Nearly half of all comment letters mentioned disclosures, demonstrating the importance the SEC places on the information companies share in their filings. If these arrangements are material, please tell us how you considered if existing content and new content represent separate performance obligations and explain how you considered judgments in determining both amounts allocated to and the timing of satisfaction of each performance obligation. 4. 3. For example, the SEC sent a comment to Starbucks on July 8, 2019 that said, “Please revise your disclosure to include your explanation of why recognition of the upfront payment of $7 billion on a straight-line basis over the economic life of the arrangement provides a faithful depiction of the transfer of goods or services pursuant to ASC 606-10-50-18.” This is to ensure that companies are clarifying not only the conclusion they arrived at, but also why the conclusion most accurately represents the transfer of control. In a letter to Comcast, dated November 5, 2018, the SEC wrote, “Please revise your disclosure in future filings to clarify that you consider your distribution agreements to be functional licenses of intellectual property. Describe your reasoning. The Intelligize report says the research company identified only 32 companies that adopted the … While these four areas generate some of the most frequent comments, topics can vary significantly depending on the industry, size, and complexity of your company. This can lead to unexpected legal and accounting fees or missed funding opportunities. Critical estimates and judgement included accounting policies – Critical accounting policies disclosed in the MD&A are duplicative of the notes to financial statements. SEC comments drove changes in revenue reporting, analysis says. Refer to ASC 606-10-50-13. Dillard’s had included a fair disclosure of its methods, inputs, and estimates for private label programs in a different part of its 10-K filing but, in its response to the SEC, agreed that in future filings it would “include this disclosure within our Revenue Recognition description under Note 1.”. For the six industries that received the most comment letters, we have compiled the most frequently commented topics along with links to example SEC comment letters. Most of the SEC’s commentary on disclosures was unique to each company and circumstance, but by understanding the trends above, companies can make proper disclosures that provide financial statement users with the clearest picture possible. For example, the SEC sent a comment to Starbucks on July 8, 2019 that said, “Please revise your disclosure to include your explanation of why recognition of the upfront payment of $7 billion on a straight-line basis over the economic life of the arrangement provides a faithful depiction of the transfer of goods or services pursuant to ASC 606-10-50-18.” This is to ensure that companies … 2. 27:29 - Segment reporting. Other subjects of frequent SEC staff comment include revenue recognition, income taxes, loss contingencies, business combinations and intangible assets, segments, fair value measurements, non-GAAP measures, and risk factors. That position echoes one that Google’s parent company Alphabet took, when earlier this year it stonewalled the SEC on its request to break out YouTube revenue under the new rules, according to Intelligize, an SEC risk and compliance analytics firm that has been analyzing the SEC’s comment letters on the new revenue recognition standard. The SEC is publicly releasing comment and response letters relating to disclosure filings made after August 1, 2004, and reviewed by the Division of Corporation Finance and the Division of Investment Management (see Press Release 2005-72, May 9, 2005).For background information on what materials are released, timing, and … 5. As of January 31, 2020, the SEC had issued 160 comment letters concerning revenue recognition disclosure requirements (ASC 606-10-50). SEC comment letters may request additional clarification concerning: 1. 25:37 - Revenue recognition. Refer to ASC 606-10-50-13b. 5. Please note that SEC only publishes comment letters that have been fully addressed and closed. Our analysis of SEC comment letters identifies the frequency of topical areas addressed by the SEC staff and how their focus … 1.4 Reviews With Comment Letters and Number of Comment Letters Trending Downward 6 1.5 Comment Letters per Review and Days to Complete a Review 7 1.5.1 Comment Letters per Review 7 1.5.2 Days to Complete a Review 8 1.6 Topics Addressed per Initial Comment Letter 9 1.7 Reviews by Filing Status and Revenue 9 1.7.1 Reviews by Filing Status 9 … Disaggregation, Performance Obligation, Timing. Is point in time revenue recognition justified? A total of 38 companies have been issued comment letters, 8 of which are early adopters of the new revenue standard. ASC 606-10-50-13 through 50-16 spells out disclosure requirements for performance obligations that remain unsatisfied. The SEC staff continues to focus on accounting and disclosure related to revenue recognition in general and multiple-element arrangements and software revenue recognition in particular. 18:46 - Non-GAAP. Other comments were more focused on the methods, inputs, and estimates that companies used in measurements. Our SEC Reporting Update publication highlights key trends in SEC staff comment letters issued during the year ended 30 June 2020, including comments on accounting and disclosures related to the COVID-19 pandemic, the use of non-GAAP measures, management’s discussion and analysis and revenue recognition. For example, the SEC sent a comment letter to Old Dominion Freight Line on June 15, 2018 asking for the following information: We note from your disclosure on page 11 (Revenue) that fuel surcharges increased to 12.8% of total revenue in the first quarter of 2018, and you regularly monitor the components of your pricing, including fuel surcharges. X Financial, a company that provides a peer-to-peer platform for lending services in China, received eight SEC comment letters related to the new revenue recognition standard during the 15 months we analyzed. 