Tag Archives: U.S. GAAP

Rev Rec Trail Blazers? We Can Learn Together!

By: George M. Wilson & Carol A. Stacey

What do United Health Group, Alphabet, and Ford have in common? What if we also included Raytheon? That’s right, all these companies have early adopted the FASB’s new revenue recognition standard! Microsoft and Workday have also indicated that they plan to early adopt. Microsoft has indicated they will adopt as of July 1, 2017 and file their first 10-Q under the new method for the quarter-ended September 30, 2017. Workday has said that they will early adopt as of February 1, 2017 and hence their first 10-Q under the new method will be for the quarter-ended April 30, 2017, which should be filed soon. Here is a summary of some of the early adopters:


Early adopters who have filed with ASU 2014-09:

Alphabet                                        January 1, 2017           Modified Retrospective

Ford                                                 January 1, 2017           Modified Retrospective

United Health Group               January 1, 2017            Modified Retrospective

First Solar                                     January 1, 2017            Full Retrospective

General Dynamics                     January 1, 2017            Full Retrospective

Raytheon                                     January 1, 2017            Full Retrospective


Planned adoptions – no filing yet:

Workday                                  February 1, 2017         Full Retrospective

Microsoft                                July 1, 2017                 Full Retrospective


(If you know of any other companies that have early adopted it would be great if you could mention them in a comment on this post or email Carol or George – Thanks!)


As is always the case with a major new standard, it is helpful to learn from the experience of folks who have gone past the frontier to the leading, and hopefully not the bleeding, edge! Here are a few highlights and links to Form 10-Q’s with the new standard adopted.


From Alphabet’s Form 10-Q for the first quarter of 2017:


In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2017 using the modified retrospective transition method. See Note 2 for further details.


Alphabet’s disclosures, including how they decided to disaggregate revenues, make for interesting reading!


From Fords Form 10-Q for the quarter ended March 31, 2017:


On January 1, 2017, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.


You can read about the impact of the change on revenues and review Fords Note 3 – Revenue to see how they decided to present the new disclosure for disaggregated revenues.


Raytheon, who had previously announced they would early adopt, did so in their Form 10-Q for the First Quarter of 2017, which you can find here.


Note 2: Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. In July 2015, the FASB approved the deferral of the new standard’s effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB permits companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016. Effective January 1, 2017, we elected to early adopt the requirements of Topic 606 using the full retrospective method.


Raytheon’s disclosures for the full retrospective adoption, and the volume of their disclosures overall because of their government contracting business, are great reading for anyone facing similar issues.


From United Health Groups Form 10-Q for the quarter ended March 31, 2017:


In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively
ASU 2014-09). ASU 2014-09 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other standards (e.g., an insurance entity’s insurance contracts). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.


The Company early adopted the new standard effective January 1, 2017, as allowed, using the modified retrospective approach. A significant majority of the Company’s revenues are not subject to the new guidance. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three months ended March 31, 2017. The Company has included the disclosures required by ASU 2014-09 above.


General Dynamics early adopted with the full retrospective method. From their Form 10-Q for quarter one 2017:


The majority of our revenue is derived from long-term contracts and programs that can span several years. We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2017, using the retrospective method. See Note Q for further discussion of the adoption, including the impact on our 2016 financial statements.



First Solar also early adopted and used the full retrospective transition method. Here is an excerpt from their Form 10-Q for quarter one of 2017:



In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), to clarify the principles of recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards. Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.


We adopted ASU 2014-09 in the first quarter of 2017 using the full retrospective method. This adoption primarily affected our systems business sales arrangements previously accounted for under ASC 360-20, which had required us to evaluate whether such arrangements had any forms of continuing involvement that may have affected the revenue or profit recognition of the transactions, including arrangements with prohibited forms of continuing involvement. When such forms of continuing involvement were present, we reduced the potential profit on the applicable project sale by our maximum exposure to loss.


Microsoft and Workday will also be filing with the new standard this year, so watch for their first 10-Q’s this year. Here is Microsoft’s SAB 74 disclosure (not included here is the section in which they say it is their intent to also early adopt the new lease standard as of July 1, 2017), followed by Workday’s SAB 74 disclosure for revenue recognition.



Revenue from Contracts with Customers

In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.


The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We plan to adopt the standard using the full retrospective method to restate each prior reporting period presented.


