Reporting professionals are scrambling to get up to speed on the details and how to implement the FASB/IASB New Revenue Recognition Standard.

Learn how to successfully apply and use the new revenue recognition model in ASC 606 to ensure your implementation plan is complete. Also learn how the new standard changes revenue recognition accounting and affects the related estimates and judgements required.

Attend a SECI Revenue Recognition Workshop in May or June and get the answers.

May 1-2         New York

May 21-22    Chicago

June 20-21  San Francisco

https://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z1012cZ4k?ID=320796&t=DCG8_BLOG1

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!

By: George M. Wilson, SEC Institute

You have likely heard much about how adopting ASC 606 will substantially increase the volume of disclosures about revenue recognition. The new disclosure requirements include a number of qualitative disclosures including information about performance obligations, estimates and related issues. They also include a significant number of new quantitative disclosure requirements, including disaggregated information about revenues.

Here, courtesy of General Dynamic, one of the early adopters of ASC 606, is an interesting example. This example compares the disclosures in General Dynamics’ Form 10-Q for March 31, 2016 using old GAAP to the disclosures in their first Form 10-Q using new GAAP, the quarter ended March 31, 2017.

In their Form 10-Q for the first quarter of 2016 (Old GAAP) General Dynamic’s revenue disclosures were comprised of the following three items:

1. The top line of the income statement:

2. This accounting policy:

Revenue Recognition. We account for revenue and earnings using the percentage-of-completion method. Under this method, contract costs and revenues are recognized as the work progresses, either as the products are produced or as services are rendered. We estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the loss in the quarter it is identified.

We review and update our contract-related estimates regularly. We recognize changes in estimated profit on contracts under the reallocation method. Under the reallocation method, the impact of a revision in estimate is recognized prospectively over the remaining contract term. The net impact of revisions in contract estimates on our operating earnings (and on a diluted per-share basis) totaled favorable changes of $104 ($0.22) and $63 ($0.12) for the three-month periods ended April 3, 2016, and April 5, 2015, respectively. No revisions on any one contract were material to our unaudited Consolidated Financial Statements in the first quarter of 2016 or 2015.

3. These operating segment disclosures:

Compare that with these disclosures from the first Form 10-Q after General Dynamics adopted ASC 606, that is the first quarter of 2017:

1. REVENUE

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.

Performance Obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.

Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for 70 percent and 73 percent of our revenue for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. Substantially all of our revenue in the defense groups is recognized over time. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Contract costs include labor, material, overhead and, when appropriate, G&A expenses.

Revenue from goods and services transferred to customers at a single point in time accounted for 30 percent and 27 percent for the three-month periods ended April 2, 2017, and April 3, 2016, respectively. The majority of our revenue recognized at a point in time is for the manufacture of business-jet aircraft in our Aerospace group. Revenue on these contracts is recognized when the customer accepts the fully outfitted aircraft.

On April 2, 2017, we had $60.4 billion of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 30 percent of our remaining performance obligations as revenue in 2017, an additional 45 percent by 2019 and the balance thereafter.

Contract Estimates. Accounting for long-term contracts and programs involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract.

Contract estimates are based on various assumptions to project the outcome of future events that often span several years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The nature of our contracts gives rise to several types of variable consideration, including claims and award and incentive fees. We include in our contract estimates additional revenue for submitted contract modifications or claims against the customer when we believe we have an enforceable right to the modification or claim, the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim. We include award or incentive fees in the estimated transaction price when there is a basis to reasonably estimate the amount of the fee. These estimates are based on historical award experience, anticipated performance and our best judgment at the time. Because of our certainty in estimating these amounts, they are included in the transaction price of our contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates regularly. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. The aggregate impact of adjustments in contract estimates increased our revenue and operating earnings (and diluted earnings per share) by $72 and $50 ($0.11) for the three-month period ended April 2, 2017, and $68 and $58 ($0.12) for the three-month period ended April 3, 2016, respectively. No adjustment on any one contract was material to our unaudited Consolidated Financial Statements for the three-month periods ended April 2, 2017, and April 3, 2016.

Revenue by Category. Our portfolio of products and services consists of over 10,000 active contracts. The following series of tables presents our revenue disaggregated by several categories.

