Posted by
Graham Hulme on Dec 14, 2018 12:17:42 PM
This week’s entry will run through recent notable and instructive 10-Q filings that had frequent references to ASC 606. Additionally, we also share a high value ASC 606 exchange between a company and an analyst during a recent earnings call.
12/3/18: Weekly Revenue Recognition - ASC 606 RoundupTo quickly identify ASC 606 information in the below links, click on the link, hit Control + F, enter the text “606”, “2014-09”, or “ASC” and go to your search results.To quickly identify key areas, open each link and search for “606” or “2014-09” in the text. This week’s blog focuses on SEC filings, SEC Comment Letters, and SEC Comment Letter responses for Amazon. Over the past few months a highly instructive and informative interplay of communications occurred between Amazon and the SEC specific to ASC 606. This week’s blog will chronologically outline these communications with our thoughts on the value of each.
Amazon.com’s Filings, SEC Comment Letters, and Amazon’s Responses
Our thoughts: Amazon’s 10-K and 8-K filings disclose quantitative information on the number of global Amazon Prime members along with how many shipments were applicable to those Prime members. Due to the prevalence of Amazon Prime in the market, this information on its own holds value, but it also leads into a question about the financial impacts/benefits of these members in terms of net sales and revenue. The SEC Comment Letter aims at this area asking for greater detail on net sales in future filings. From our standpoint, this is a logical ask if for no other reason than Amazon Prime is touted as a high-profile product/service offering of a highly popular and notable company. It’s a question that an analyst, investor, or really any reader of the filing would intuitively think of asking after reading such a disclosure. For the 10-Q filing’s SEC Comment Letter input, the focus was on reconciling qualitative points made in the filing specific to presenting revenue on a gross versus net basis for similar products/services. At one point in the filing, the company notes that it presents revenue on a net basis for digital media content while later in the filing it states that it presents revenue on a gross basis for digital media content. This is a solid working example where the SEC asks a company to offer clarity on how it arrived at its decisions specific to ASC 606’s application. It’s not enough for companies to simply state what was done specific to ASC 606; they must also provide details and analysis that led to its determinations.Beyond the above, the SEC asks the company to provide greater clarity on how it determines whether revenue is taken over time or at a point in time for specific products and services.
Our thoughts: The company’s response to the first SEC Comment regarding Net Sales for Prime members is striking on a few fronts. First, it clearly pushes back on the SEC’s request. What’s notable in the company’s response is that it appears to be highly focused on what makes the most sense from the company’s standpoint, from its management’s standpoint, rather than attempting to meet the SEC halfway in terms of identifying what value it could offer from an investor’s, analyst’s, or other party’s viewpoint to grade the company’s performance. The answer is robust in terms of qualitative details even to the point of opening the curtain a bit in terms of its sales, marketing, and operational approaches for Prime memberships. Yet, it is company-focused in our view.In terms of responses to the SEC’s comments on its 10-Q filing, the company’s feedback appears to be more favorable in terms of playing ball with the SEC. Meaning, the company goes to great lengths in its responses to address the what, why, how, and when points in its answers to the point where you could say it discloses more about its financial and operational decisions than pre-ASC 606 filings. In alignment with points made in prior SOFTRAX blogs, and by articles put forward from the Big 4, the level of detail that ASC 606 pushes companies to disclose needs to be governed by companies to be sure it does not share too much putting it at a competitive disadvantage in some cases.
Our thoughts: This SEC Comment Letter goes back at the company pushing for clarity on when revenue is recognized for specific services the SEC inquired about in its initial Comment Letter. The direct line of questioning offers prescriptive guidance to the company so that it provides a satisfactory answer to the questions. The crux of the SEC’s push is to have the company fully disclose which of the services is recognized at a point-in-time versus those are recognized over time. The takeaway is that the initial set of responses from the company did not satisfy the SEC. As a result, their questions were repeated in a direct, targeted, manner to remove ambiguity in the company’s answers.
Our thoughts: The company modified their disclosures in alignment with what the SEC requested. Similar to a point made above, the company’s answers shine a light on business practices (marketing, operational, sales, etc.) that otherwise might not be shared. It’s an example of how ASC 606 will push companies to reveal more per its disclosure requirements. Companies need to be vigilant that such disclosures do not expose too much to competitors.What level of risk are you willing to accept with your company’s ASC 606 adoption? What would the costs be to your company if it gets ASC 606 wrong? What would the costs be for you? We encourage you to visit http://www.softrax.com for information on how SOFTRAX can help your company and you handle ASC 606.
One ASC 606 topic that continues to come up per recent discussions with our clients, prospects and accounting and finance professional is the concept of standalone selling price.
