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Transition to FASB’s New Revenue Standard Remains a Regulatory Priority

More than two years after the FASB released its landmark revenue standard, and with nearly a year-and-a-half remaining before the standard must be applied to regulatory filings by U.S. public companies, revenue accounting continues to be the most frequent source of questions put to the SEC’s staff. At the same, the existing revenue guidance in U.S. GAAP remains a frequent source of questions by reviewers in the SEC’s Corporation Finance Division and the most common source of investigations by the agency’s Enforcement Division.

More than two years after the FASB released its landmark revenue standard, and with nearly a year-and-a-half remaining before the standard must be applied to regulatory filings by U.S. public companies, revenue accounting continues to be the most frequent source of questions put to the SEC’s staff, SEC Interim Chief Accountant Wesley Bricker said on August 9, 2016.

That the guidance from Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), causes so many questions to be asked is maybe not surprising. Bricker said revenue accounting under the accounting standard that is being replaced, Topic 605, Revenue Recognition, remains the issue that is most commonly questioned by staff reviewers in the SEC’s Corporation Finance Division and the most common source of investigations by the agency’s Enforcement Division.

Rather than being frustrated by the flood of inquiries, the SEC staff is encouraging companies to come forward with questions as they arise during the transition to the new standard, Bricker said during a panel discussion at the American Accounting Association’s annual meeting in New York.

“Good companies, in thinking about the time that the standard-setters provide for thinking about transition activities, will be reflective about the important questions that should be resolved before they prepare and provide financial statements for reliance,” Bricker said. “The consultation activity, whether it occurs with us, or the standard-setters, or in an industry context gives you a sense, in my view, for a good, healthy conversation about the application of the standard.”

Bricker said the staff in the Office of the Chief Accountant has been fielding questions about some of the standard’s fundamental requirements, particularly the definition of a contract and when to recognize revenue from a contract including at least one product or service that is sold at a loss. The business activity that sparked the question had some common traits with sales of printers that are sold by computer manufacturers at a loss because the suppliers are counting on follow-on sales of toner or ink at a high mark-up to more than cover the losses from the printers.

“The standard is built on a key principle of having an enforceable set of rights and obligations,” Bricker said. “If one is counting on or expecting contracts to rise in the future, but they’re not in fact legally enforceable as of the preparation of the financial statements for the period covered, could one count that as revenue?”

The SEC staff said the follow-on sales could not be counted as revenue because that was the conclusion the FASB and IASB reached in the standards.

Other questions involved contracts that were combined and the timing for recognizing revenue from royalties.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

Additional analysis of the standard can be found on Checkpoint in Accounting and Auditing Update Service [AAUS No. 2014-18] and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): Special Report: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements .