By: George M. Wilson, SEC Institute

As we posted back in May, several companies have early adopted the new revenue recognition accounting of ASC 606, blazing a trail for those in this process. And, as part of the learning curve, as we reviewed in this October post and this November post, some of these companies have received comments from the SEC.

In mid-August, General Dynamics (one of the early adopters) received a comment letter with several interesting revenue recognition comments. As you read the comments below, notice how often the issues raised by the Staff focuses on disclosures and how the company has made judgments:

Note B. Revenue, page 10
General

1. Please tell us and disclose, if material, how the adoption of ASC Topic 606 has impacted your accounting for costs to obtain or fulfill a contract, including commissions, bidding cost, and/or pre-production costs. We refer you to the disclosure requirements of ASC 340-40-50-1 through 50-5.

Performance Obligations, page 10

2. We note some of your contracts have multiple performance obligations. Please tell us and revise to disclose the nature of these performance obligations pursuant to ASC 606- 10-50-12(c). For maintenance, support, and warranty services, please provide us with your analysis as to why these services were not separately identifiable in accordance with the guidance of ASC 606-10-25-21, as applicable.
3. Given that the majority of your revenue is generated from long-term contracts, please provide us with your analysis on if they contain a significant financing component. If a material portion of your contracts contain a significant financing component, please revise to disclose this information pursuant to ASC 606-10-50-12(b). If you relied upon the practical expedient based pursuant to ASC 606-10-32-18, disclose this pursuant to ASC 606-10-50-22 and confirm the timing between progress payments and transfer of control and payment was not expected to exceed one year.
4. You disclose you recognize revenue over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion). Revise to disclose why this method is a faithful depiction of the transfer of goods or services pursuant to ASC 606-10-50-18(b).
5. We note that you recognize revenue at a point in time for the manufacture of business-jet aircraft in your Aerospace group, which is generally when the customer accepts the fully outfitted aircraft. Please tell us, and revise to disclose, what significant judgments were evaluated in determining that this was the appropriate point to recognize revenue. Refer to ASC 606-10-25-30 and 606-10-50-19. In addition, please provide us with your analysis regarding whether revenue for your business-jet aircraft should be recognized over time in accordance with ASC 606-10-25-27 through 29. In this regard, please specifically address your consideration of customer deposits and customer specific specifications.

Contract Estimates, page 11

6. With a view towards future disclosures, please help us better understand the general nature of your contract modifications and whether modifications typically add distinct goods or services. Reference is made to ASC 605-10-25-10 through 13 and ASC 606-10- 50-12(c).

Interestingly, in this new revenue recognition world, none of these comments required revision of a prior filing. Each was resolved with a discussion of the judgments involved and several resulted in a commitment by General Dynamics to provide more disclosure in future filings.

These comments are very consistent with those received by other early adopters. They provide us all with a message to thoughtfully and carefully make and document our judgments in applying the new standard, and then make appropriate disclosures! You may have read our post about how much the new standard affected General Dynamics’ disclosures, perhaps thinking the new disclosures were almost too much. In this new principles-based world, we may need to disclose more than we thought we would!

If you hear of any other early adopters and related news, please feel free to share it in a response to our post. As we say in our workshops, we all learn together!

As always, your thoughts and comments are welcome!