One of the points we make in our workshops is that companies should exercise care to be consistent across all communication vehicles including SEC filings, earnings releases, webpage information and investor presentations. Someone in every organization should be charged with reviewing all communications to assure they are all singing the same song.
The SEC looks at all the channels a company uses to communicate when they review filings. Inconsistencies in the disclosure across these channels are “low-hanging fruit” in the comment process.
The FASB’s new revenue recognition standard, Accounting Standards Codification Topic 606 creates a new reason to be even more careful about this consistency. The focal point for this concern is the requirement to disclose disaggregated revenues (606-10-50-05):
An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Theimplementation guidance related to this disclosure requirementincludes this language, one of the few places US GAAP refers to information outside the financial statements:
When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity’s revenue has been presented for other purposes, including all of the following:
- Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations)
- Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments
- Other information that is similar to the types of information identified in (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.
This is the genesis of the following comment exchange on revenue recognition disclosures:
- Original Comment:
We note your disaggregated revenue disclosures of revenue by product and by geographic region in Note 16. Tell us your consideration for disclosing further disaggregation of revenue for other fresh produce similar to the table disclosed on page 4 of your 10-K for the Fiscal Year Ended December 29, 2017 and in your earnings releases furnished on Form 8-K.
- Company response to initial comment:
We call to the Staff’s attention that, in Note 16 to the consolidated financial statements contained in our Form 10-Q for the quarter ended June 29, 2018 (the “Q2 2018 Form 10-Q”), we continued to show disaggregated revenue from contracts on the basis of our aggregated reportable segments consistent with Accounting Standards Codification (“ASC”) 280, Segment Reporting, as we did in our Form 10-K for the fiscal year ended December 29, 2017 and our Form 10-Q for the fiscal quarter ended March 30, 2018. We also call to the Staff’s attention that Note 3 to our consolidated financial statements included in the Q2 2018 Form 10-Q contains a cross reference to Note 16, with that cross reference expressly referring to the additional description of our reportable business segments and disaggregated revenue disclosures in Note 16. Under the circumstances, we believe that the approach taken in the Q2 2018 Form 10-Q meets the disclosure requirements ASC 606, Revenues from Customers. The objective of ASC 606 is to show how the nature, amount, timing of revenue and cash flows affected by economic factors and mirror our contracts with customers. It is important to note that our contracts with customers do not differ significantly across the various fresh fruit products, shown on page 4 of our Form 10-K and, as such, we believe that the disclosure included in the Q2 2018 Form 10-Q based on aggregated reportable segments as included in Note 16 is sufficient to meet the requirements of the standard.
- SEC follow-up comment:
We note from your response to our prior comment 1 that you believe
your disclosure based on aggregated reportable segments as included in Note 16 is sufficient to meet the requirements of ASC 606 in terms of disaggregated revenue disclosures because your contracts with your customers do not differ across fruit products. However, the guidance in ASC 606-10-55-90 indicates that when selecting the type of category to use to disaggregate revenue, you should also consider how information about your revenue has been presented for other purposes including among other factors, disclosures presented outside your financial statements such as in earnings releases, annual reports or investor presentations. In this regard, we note that you have provided revenue amounts on a further disaggregated basis than your reportable segments in earnings releases and in the front section of your Form 10K.The guidance also gives examples of categories that might be appropriate which includes type of contract, but does not limit the categories based on customer contracts. Please provide us further analysis for why you believe product types such as pineapples, fresh-cut product, avocados, melons, and non-tropical produce have similar economic factors in the nature, amount, timing and uncertainty of revenue and cash flows and therefore do not need to be disaggregated under the guidance in ASC 606. Alternatively, please further disaggregate your revenue in the notes to the financial statements under ASC 606-10-50-5. Refer also to the guidance in ASC 606-10-55-89 through 91.
As you can read in the company’s second response letter, they did agree to provide incremental disclosures.
As always, your thoughts and comments are welcome!