The standard will be effective for us beginning July 1, 2018, with early adoption permitted as of the original effective date of July 1, 2017. We plan to adopt the standard effective July 1, 2017. While our ability to early adopt using the full retrospective method depends on system readiness, including software procured from third-party providers, and completing our analysis of information necessary to restate prior period consolidated financial statements, we remain on schedule and have implemented key system functionality to enable the preparation of restated financial information.


We have reached conclusions on key accounting assessments related to the standard. However, we are finalizing our assessment and quantifying the impacts related to accounting for costs incurred to obtain a contract based on guidance issued by the FASB Transition Resource Group as part of their November 2016 meeting. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.


The most significant impact of the standard relates to our accounting for software license revenue. Specifically, under the standard we expect to recognize Windows 10 revenue predominantly at the time of billing rather than ratably over the life of the related device. We expect to recognize license revenue at the time of contract execution rather than over the subscription period from certain multi-year commercial software subscriptions that include both software licenses and Software Assurance. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances may vary from recognition at the time of billing.


We expect revenue recognition related to our hardware, cloud offerings including Office 365, LinkedIn, and professional services to remain substantially unchanged.

We are nearing completion of retrospectively adjusting financial information for fiscal year 2016 and are progressing as planned for fiscal year 2017. We estimate our revenue would have been approximately $6 billion higher in fiscal year 2016 under the standard primarily due to the net change in Windows 10 revenue recognition.





We have closely assessed the new standard and monitored FASB activity, including the interpretations by the FASB Transition Resource Group for Revenue Recognition, throughout fiscal 2017. In the fourth quarter of fiscal 2017, we finalized our assessment of the new standard, including completing our contract reviews and our evaluation of the incremental costs of obtaining a contract. Based on our assessment, we decided to early adopt the requirements of the new standard in the first quarter of fiscal 2018, utilizing the full retrospective method of transition.


The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impact of adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts. Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized those costs over the term of the related subscription contract, which was generally three years. Under the new standard, we defer all incremental commission costs to obtain the contract. We amortize these costs over a period of benefit that we have determined to be five years.


As always, your thoughts and comments are welcome! And if you hear of or know of any other early adopters please put that in a comment to this post, or email George or Carol

Due Care and Good Faith with Accounting Judgments – More Enforcement News!

On April 19th the SEC Enforcement Division announced two financial fraud enforcement cases in which companies, officers and in one of the cases the company’s auditors were named and barred or paid fines. Financial fraud enforcement cases are on the rise, but the interesting issue in these cases is that both centered on the challenging, grey area judgements that we make in the accounting process.

In the release Enforcement Division Director Andrew Ceresney said:

“We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP.”

The most unsettling implication of these two cases is that while we make these judgements with uncertain and sometimes incomplete information, the people who pass judgment on them after the fact always operate with 20-20 hindsight.

The areas involved in these two cases are classic accounting estimate areas. One of the named companies/executives used a warranty accrual, failure to appropriately amortize intangibles and failure to appropriately write down inventory to lower of cost or market to be able to meet earnings targets.

In the other case, company executives failed to appropriately value accounts receivable from and impair investments in an electric car manufacturer that was a major customer. In addition, the audit engagement partner was suspended from appearing before the SEC.

You can read the release at:


This message is more than unsettling, it’s downright scary. It almost starts to feel that someone is watching over our shoulder as we make difficult judgment calls. And we know that when we make these kinds of accounting judgments and estimates there is usually no “right answer”. In fact, different professionals may arrive at different conclusions when making these kinds of judgements, but there is usually a range of reasonable estimates.


That said, the message is clear, be sure to exercise due care and follow GAAP when making subjective accounting judgments, because if things go wrong, enforcement may be asking questions! And, as we said above, when they ask questions, they will have the benefit of 20-20 hindsight.


How do we assure that when someone with hindsight evaluates our decisions we have as strong a position as possible? Here are a few reminders about your process for making and documenting these judgments:

  1. Always create your documentation contemporaneously. If you wait to document a decision until you are asked about it by someone like the SEC, you will never remember all the issues and considerations in your decision. And, it will be easy to see that you created the documentation after the fact.


  1. In your documentation be sure to thoroughly evaluate all the different alternatives in the decision process. Lay out in clear language each alternative and the pros and cons of each alternative. Include all relevant factors on all sides of the decision. If someone wants to second guess your decisions and you have not addressed all the issues, it will be more likely that you will be second guessed.


  1. Support your discussion with appropriate references to the Accounting Standards Codification. Explain what GAAP you think is relevant and how the guidance applies in your situation. Most importantly, document and be faithful to the principles underneath the GAAP you are using.


