bricker said in a presentation at the Practising Law Institute’s SEC Speaks conference on Feb. 24, 2018, in Washington. “The message here is really one of final preparation from two respects: implementation plans should be coming into their final step in terms of selection of accounting policies, identification of the important judgments, assumptions to be included in disclosures and dialogue with the external auditors [and] the audit committee.”

The SEC considers the disclosures to be particularly important about the effect companies expect from the new accounting standard on their financial results, Bricker said. The information is required by Staff Accounting Bulletin (SAB) No. 74, Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, (SAB Topic 11.M). The staff guidance instructs public companies to consider four elements of disclosures: a brief description of the new standard, a discussion of the methods of adoption, a discussion of the effect on financial statements and a disclosure of the potential effect of other significant matters.

“Those anticipated disclosures really provide investors with an ability to absorb the change before they see it in the primary financial statements,” Bricker said. “It’s a particular focus of ours this period-end because our expectation is that for most companies on a calendar-year basis, they would essentially be in the final stages of their implementation.”

In Bricker’s view, 10-K filings for 2017 should give investors a clear description of the anticipated effect the revenue standard will have on the results they report throughout 2018. Bricker added that the SAB No. 74 disclosures should provide “a jumping off point” for investors to understand the effect the revenue standard will have.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in May 2014 published largely converged standards that make major changes to how companies report revenue. The standards erase about 180 pieces of industry-specific revenue guidance in U.S. generally accepted accounting principles (GAAP) and provide a single, principles-based process by which all businesses must calculate the top line in their income statements. The FASB issued Accounting Standards Update (ASU) No. 2014- 09, Revenue From Contracts With Customers (Topic 606), and the IASB published International Financial Reporting Standards (IFRS) 15, Revenue From Contracts With Customers. The FASB standard is effective for public companies’ 2018 first-quarter filings.

“The GAAP requirement for revenue recognition is to disclose the significant streams of revenue, the significant types of revenue and disaggregating revenue on a basis that’s consistent with how management views the business and operates the business,” Bricker said. “Advisors to audit committees and management teams would do well to focus on the judgments required when applying the disclosure requirements under the new standard.”

Kyle Moffatt, chief accountant of the SEC’s Division of Corporation Finance, advised companies to provide extra disclosures if they plan to capitalize their costs for obtaining and fulfiDisclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Periodlling customer contracts. Certain costs — such as marketing costs, bids, commissions and legal fees — are recognized as assets under ASU No. 2014- 09, and the expenses may qualify for capitalization and the related subsequent accounting.

“That’s some disclosure you may want to consider adding in there to balance the disclosures surrounding the reported impact of the adoption of revenue recognition standard,” he said. “That’s another piece to layer in there, just to make sure you have a good balanced discussion of that fact that you will have capitalized costs and would be amortizing those in future periods.”

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