Revenue Recognition: SAB 74 Disclosures

As we are now only one year away from the adoption deadline for the new revenue recognition accounting standard (ASC 606), it is time for more serious disclosure regarding the expected impact the new standard may have on a registrant’s financial statements.

At the 2016 AICPA National Conference on Current SEC and PCAOB Developments on December 5, 2016 Wes Ricker, Chief Accountant of the Securities and Exchange Commission discussed SAB 74, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period (Topic 11M), in the context of the new revenue recognition standard.  Mr. Ricker stated even if the extent of the change upon adoption of a new accounting standard is expected to be slight, companies should make disclosures in accordance with SAB 74 about the significance of the impact, whether quantitative or qualitative, on the financial statements.  He emphasized that investors and the SEC staff will be reviewing a registrant’s year-end and interim SAB 74 disclosures with a keener eye.

Mr. Ricker cited a recent survey of public companies released in October 2016, that concluded eight percent of respondents still had not started an initial assessment of the new revenue recognition standard, while 75% are still assessing and 17% are implementating.  He stressed for companies where implementation is lagging, that preparers, their audit committees, and auditors should discuss the reasons and provide useful disclosures to investors about the status of implementation, so investors can assess the potential effect of the information.

Silvia Alicea, a member of the SEC staff at the conference stressed that the disclosures should include a description of the effect of the accounting policies the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies.  Examples of the types of disclosures that might be made include:

• a statement that the registrant expects the timing of revenue recognition to be accelerated because it anticipates that license revenue will be recognized at a point in time, rather than over time, which is its current practice
• a description of the status of the registrant’s process to implement the new standard and the significant implementation matters yet to be addressed (for example, a registrant might provide a statement that it has completed an initial assessment, but has yet to determine its accounting policy for capitalization of costs to obtain a contract).

Ms. Alicea also stated her belief that a registrant should not be reluctant to disclose reasonably estimable quantitative information merely because the ultimate impact of adoption may differ, since that information may be relevant to investors even while lacking complete certainty.  She also, encouraged a registrant to disclose known or reasonably estimable quantitative information even if it is only for a subset of the registrant’s arrangements — for example, one product category or revenue stream — rather than waiting until all the impacts are known. She went on to state the disclosures should be consistent with other information provided to the Audit Committee and investors, and they should be subject to effective internal control over financial reporting. She also advised as management completes portions of its implementation plan and develops an assessment of the anticipated impact, effective internal control should be designed and implemented to timely identify disclosure content and ensure that appropriately informative disclosure is made.

If a company cannot reasonably determine the expected impact, they aren’t out of the woods. At the Emerging Issues Task Force (EITF) meeting on September 22, 2016, an SEC staff member discussed the nature of the type of SAB 74 disclosures the staff expects to see in registrants’ financial statements if the expected effect of the adoption cannot reasonably be determined. In such situations, the entity should:

1. state that fact;
2. compare the not-yet-adopted ASU to current accounting policies of the entity;
3. discuss the effect of any accounting policies that the entity expects to select upon adopting the ASU;
4. discuss the status of the process to implement the new ASU along with the significant implementation matters yet to be addressed; and
5. provide any additional qualitative disclosures necessary to help financial statement users to understand the potential impact of the new ASU on the entity’s financial statements.

In summary, the SEC is expecting more robust and specific types of SAB 74 disclosures in a registrant’s upcoming year-end financial statements.  Registrants should be aware of these expectations and not wait until the last minute to draft the disclosures.