In the first hint of regulatory response to corporate adoption of new revenue recognition rules, staff at the Securities and Exchange Commission have signaled companies might want to take a second look at their compliance as they approach their first year-end filing under the new standard.
Minutes from the July meeting of the Center for Audit Quality’s SEC Regulations Committee indicate SEC staff members shared their observations from limited reviews so far of companies that are filing quarterly reports reflecting Accounting Standards Codification Topic 606, or ASC 606, the new revenue standard. While it’s too early to consider SEC staff observations to be “trends or otherwise noteworthy,” staff indicated audit committees would be well advised to review the company’s approach to compliance with its management and external auditors.
Calendar-year public companies began filing quarterly reports in 2018 reflecting the massive new requirements for when and in what amounts to recognize revenue in financial statements. Companies so far have filed two 10-Qs following the new rules, and they still have one more quarterly report to complete before filing their first year-end report observing the new accounting.
SEC staff are reviewing filings and paying particular attention to compliance with ASC 606 as part the normal course of the Division of Corporation Finance’s filing review process. Staff members attending the recent CAQ committee meeting said they will issue comments “to the extent that there appear to be material items that conflict with the standard, or material disclosures that are missing,” the meeting minutes indicate. Even if a company’s disclosures are not materially deficient, however, companies “may choose to revise or improve” disclosures in future filings.
Staff members said they would encourage audit committees to dialogue with management and external auditors to get a sense of “where a company is relative to the standard’s requirements and investor and regulatory feedback.” Staff members even indicated good topics of discussion for those conversations, such as the use of significant judgments in application of ASC 606, identification of performance obligations, determinations of where a company acts as a principal or an agent in a given contract, and disclosures regarding the separate reporting of different types of revenue streams.
Public companies are also in the final stages of preparing for new lease accounting rules, which take effect for calendar-year filers on Jan. 1, 2019. Private companies have an extra year to adopt both major new rules, so many of them are focused on the new revenue rules as they move closer to year-end reporting.