Whatever public companies have been saying in their disclosures about revenue recognition so far, regulatory reaction after two quarterly filings would suggest they should plan to say more.

“Expand and clarify,” says Eric Knachel, a senior consultation partner at Deloitte & Touche. Those, he says, are the two most common words appearing in comment letters issued by the Securities and Exchange Commission to public companies that are complying with new revenue accounting rules under Accounting Standards Codification Topic 606.

The standard took effect Jan. 1, 2018, producing a single, five-step method followed by all companies to determine when and in what amounts to recognize revenue in financial statements. Calendar-year companies have completed two quarterly filings that have been reviewed by auditors, but their first year-end filing that will be fully audited is only a few months away. In the meantime, they’re also preparing for another major accounting standard adoption around leasing, which takes effect Jan. 1, 2019.

With respect to ASC 606 compliance so far, “the areas may vary, but the requests from the SEC are predictable,” says Knachel. “Expand and clarify. We see that over and over.”

Sean Prince, a senior manager in the national office at Crowe, says the general message he’s hearing is that companies need to improve their disclosures, especially around significant judgments under the new standard. Comment letters seem to suggest the SEC staff is not clear on how companies are arriving at their conclusions, he says.

“They are saying ‘give us more, tell us why,’” says Prince. “How did you determine there was no significant financing component? How did you determine you had one performance obligation and not two? Why does it make sense to constrain variable consideration? Why does this measure of progress you’ve selected for satisfying your performance obligation over time make sense? Help us understand.”

Not every company needs to say more, says Prince, as some companies are providing plenty of detail. “Right now it’s a fairly broad range as to how much detail companies are providing,” he says. “Some are heavy on the detail, others are lighter.”

“This is an area where companies and auditors expect the SEC staff to focus, and it’s an area that requires a lot of judgment. So it makes sense for companies that have similar business models to compare themselves and see if their peers have more or less disaggregation.”
Cullen Walsh, Partner, Grant Thornton

SEC staff reported to audit firms via the SEC Regulations Committee at the Center for Audit Quality that they hope to see better disclosures at year-end than they’ve seen so far in first- and second-quarter reports. Meeting minutes indicate the staff has performed only limited reviews among early filings, but so far saw room for improvement. The SEC especially wants to see more explanation around uses of significant judgments, identification of performance obligations, and the disaggregation of revenue into separate revenue streams.

The staff is also looking for better descriptions of how companies determine whether they are a principal or an agent to a contract. That analysis is critical because it determines whether a company recognizes revenue on a gross or net basis, which can have a huge impact to the top line.

Knachel says many companies are engaging in a significant amount of benchmarking right now, comparing their disclosures to those of peer companies to see how they stack up against one another. They are comparing the extent, the format, and the quantitative and qualitative content of their disclosures as well as accounting policies, he says.

Some companies are recognizing they are disclosing less than their peers, and they’re asking whether they are putting themselves at risk, says Knachel. Some also see they are disclosing more than others and wonder if they can say or do less going forward. “Maybe there are opportunities to streamline processes and workflow while still achieving full compliance,” he says.

Beyond disclosures, some companies also are continuing to tweak their controls, procedures, and systems with respect to ASC 606, says Knachel. That is especially true where companies may have adopted manual controls running up to the effective date because they weren’t quite ready to run their more automated, sustainable systems.

Cullen Walsh, a partner in accounting and advisory services at Grant Thornton, is seeing a great deal of benchmarking activity as well. He sees companies focused on a few specific themes in particular—disaggregation of revenue and backlog disclosures.

The standard requires companies to disaggregate, or break down their revenue, into whatever categories make most sense for the company. That might mean breaking out revenue by product type, business entity, geography, brand name, or some other factor that might be relevant to the company.

“This is an area where companies and auditors expect the SEC staff to focus, and it’s an area that requires a lot of judgment,” says Walsh. “So it makes sense for companies that have similar business models to compare themselves and see if their peers have more or less disaggregation.”

The backlog disclosure is another area of retrospection, says Walsh. That’s a disclosure that gives financial statement users a sense of unmet performance obligations, or obligations that will be fulfilled in future periods. Prior revenue recognition rules required no such disclosure, so this area is particularly new for companies.

Walsh says he sees companies comparing their unaudited footnote disclosures and comparing them to numbers that will be audited at the end of the year. “There are reasons why the numbers could be different,” he says.

Companies are asking why the numbers are different, whether peers are finding different numbers, and discerning how they will address that at year-end. “From a big-picture perspective, an investor is going to look at the numbers and wonder why,” he says. Companies must have good answers, he says.

In Knachel’s view, companies would not be wise to assume their accounting and disclosures under ASC 606 are passing muster with the SEC if they haven’t received a comment letter. The SEC doesn’t have the resources to review every filing every quarter, he says.

“Silence does not necessarily mean the company has great disclosures and accounting, and there are no questions,” says Knachel. As the SEC continues commenting and companies continue benchmarking, accounting and disclosures will continue to adjust in future quarters, creating a bit of a “moving target,” he says.

“The implementation process of 606 is not over,” says Knachel. “It is still an ongoing exercise from an accounting standpoint and an operational standpoint, and it will probably continue for another six to nine months.”