Each of these contract types presents advantages and disadvantages. Typically, we assume more risk with fixed-price contracts. However, these types of contracts offer additional profits when we complete the work for less than originally estimated. Cost- reimbursement contracts generally subject us to lower risk. Accordingly, the associated base fees are usually lower than fees earned on fixed-price contracts. Under time-and-materials contracts, our profit may vary if actual labor-hour costs vary significantly from the negotiated rates. Also, because these contracts can provide little or no fee for managing material costs, the content mix can impact profitability

Contract Balances. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the Consolidated Balance Sheet. In our defense groups, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., biweekly or monthly) or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits from our customers, particularly on our international contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period. In our Aerospace group, we generally receive deposits from customers upon contract execution and upon achievement of contractual milestones. These deposits are liquidated when revenue is recognized. Changes in the contract asset and liability balances during the three-month period ended April 2, 2017, were not materially impacted by any other factors.

Revenue recognized for the three-month periods ended April 2, 2017, and April 3, 2016, that was included in the contract liability balance at the beginning of each year was $1.7 billion and $1.4 billion, respectively, and represented primarily revenue from the sale of business-jet aircraft.

The incremental length of the new disclosures is startling enough, but as you read the details about how the new model applies to General Dynamics and the significant amount of detail in the quantitative disclosures you can get a sense for how the new model increases the information available to investors!

Our next post will do this same process for a service business.

As always, your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

New accounting standards always draw attention from the SEC. Way back in the 1990s, SFAS 133 (now of course ASC 815) was issued to create dramatically different new guidance for derivative and hedge accounting. Louis Dreyfus Natural Gas early adopted the new standard. After certain issues were raised in an SEC review, Louis Dreyfus Natural Gas was forced to restate its initial application of the new derivative accounting model. Their 10-K/A actually included this language:

EXPLANATORY NOTE REGARDING THE REVIEW OF THE COMPANY’S PUBLIC FILINGS BY THE SECURITIES AND EXCHANGE COMMISSION:

IN SEPTEMBER 1999, THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION

INFORMED THE COMPANY THAT THE DOCUMENTATION FOR ITS DERIVATIVE CONTRACTS AND HEDGING ACTIVITIES WAS INSUFFICIENT AT THE OCTOBER 1, 1998 DATE OF ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, “ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES” (“SFAS 133”) TO QUALIFY FOR THE SPECIAL HEDGE ACCOUNTING PROVISIONS OF THE STANDARD. THE COMPANY BELIEVED THAT IT COMPLIED WITH THE SPIRIT AND INTENT OF THE PROVISIONS OF THE STANDARD WITH RESPECT TO DOCUMENTATION; HOWEVER, THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION CONCLUDED THAT THE COMPANY HAD NOT SPECIFICALLY COMPLIED WITH THE PROVISIONS OF THE STANDARD …..

As we discussed in this post last May, several companies have early adopted the new revenue recognition standard. It is not surprising that the SEC has already reviewed at least some of these companies. The first two comment letters we have found were to First Solar and Workday. Both appear to be financial reviews, with comments on the financial statements and MD&A in First Solar’s case. The revenue recognition comments, which were resolved by First Solar in their first response letter, and by Workday after one follow-up comment, shed some interesting light into the approach the staff is using in assessing whether companies are appropriately implementing the new revenue recognition model.

First Solar

Note 2. Summary of Significant Accounting Policies, page 7

7. Tell us your significant payment terms and how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contract asset and liability balances. Disclose the information required by ASC 606-10-50-9 and 50-12(b) in future filings.

Revenue Recognition – Solar Power Systems Sales and/or Engineering, Procurement and Construction Services, page 8

8. We note your disclosure that your solar power system sales include performance guarantees that represent a form of variable consideration and are recognized as adjustments to revenue. Please help us better understand your accounting for these potential bonus payments and/or liquidated damages. In this regard, based on your disclosure, it is unclear to us whether these amounts are included as part of your estimate of your transaction price at the outset of the arrangement and then reassessed at the end of each reporting period. Refer to ASC 606-10-32-5 through 32-10 and ASC 606-10-32-14.

