Sylvia E. Alicea, Professional Accounting Fellow, Office of the Chief Accountant, gave her views on implementation of the new revenue recognition standard at a conference dedicated to the topic.

Transition Disclosures Include Footnote Disclosures

Not surprisingly, Ms. Alicea reminded registrants on the continued importance of transition disclosures. Staff Accounting Bulletin No. 74 requires companies to provide transition disclosures of the impact that a recently-issued accounting standard will have on its financial statements when that standard is adopted in a future period. Reiterating previous views, she noted when a company does not know, or cannot reasonably estimate the expected financial statement impact, that fact should be disclosed. But, in these situations, the SEC staff expects a qualitative description of the effect of the new accounting policies, and a comparison to the company’s current accounting to aid investors’ understanding of the anticipated impact. It should also disclose the status of its implementation process and significant implementation matters yet to be addressed.

Ms. Alicea noted the changes in the new revenue standard will impact nearly all companies. Even if the extent of change on the balance sheet or income statement is not deemed to be material, the related disclosures may be material.

Ms. Alicea disagrees with the view that when SAB 74 refers to the “financial statements” it is concerned only with effects on the primary financial statements and not how disclosures in the notes to the financial statements may also be affected. She believes that such a view misses the definition of “financial statements,” which includes the accompanying notes.

Themes Noted by the Staff in Consultations with Registrants

The remarks also shared some observations from registrants’ consultations with SEC staff. Careful analysis of enforceable rights and obligations when evaluating contracts was urged. For example, when one or both parties have a right to terminate a contract, a registrant would need to evaluate the nature of the termination provision, including whether the termination provision is substantive. This requires the application of reasonable judgment and could affect the duration of the contract.

Ms. Alicea also discussed that the concept of a “deliverable” under existing revenue guidance should not be presumed to be the same as the concept of a “performance obligation” under the new revenue standard. The identification of a registrant’s performance obligation(s) requires a “fresh look” that begins with an evaluation of the contractual terms of contracts with customers. Registrants may ultimately determine – as a result of their “fresh look” – that there is no change in the unit of account. She noted that in the fact patterns OCA has evaluated, most of the registrants’ conclusions regarding performance obligations happened to be consistent with their conclusions regarding deliverables under existing revenue guidance. However, this does not obviate the need for a “fresh look.”

Ms. Alicea also noted that while the staff did not object to the registrants’ proposed accounting for the promised goods and services as a single performance obligation, the staff’s views were based on the registrants’ careful analysis of the promised goods and services and whether those goods and services were both “capable of being distinct” and “distinct within the context of the contract.” A company must support its identification of performance obligations according to the core principles in the standard – including whether or not the promised goods and services are inputs to a combined output. There are examples in the new revenue standard that are intended to illustrate application of the principles in the standard. However, the examples do not eliminate (or obviate) the reasonable judgment required to apply those core principles.