This week’s edition covers both relevant news articles as well as a recent comment letter/company’s response on ASC 606.
To quickly identify ASC 606 information in the below links, click on the link, hit Control + F, enter the text “606” or “2014-09”, and click the down arrow button.
Are you reading these weekly rev rec blogs? If so, please let us know what you think as we will tailor future weekly roundups to the most relevant, timely, content based on feedback from you, and as always, feel free to reach us at: http://www.softrax.com/about/contact-us to learn more about SOFTRAX and the value we can provide for your company’s ASC 606 adoption!
SPOTLIGHT FEATURE - MiMedx
MarketWatch, “The bad news keeps coming for MiMedx and its new auditor EY”, by Francine McKenna: https://www.marketwatch.com/story/the-bad-news-keeps-coming-for-mimedx-and-its-new-auditor-ey-2018-07-02
The Motley Fool, “Why MiMedx Group Inc. Stock Is Being Obliterated Today”, by Brian Feroldi: https://www.fool.com/investing/2018/07/02/why-mimedx-group-inc-is-being-obliterated-today.aspx
Our thoughts: In March 2017 a lawsuit was filed against the company stating it had fraudulent revenue recognition practices. Since that point, a number of key activities that signal a deep dive into revenue recognition issues occurred: internal investigation, change in auditor to a Big4 firm, senior level management departures, and inquiries via public SEC comment letters regarding its annual filing.
The latest news in a wave of rapidly changing leadership announcements is of an interim CFO as well as a new Board Chairman. News broke that the CFO and Controller/Treasurer would be departing after the company gave official notice last month that it would be restating more than five years of financial statements stretching from 2012 through 2016 and the first three quarters of 2017. Unfortunately, the stock took a steep hit, and fell 38%.
While more details are still required to assess causes and impacts of the situation, all signs are trending to the conclusion that a lack of accounting controls, policies, and quality around revenue recognition will take center stage in terms of how the company ended up at this point. This is exactly the type of situation that can be avoided by implementing a true revenue subledger that automates revenue recognition policy, procedures, transactions, etc. with a clear audit trail.
Additional News - KBR, Uncollectibles, ARLO, and Synchronoss
KBR - CFO.com, “KBR Fined $2.5M for Inflating Work in Backlog”, by Matthew Heller: http://ww2.cfo.com/financial-reporting-2/2018/07/kbr-fined-2-5m-for-inflating-work-in-backlog/
Our thoughts: The situation detailed in this article is another prime example of one that could be prevented via an automated revenue management solution. By taking manual efforts and spreadsheets out of the equation, and going to a fully automated revenue subledger, there would be a clear trail of contract-to-cash versus contract-to-revenue to support backlog metrics, removing the potential for a ‘bad actor’ to control financials, as this article details.
UNCOLLECTIBLES - CFO. com, "Metric of the Month: Uncollectible Balances", by Perry D. Wiggins: http://ww2.cfo.com/cash-flow/2018/07/metric-of-the-month-uncollectible-balances/
Our thoughts: ASC 606-10-05-4, which is Step #1 of the 5-step model for ASC 606, says it is necessary to “Identify the contract(s) with a customer”. If you cannot get past Step #1, none of the other steps matter. To that end, ASC 606-10-25-1e gets into the concept of collectability.
The above article regarding how to calculate uncollectible balances intersects with Step #1 of ASC 606. It’s worth a read to juxtapose with the following two high value articles that discuss the concept of collectability in ASC 606:
RevenueHub, “Collectability Of Consideration”, by Haoran Jiang: https://www.revenuehub.org/collectibility-of-consideration/
Deloitte Global Services Limited, “Heads Up — FASB makes narrow-scope amendments to revenue standard and provides practical expedients” (focus on the ‘Collectability’ section): https://www.iasplus.com/en-us/publications/us/heads-up/2016/issue-14
ARLO - ARLO TECHNOLOGIES, INC., S-1:
- Starting on page F-18 in the "Note 2. Revenue Recognition" section, the company details how ASC 606 primarily impacted its handling of channel rebates and discounts upon revenue recognition. Additionally, it discusses how deferred revenue balances were impacted by the variable consideration provision of ASC 606.
Our thoughts: With over 35 references to ASC 606 through this filing, paired with the inherent level of detail that an S-1 filing includes specific to revenue recognition policies, it is worth a read as it touches on several key areas of ASC 606.
SYNCHRONOSS - SYNCHRONOSS TECHNOLOGIES, INC., 10-K:
- A clear statement is made on page 42 regarding the level of effort to date and expected efforts going forward regarding the company's adoption of ASC 606, "The implementation by us of a new revenue recognition standard in 2018 requires substantial preparation and expenditures, and our failure to properly implement these standards in a timely manner could result in inaccurate revenue recognition and inappropriate disclosures and cause us to fail to meet our financial reporting obligations."
- Page 128 explains how there was a give and take impact on different revenue types by ASC 606. Professional Services executed for customizations had a delayed impact on revenue recognition while revenue recognition occurred earlier in cases of license revenue where the company provided hosting services for on-premises license customers.
- Page 128 also summarizes additional ASC 606 impacts in terms of adjustments to how the company allocated consideration to performance obligations, handling of sales commissions, variable consideration requirements, and the need to account for discounted customer options to purchase future products or services as material rights.
Our thoughts: Page 128 offers a brief, yet effective, picture of ASC 606's impacts in both qualitative and quantitative forms. The discussion regarding impacts to how the company needed to change its approach to allocating consideration to performance obligations offers extensive value, as it has not been mentioned with high frequency in other filings reviewed to date.
ASC 606 is not a challenge your company has to face settling for limited functionality in existing systems or through high risk manual efforts. SOFTRAX provides superior experience, knowledge, products, and services to address your company’s ASC 606 needs. We encourage you to visit http://www.softrax.com/about/contact-us to learn more about SOFTRAX and the value we can provide for your company’s ASC 606 adoption.