2. How did you determine the company has only one performance obligation? Even if companies utilize the practical expedient found in paragraph 14, they still must disclose the practical expedient election in their filings. Revenue recognition: The new revenue recognition standard (ASC 606) is one of the most significant changes to GAAP in years and affects all companies that earn revenue from contracts with customers. When analyzing the letters, we grouped some of the paragraphs into distinct “subtopics” based on the FASB codification headers. We looked closely at the top four topics to uncover the issues that companies were experiencing with providing proper disclosures. Most public companies were required to adopt the standard in 2018, requiring extensive new disclosures. We can find patterns and pain points when looking at the letters collectively. The adoption of ASC Topic 606 – Revenue from Contracts with Customers will most likely result in updates to the timing and process for recognizing revenue from contracts with customers, as well as how revenues are presented and disclosed in a company's financial statements. Generally Accepted Accounting Principles help ensure that financial statement users are provided with information that is consistent and easily comparable. An analysis of SEC comment letters related to the adoption of Accounting Standards Codification Topic 606 on revenue recognition says 11 companies that adopted the standard ahead of the required effective date promised to revise their language in future filings. In a January 2016 post, we examined trends in IPO comment letters between 2013 and 2015, including several metrics designed to shed light on the length and level of detail of the pre-IPO review process.In this blog, we extended the analysis to years 2016 and 2017 as well as the first quarter of 2018. The SEC sent many letters like the letter it sent to Delta Air Lines on July 16, 2018. Comments have addressed whether registrants have disclosed their SEC says companies should brace for comment letters on new revenue rule ... about how they have implemented new revenue recognition rules. However, some require extensive follow-up with SEC staff to be resolved. The SEC is pushing companies to provide more detail, clarity, and analysis so that users of financial statements can better understand the company’s reasoning behind components of revenue recognition. Common SEC comments concerning the MD&A may include: 1. • Comment letter language includes “Topic 606”, “ASC 606” or “ASU 2014-09”. One example of how the SEC comments on these issues is found in its letter to Avid Technology, dated November 29, 2018: Please tell us and disclose the transaction price allocated to the performance obligations that are unsatisfied as of September 30, 2018 and explain when you expect to recognize such amount. This would appear to include amounts referred to as Other Backlog as provided in the Form 8-K furnished on November 11, 2018. Comment letters cannot always be avoided, and companies should not make avoiding comments their first priority when preparing disclosures. This assessment must state management’s responsibility for establishing and maintaining adequate reporting controls, describe the framework used in the evaluation and include an assessment of any material weaknesses identified. Variable consideration: Determination of transaction price – Describe how variable consideration estimates affect transaction price. Also, please tell us and revise to clarify if revenue from private label cards is recognized over time or at a point in time. When the SEC commented on disclosure requirements for performance obligations, it mainly touched on the nature and timing of performance obligations, principal vs. agent relationship considerations, significant payment terms, and licensing arrangements. 3. Filers should disclose the amount still unsatisfied, an expectation of when revenues will be recognized (based on both qualitative and quantitative analyses), and the reasoning behind any exceptions. There was a particular interest in “converged” standards. Recognizing revenue: When control transfers – Your contracts indicate consulting services are provided over a period of time. When it came to transaction price disclosures, the SEC seemed to focus particularly on guarantees, variable consideration, and associated constraints. Please tell us if fuel surcharge revenues represent variable consideration under ASC 606 and, if so, tell us and revise your future filings to disclose how you estimate variable consideration amounts, including how you assess the constraint (if applicable) and how you allocate this variable consideration to the performance obligations. 3. The SEC has indicated the staff plans to take a hard look at the first annual reports under the new standard, with a focus on material matters. Lack of conclusion on effectiveness - File an amended form 10-K to specifically state your assessment of ICFR as either effective or ineffective. 2. The SEC’s focus on methods, inputs, and estimates is further demonstrated in a May 29, 2019 comment letter to Dillard’s: Please tell us your consideration of disclosing your revenue recognition policy related to internet sales. The annual recognition is not expected to vary significantly over the next 10 years as the vast majority of existing Customer Agreements have at least 10 years remaining, given that the average age of our fleet of residential solar energy systems under Customer Agreements is less than three years due to the Company being formed in 2007 and having experienced significant growth in the last few years. The SEC highlighted its point regarding new and existing content in a Sept. 24, 2018 letter written to NBCUniversal: Please tell us if content licensing agreements include promises to provide content libraries. Please tell us how you considered that these two time bands would be the most appropriate to explain when you expect to recognize the revenue related to your remaining performance obligations given the initial band only represents 5% of a 20 year remaining initial term of the customer agreement. Please refer to ASC 606-10-50-12.”  