  1. As part of ICFR, have a documented review process. All appropriate levels of involvement in the decision should be documented, and if your company has a policy about reviewing accounting decisions it should be documented that that policy was followed. If you know there is a material intentional error, such as occurred in these cases, use the appropriate channels within your company to rectify it.


If you would like some background about writing these kinds of white papers you could check our One-Hour Briefing about drafting accounting white papers at:


And lastly, if you are thinking about how the issues in this enforcement relate to issues that could be critical accounting estimates, you could also review the requirements for these disclosures in FR 72. You can find them at the end of the FR at:



As always, your thoughts and comments are welcome!

Some XBRL News and A Few Tidbits

XBRL has not really been in the news much lately, but on March 29, 2016 the SEC released a second DERA study about tagging processes. The study, titled “Staff Observations of Custom Axis Tags” is at:


Here is an excerpt from the introduction of the report:

As part of our ongoing process to monitor registrant compliance with the requirements to report their financial information in their eXtensible Business Reporting Language (XBRL) exhibits, staff in the SEC Division of Economic and Risk Analysis recently assessed certain aspects of the XBRL exhibits that affect the data quality of the disclosures provided. Specifically, the staff examined the use of custom axis tags in XBRL exhibits that reporting companies submitted with their annual reports on Form 10-K. An axis tag in XBRL allows a filer to divide reported elements into different dimensions (e.g., revenue by geographical area, fair value measurement levels, components of total equity (e.g., common, preferred)) while also showing the relationships between separately reported elements.


The staff’s analysis resulted in a few key observations. First, unlike our previous staff observations that revealed a lower average rate of custom line item tags among large filers, staff observed a higher average use of custom axis tags as filer size increased, with the rate of custom axis tags highest for large accelerated filers. Second, for a random sample of filings that staff reviewed, staff observed instances of filers creating custom axis tags unnecessarily when an appropriate standard axis tag existed in the U.S. GAAP taxonomy.


This is an interesting development, and clearly demonstrates the SEC’s work to help make XBRL information more reliable and useful.

The earlier information the SEC has issued about XBRL include:

A “Dear CFO” letter about calculation structures that is at:


This earlier DERA study of extension use at:



Getting XBRL Right

Next, here is a good reminder to make sure that your XBRL submissions are prepared properly and tagging is done appropriately. While XBRL is not subject to ICFR and there is no requirement for any sort of auditor review, XBRL submissions are subject to your disclosure controls and procedures. As a result you should have appropriate controls to assure that your XBRL submission:

“is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”

The above quote is from the definition of Disclosure Controls and Procedures in Exchange Act Rule 13a-15 which is at:


This requirement is highlighted in a recent Form 10-K/A filed by Goldman Sachs to make some corrections in their XBRL submission. Goldman filed their original 10-K on February 19, 2016 and on March 1, 2016 filed a Form 10-K/A. As is required by the Exchange Act Rules for amendments, Goldman included this explanatory note:


Due to an error by our external financial printer, our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Original Form 10-K) was filed with an incorrect version of Exhibit 101, which provides items from our Original Form 10-K formatted in eXtensible Business Reporting Language.

This Amendment No. 1 on Form 10-K/A (Amendment) to our Original Form 10-K, filed on February 19, 2016, is being filed in accordance with Rule 12b-15 under the Securities Exchange Act of 1934 for the sole purpose of including the correct version of Exhibit 101.

This Amendment does not amend or otherwise update any other information in the Original Form 10-K and does not reflect events occurring after the date of the Original Form 10-K.

Goldman was perhaps doing something that is appropriate, which we discuss in our workshops. After the filing someone likely double checked the XBRL submission and found the problem, and they fixed it as soon as possible. This is an example of disclosure controls in action on a detective basis, and again, while the SEC has not really indicated that they will do a lot of review of XBRL submissions, we need to make sure they are done appropriately. And, who knows, it is possible the SEC pointed this out to Goldman.


Taxonomy Update

On March 7, 2016 the SEC updated the EDGAR system to accept the 2016 XBRL taxonomies previously released by the FASB. The announcement is at:



Using XBRL Information

While we still don’t hear a lot about users taking advantage of all the information in the XBRL database, user tools are continuing to evolve. One tool that provides a nice way to access and use XBRL data comes from a company called Calcbench. If you do peer group analysis or are searching for comparable disclosures, this is a very useful tool. You can learn more at:



As usual your thoughts and comments, including any insights you have about people using XBRL or XBRL user tools, is welcome!