The Securities and Exchange Commission is telling companies its historic staff guidance on revenue recognition will not trump the new revenue standard when it takes effect in 2018.
The SEC issued Staff Accounting Bulletin No. 116 to make its guidance on revenue recognition consistent with the new revenue standard under Accounting Standards Codification Topic 606. And in two additional releases, the staff addresses historic guidance with respect to bill-and-hold arrangements, which is an area that has been ripe for manipulation, and sales into government vaccine stockpiles.
SAB 116 is a slim, five-pager that says, in essence, all revenue recognition guidance in ASC 606 makes obsolete any SEC guidance contained in earlier staff accounting bulletins. SAB 116 calls out a handful of specific areas in the SEC’s Staff Accounting Bulletin Series that still apply to current GAAP with respect to revenue recognition, but will not apply when the new standard takes effect.
The new release on bill-and-hold arrangements overwrites old SEC guidance contained in other historic releases, especially Accounting and Auditing Enforcement Release No. 108. Arising from an enforcement action, the guidance lays out the criteria companies must meet to qualify for recognizing revenue when a company has not actually delivered a product it claims to have sold.
Bill-and-hold is a classic method for gaming accounting results, where companies historically might claim revenue late in a period to meet a particular target or metric, only to have the transaction ultimately unwind in a subsequent period. The new revenue recognition standard requires a customer to take control of a deliverable before a company can recognize revenue on a transaction.
The third release addresses SEC guidance contained in a 2005 SEC release that was intended to assure accounting restrictions on revenue recognition would not discourage pharmaceutical manufacturers from participating in stockpile programs meant to support bioterror countermeasures. Such stockpile programs often rely on bill-and-hold type arrangements, whereby a manufacturer will commit to making a given supply available upon demand, but won’t physically deliver those vaccines to any government warehouse.
The new standard, with its focus on customer control as a criteria for recognizing revenue, might lead some pharmaceuticals to question whether they can recognize revenue if they haven’t physically delivered vaccines. The new SEC guidance says, essentially, the customer has taken control under such programs, and therefore revenue can be recognized. The release provides more specific detail regarding which vaccines are covered by the guidance.
The SEC action is not entirely unexpected, says Eric Knachel, senior consultation partner on revenue recognition at Deloitte & Touche. “It’s been a longstanding question since 606 came out,” he says. “Companies and auditors have said what about these SEC enforcement releases? How are we supposed to think about that?”
The profession has generally anticipated the SEC would eventually rescind historic guidance that would seem to be at odds with the new accounting pronouncement by the Financial Accounting Standards Board, says Knachel. “This formalize the SEC’s view that these actions and public statements that exist are no longer to be relied upon once a company adopts 606,” he says.