In its response to the broad comment, AT&T explained in greater depth its various products and how it packages them for customers, how it delivers the products, and how it evaluates the sales for revenue recognition purposes. Comments issued on revenue recognition have focused on the following areas of judgment: • Identifying performance obligations • Determining whether a registrant is the principal or an agent in a revenue transaction • Estimating variable consideration • Meeting the criteria for using the residual approach for estimating selling prices 4. In its letter to Sunrun, Inc. on October 1, 2018, the SEC drilled down on certain key details: You disclose that you had contracted but not yet recognized revenue of approximately $4.4 billion as of June 30, 2018 of which you expect to recognize approximately 6% over the next twelve months and the remainder thereafter through the remaining initial term of the customer agreement. Those comment letters SEC comments can cover a range of issues depending on the particular filing under review. 2. Reconciliation to comparable GAAP – Include a reconciliation of “core earnings” with net income and individually disclose all adjustments. Because the standard is still relatively new, it is a common focus of many SEC comment letters. 17:07 - COVID-19. In this letter, the SEC asked Avis to “tell us your consideration of disclosing any obligations for refunds and other similar obligations pursuant to ASC 606-10-50-20(d).” Understanding this information helps financial statement users to better gauge the likelihood of returns and refunds occurring. The SEC staff continues to issue substantial industry-specific comments. Performance obligations: Nature of performance obligations – Descriptions of your contracts discuss several activities. Misleading adjustments or “tailored accounting” to hide infrequent or unusual items – Non-GAAP adjustments for items occurring in the past two years or expected to reoccur in the next two years are not permitted. 2019-07-26T18:21:00Z. State Sponsors of Terrorism Internal Control over Financial Reporting: SEC annual reports require management’s assessment of the effectiveness of Internal Control over Financial Reporting (ICFR) for the most recent fiscal year. 2. During the first six months of 2017, 2,315 letters 1 were filed (905 CORRESPs and 1,410 UPLOADs) – a decrease of 246 letters (9.6%) from the first six months of 2016.. The company had a disappointing debut on the New York Stock Exchange (NYSE) in September 2018, raising $104.5 million. 5. Reach out to us with your questions or suggestions for future articles. Revise the MD&A to discuss steps you are taking to avoid default, the impact of default and alternate sources of funding. Steven has spent a summer with Goldman Sachs' investment banking division and plans to join Houlihan Lokey's restructuring investment banking team upon graduation. For example, paragraph 12 is found inside the “performance obligations” section of the codification in ASC 606-10-50. Revenue Recognition As expected, there has been a noticeable increase in revenue recognition comments with the adoption of ASC 606 in January 1, 2018 for most registrants. Often, comments can be resolved without changes to accounting or disclosures. Each reporting entity is reviewed, in some respect, at least once every three years. The MD&A is a narrative of the company’s financial condition reflecting each registrant’s specific facts and circumstances. What exactly have we learned from the initial wave of comment letters? Paragraphs 18 and 19 both deal with timing issues, etc. The 15 industries (categorized by SIC codes – a four-digit code that identifies the primary business of a company) that received the most comment letters are as follows: We examined comment letters sent to each industry and identified the most common issues for each one. However, management can anticipate potential comments and take proactive steps to improve the quality of filings. Disclose how long you expect to be able to continue operating without additional capital. Because SEC letters are public, there is also the potential for reputational damage. Clear description of non-GAAP measures – Your gross margin excludes depreciation and amortization and should be disclosed as a non-GAAP measure. The changes that companies are making to disclosures are helping financial statement users (who may not fully understand ASC 606) understand the bigger picture of a company’s revenue indications. 1. Reference ASC 606-10-50-12.”