9. Please help us better understand how you reflect consideration in the form of a non-controlling interest as part of your transaction price. In this regard, clarify for us which amounts are included in your estimate of fair value at contract inception and why any profit associated with the non-controlling interest is deferred. Refer to ASC 606-10- 32-21 through 32-24.

10. Revise future filings to disclose why for performance obligations that you satisfy over time the method used provides a faithful depiction of the transfer of goods or services. Refer to ASC 606-10-50-18.

Workday

Form 10-Q for the quarter ended April 30, 2017 Note 2. Accounting Standards and Significant Accounting Policies Revenue Recognition, page 10

1. We note that prior to the adoption of ASC 606, you capitalized direct sales commissions when they could be associated specifically with non-cancelable subscription contracts, and now, you capitalize all incremental sales commissions. Please describe the additional commission fees that you are now capitalizing, and tell us how you determined that these are incremental costs of obtaining a contract. Refer to ASC 340-40-25-2.

2. We note you amortize your commission costs over a period of benefit that you have determined to be five years while your subscription contracts are generally three years or longer. Please help us understand how you determined that five years was the appropriate period of benefit. In this regard, tell us how you considered renewals. Please clarify whether additional sales commissions are paid upon contract renewal and, if so, whether such amounts are commensurate with the initial commissions. Please also reconcile your considerations to your disclosure on page 46 that your ability to predict renewals is limited. Refer to ASC 340-40-35-1.

That these comments focus on two issues, (1) providing robust disclosures and (2) building an understanding of how the company made judgments in the application of this new principles-based standard is not surprising.

With the implementation of the new revenue recognition standard soon upon most of us, the information from the review process of early adopters has already provided some helpful insights.

As always, your thoughts and comments are welcome.

By: George M. Wilson & Carol A. Stacey

As we discussed in this post enumerating Rev Rec early adopters, Microsoft disclosed in their SAB 74 disclosures plans to early adopt both the new Rev Rec and Lease Accounting standards as of July 1, 2017, the beginning of their fiscal year 2018. As you will see in their Form 10-K for the year-ended June 30, 2017, they have executed their plan. (New Microsoft financial reporting motto: “Sleep is for the Weak”?)

As you review their disclosures you will see that Microsoft adopted the Rev Rec standard with a full retrospective approach, making this disclosure:

The standard will be effective for us beginning July 1, 2018, with early adoption permitted. We elected to early adopt the standard effective July 1, 2017. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard, including our assessment that the impact of accounting for costs incurred to obtain a contract is immaterial.

The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we will recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance, we will recognize license revenue at the time of contract execution rather than over the subscription period. 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. Revenue recognition related to our hardware, cloud offerings such as Office 365, LinkedIn, and professional services will remain substantially unchanged.

Adoption of the standard will result in the recognition of additional revenue of $6.6 billion and $5.8 billion for fiscal year 2017 and 2016, respectively, and an increase in the provision for income taxes of $2.5 billion and $2.1 billion, respectively, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard will result in an increase in accounts receivable and other current and long-term assets of $2.7 billion and $4.2 billion, as of June 30, 2017 and 2016, respectively, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance; a reduction of unearned revenue of $17.8 billion and $11.7 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes of $5.2 billion and $4.8 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of revenue.

One of the interesting aspects of this disclosure is the conclusion that contract acquisition costs are not material, making commissions accounting much simpler! And it is worth noting that the new revenue recognition guidance will require Microsoft to recognize some revenue earlier than the old guidance.

For the new lease standard Microsoft included this disclosure:

The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information.

The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remains substantially unchanged.

Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of $6.6 billion and $5.2 billion as of June 30, 2017 and 2016, respectively.

Microsoft’s discussion of new internal controls and system functionality are key issues in implementing the new lease accounting model.

Microsoft also included a tabular disclosure entitled “Expected Impacts to Reported Results” detailing the impact on selected statement of operations and balance sheet amounts from adopting both standards. You can find it on pages 61 and 62 of the          Form 10-K.

When Microsoft files their Form 10-Q for their first Quarter Ended September 30, 2017, the full impact along with all required disclosures will be interesting to see!

As always, your thoughts and comments are welcome!

Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z10od3Z4k?ID=290619

Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z10od3Z4k?ID=290619

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.

Microsoft:

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.

Workday:

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