Staff at the Securities and Exchange Commission are starting to demonstrate a keen interest in some specific disclosures companies are providing in their early days of compliance with the new revenue recognition standard, based on themes emerging from comment letters to early adopters.

In its analysis of comment letters the SEC staff has sent to early adopters, PwC says the SEC is focusing its remarks so far on disclosures regarding the disaggregation of revenue, contract costs, performance obligations, and the considerations companies took into account in determining whether they were the principal or the agent to a particular contract with a customer.

Calendar-year public companies began reporting revenue under Accounting Standards Codification Topic 606  on Jan. 1, 2018, but a handful of early adopters began following the new standard a year earlier. SEC comment letters on those filings represent the first look at how regulators might be scrutinizing year-end reporting under the new standard.

With respect to disaggregation, ASC 606 requires companies to develop categories of revenue based on how the nature, amount, timing, and uncertainty of revenue and cash flow might be affected by economic factors. That could mean companies need to disaggregate, or break apart, their revenue by major product line, geography, customer type, or other factors that would be specific to a company’s own business.

Cameron Murray, senior manager at PwC, said in a recent podcast that SEC staff is asking companies general questions about how they selected their various categories for disaggregation and why they might not have disaggregated certain components even further. “We’ve also seen the SEC comment on reconciling information reported in disaggregated revenue disclosures with information reported elsewhere,” he says. SEC staff is looking at whether information disclosed under the standard is consistent with information the company has reported not just in its filing, but even in other materials entirely, like earnings releases or investor presentations. 

Contract costs also are getting some scrutiny by SEC staff, said Murray. Under ASC 606, some costs to obtain a contract must be added to the balance sheet as an asset and amortized or written down over the life of the contract. Companies need to provide plenty of disclosure to explain how they determine what costs should be capitalized. 

SEC comment letters are drilling deep into commissions, said Murray, which often must be reported as an asset under the new accounting. Comment letters are asking questions about how renewals in customer contracts are affecting cost determinations, for example. With multiple judgments going into determining how costs are treated, good disclosure is key, he said.

In the area of performance obligations, staff comments are focusing on asking companies to better explain the nature of their obligations, especially when obligations might be satisfied at a point in time or over time, said Michelle Dion, senior manager at PwC. “We’ve seen a couple of comments that really drive home the point for companies to describe the nature and timing of when a performance obligation is satisfied,” she said. Comments suggest the SEC is looking for plenty of robust disclosure in this area, she said.

Finally, the SEC is looking for a good understanding of how companies determine when they are a principal to an arrangement versus when they are acting as an agent, said Dion. In one case, the SEC staff asked a given company to provide a copy of its analysis and asked for a revision to future filings to better clarify its view. “The SEC staff wants to see more robust disclosure in this area,” she said. And that doesn’t mean simply re-listing the factors a company considered in its analysis, she said.

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