. In its response, Sunrun proposed an adjustment to its disclosures and concluded that the disclosure would give financial statement users more information about the amount, timing, and trends related to the remaining performance obligations: Contracted but not yet recognized revenue was approximately $4.4 billion as of June 30, 2018, of which the Company expects to recognize approximately 6% over the next 12 months. Though the SEC more generally prodded companies to disclose broad information about remaining obligations, it also sometimes asked for finer detail and analysis. Usefulness to investors – Update disclosures to discuss how investors should evaluate your use of non-GAAP measures. Because disclosures receive so much attention from the SEC, we analyze those comment letters in a separate article: SEC Commentary on Revenue Recognition Disclosures. Gross v. Net presentation: Control over goods and services – Explain how you determine whether you are a principal or agent in your contracts. The new revenue recognition standard (ASC 606) is one of the most significant changes to GAAP in years and affects all companies that earn revenue from contracts with customers. Regardless of whether the SEC agreed with the conclusion, the issue seemed to be that companies did not explain the rationale behind their conclusions to financial statement users. A letter written to Interpublic Group of Companies on December 20, 2018 is a typical example. SEC comment letter trends for technology, media and telecommunications companies. By keeping frequent topics of SEC comment letters in mind, management can be prepared to issue a timely response should a comment letter arrive. In this annual analysis, we looked at the most common issues raised in SEC comment letters over the … The annual recognition on these existing contracts will gradually decline over the following 10 years as the typical 20 year initial term expires on individual Customer Agreements. We corroborate these findings using another frequent comment letter topic – revenue recognition – and the likelihood of revenue-recognition related changes in accounting estimates. Once companies have properly carried out accounting procedures for ASC 606, they still have some work to do. He has come to love the challenge of simplifying technical accounting and finance problems and has embraced writing along the way. The SEC sent at least one comment letter relating to each of the individual paragraphs within ASC 606-10-50, but some issues were far more prevalent than others. It had Because the standard is still relatively new, it is a common focus of many SEC comment letters. When the SEC asked about the nature and timing of performance obligations, it was usually because companies failed to clearly explain the obligations to financial statement users. Quantification of unusual events or economic changes – Quantify each of the variables you describe as factors for period-to-period changes. Most of the letters addressing this issue looked like the following comment that AT&T received on September 19, 2018: “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. Companies are required to disclose the nature and timing of the different aspects of performance obligations. Our publication. In addition, please clarify the methods used to measure progress, if applicable, and why the methods reflect a faithful depiction of the transfer of the goods and services. 6. remains the leading source of comments. Due to the rotational and selective basis CorpFin uses to determine which filings to review, it is unlikely all financial institutions have been reviewed after adopting the revenue recognition standard; however, certain banking registrants have received comments on this topic. In particular, it doesn't seem that Corporation Finance, the group in the SEC that reviews company filings and send out comment letters, has a full awareness or consistent approach to addressing the deferred revenue purchase accounting adjustments that create “ghost revenue.” The SEC publicly posted the Square comment letter file on December 26, 2019, 30 days after the file was closed on November 26, according to the last letter … Most public companies were required to adopt the standard in 2018, requiring extensive new disclosures. We observe a similar spillover effect among an auditor’s clientele in the same industry and with changes to companies’ goodwill footnote disclosures. aspects of the standard would be an area of focus. ASC 606-10-50-18 and 50-19 contain disclosure requirements for the timing of revenue recognition from contracts with customers. Companies frequently engage in transactions that involve payment provisions. 31:02 - Best practices. The following areas are central to the standard’s accounting and disclosure requirements and are often the subject of SEC comment letters: 1. 2nd SEC Comment Letter to Amazon’s Responses regarding 10-Q for the Quarterly Period Ended June 30, 2018; Our thoughts: This SEC Comment Letter goes back at the company pushing for clarity on when revenue is recognized for specific services the SEC inquired about in its initial Comment Letter. Areas of Focus in Each Section of Form 20-F Not surprisingly, the SEC staff’s primary focus was on the financial statements. Analysis of results of operations – Provide additional information about components of operating expenses and the factors responsible for the changes. Comments were geared toward understanding the judgments made and assumptions used in applying IFRSs. The SEC Division of Corporation Finance selectively reviews public filings by SEC registrants to monitor and evaluate compliance with applicable disclosure and accounting requirements. 2017 marked the eighth consecutive year of decline in the number of SEC comment letters. The questions raised in the160 comment letters reveal where the SEC focused its attention. Ryan shares his observations with respect to the overall trends in SEC comment letters in 2020, including: 13:16 - MD&A. Additionally, the SEC asked many companies why the method used to determine the timing of revenue provides the most faithful depiction of the transfer of control. The SEC seems to be particularly focused on disclosure. NBCUniversal explained the significant judgments it made in concluding that it does not have a promise to provide access to a content library with a concurrent promise to refresh the library as new content is created. The SEC may provide a company with a public comment letter if they feel additional information is required, or to request that disclosures be revised. While many filing reviews are completed without comments, a comment letter can lead to delays in the filing process. Fourteen of the 18 companies received comments on their form 10-K for the fiscal year ended December 31, 2016; one company received comments on its 10-Q for the fiscal quarter ended March 31, 2017. SEC comment letters issued in response to financial disclosures relate to a wide variety of topics, but they all have one thing in common: They have the potential to disrupt normal business operations. Recognition and measurement comments varied by industry. 2019 SEC Comments and Trends: an analysis of current reporting issues. FEI identified 18 companies that received comment letters with remarks on SAB 74 disclosures. Refer to ASC 606-10-50-12 and 606-10-50-17. The 2017 edition of SEC Comment Letters — Including Industry Insights offers such ... the SEC continues to focus on the following priorities that may be helpful Management’s disclosure of effectiveness of ICFR – Explain how you determined the identified material weakness did not impact your conclusion regarding the effectiveness of your ICFR. SEC comments on early reports under the new revenue recognition standard tended to sway companies to revise their reporting, analysis shows. Refer to 606-10-50-15. In the letter, the SEC requested that Delta “revise to disclose significant payment terms for sales of mileage credits to credit card companies, hotels, and car rental agencies pursuant to ASC 606-10-50-12(b).” Though Delta appeared to have properly accounted for the transactions, the SEC prodded for more details. This publication focuses on key trends in SEC staff comment letters issued for the year ended 30 June 2019 and the outlook for next year. Performance obligations: Disclosure of remaining obligations – Describe your method for allocating revenue to unfulfilled performance obligations. If you are applying the practical expedient in 606-10-50-14 please tell us and disclose. Our analysis of SEC comment letters issued in relation to Form 10-K and Form 10-Q filings identifies the frequency of topical areas addressed by the SEC staff and how their focus areas changed over time. Based on our analysis, the average number of comments in the first-round of letters … People, Industries, Client Stories, News. In the letter, the SEC requested that the company “more fully discuss how you determined that you act as an agent for production services and media buying service. Identification and disclosure of material weaknesses – Discuss your consideration of the previous restatement during ICFR evaluation and why it does not indicate the presence of a material weakness. SEC reviews focus on critical disclosures that may conflict with the agency’s rules, do not conform to applicable accounting standards or require further clarification. It is an opportunity for management to provide context to readers and help investors see the company through the eyes of management. Certain disclosure requirements received a lot of attention, and certain industries struggled more than others. These components affect the timing and risk of payments and must meet certain additional disclosure and presentation requirements. Steven is from Georgia and grew up playing soccer, mastering the kendama, and avoiding writing. Delta thought that it met the disclosure requirements for the financing components and variable considerations associated with the transactions. ASC 606 did away with industry-specific guidance, but revenue recognition under the new standard can still be complex within certain industries, inviting questions from the SEC. Reference ASC 606-10-50-18 and 19. Designed and developed by Greenfield/Belser Ltd. Forensic and Support Services for Lenders, Paycheck Protection Program Forgiveness Services for Banks, Distressed Loan Workouts For Lenders and Borrowers, Economic & Statistical Consultants (Eco-Stat LLC), Forensic, Litigation & Consulting Services, Forensic Accounting and Fraud Investigation, Pension Administration Services | Benefits 21 LLC. Disaggregated revenue: Inconsistent disclosures – You disclose sales by segment, however your investor presentations discuss sales by end market. Both the SEC’s questions and the company’s responses can be found in the links provided below. Comment letters may request removal or modification of non-GAAP metrics, which can be used to mislead investors. Much of the licensing commentary was geared toward disclosures related to functional and symbolic licensing arrangements. The SEC’s comment to Avis Budget, dated November 27, 2018 demonstrates issues related to disclosures for obligations for returns and refunds. In recent comment letters, the SEC requested deeper explanations regarding the judgments that companies made to determine when control is transferred to the customer. vii SEC Comment Letters — Including Industry Insights • Revenue recognition — Comments continue to include those that address the completeness and … The SEC also focused on the disclosures for returns and refunds. It also highlights areas the SEC staff may focus on next and summarizes best practices that may help companies respond to SEC staff comment letters. The SEC requires a Management’s Discussion and Analysis (“MD&A”) disclosure in quarterly and annual filings. The letters often mentioned multiple paragraphs. As shown in the chart below, most of the letters were uploaded during the second half of 2018, with more trickling in throughout 2019. Contract balances, disaggregation of revenues, and significant judgments also drew some heat. At least 208 companies received letters from the SEC about their revenue-recognition practices in 2018, according to regulatory filings and data compiled by consulting firm Audit Analytics Inc. Liquidity: Cash flow – You state that you will need additional capital to meet obligations for the next 12 months. 4. The following areas … Search it Here. SEC Focus on the New Revenue Standard. 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