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Revenue Recognition - ASC 606 Roundup: 3/4/2019

Posted by Graham Hulme on Mar 4, 2019 9:00:00 AM

To 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.

 Earnings Calls

Our thoughts:  This is a good example of a company looking to be proactive with its investors in terms of presenting ASC 606 information and impacts.  This is an emerging growth company so did not have the adoption date requirement of other public companies.  Yet, the company takes time in its earnings call to educate its audience on 606 and how it will impact the company. 

Notable takeaways:

  • The company uses a straightforward approach to disclose anticipated impacts as it calls out what parts of its revenue model will and will not be affected.
  • It talks about how timing of revenue recognition will be affected as follows, “However, we expect it to have an impact on the timing of revenue recognition related to our on-premise, term license contracts because the new standard requires us to recognize the majority of revenue from these contracts upon delivery of the software. It is important to note that the vast majority of our on-premise contracts are one year in duration.”
  • Additionally, it discusses, “we expect to defer more commissions under this standard, which would reduce the amount of commission expense during the reporting period.”
  • Overall, this is a quick read, but heavy in value to show a brief, information packed, proactive approach on disclosing anticipated 606 impacts.

 

Our thoughts:  This is a good earnings call transcript to review both for the company’s presentation and analysts’ questions specific to 606.  Right at the start, the company’s CFO addresses 606 in his opening comments per the first 8 references to 606 in the transcript.  This is worth a read as it shows the company attempting to set context and control the discussion regarding 606 and its impacts on the company.

Additionally, there were key exchanges between the company and analysts where the analysts dig into how the adoption affected the timing of revenue recognition by correlating it to growth in a product/service revenue line.  Furthermore, another interesting exchange probes the relationship between ASC 606 and cashflow as follows:

Eric Wold - B. Riley & Co., LLC

And then last question on mobile. I think you mentioned in the, Lewis, in your comments around guidance. We expect mobile will increase and obviously mobile is being, I guess, the growth rates for this year is benefiting from the recasting last year. Can you give us a sense of kind of what an apples-to-apples growth rate for mobile would be in this year guidance and then any kind of level of that - that you consider minimum guarantees or I would say fixed that kind of minimum guarantee levels versus something that would be a 100% unit based?

Lewis Chew – Executive Vice President and CFO

Sure. There's a lot in there. So, maybe, I'll do a little bit of level setting for the whole audience. What Eric is referring to as that in the 606 recast one of the things I try to highlight in my prepared comments, but I took a lot more deliberation a quarter ago was mentioning that in some cases under 605, revenue that could not ever have been recognized upfront was actually required to be recognized upfront under 606.

So when we did the recast, you see revenue moving out one year into prior years, and in some cases as far back as five years. And so as you pointed out, Eric, some of these things are affecting the comparisons year-over-year. But another thing that I said last quarter that I'll reiterate this quarter that in FY 2019, we don't anticipate a significant change in upfront revenue compared to what we had been doing under 605.

So, under 605, we ran the business where our revenue sought to emulate or closely align with our customer's shipment behavior and demand. And so our FY 2019 numbers as just sort of a broader statement is not - our FY 2019 guidance is not assuming or benefiting from some assumption with the uptick and upfront in revenue because of 606.

Paul Chung - JPMorgan Securities

Okay, great. Thanks. And second question just on from the 606 accounting change. I assume your cash flow seasonality stay the same. Can you confirm?

Lewis Chew – Executive Vice President and CFO

Yes. The cash flow that we presented historically is largely unaffected by the 606 recast. Going forward, our cash flow pattern shouldn't change dramatically as a result of 606, remember 606 is very much an accounting driven standard not so much change in the way we do business per se which ultimately manifests itself and what you're asking about which is the cash flow.

 

Articles

Our thoughts:  This article offers a solid summary of a recent FASB proposal to change the recognition and measurement of deferred revenue in business combinations.  This is a 2 minute read at most, but worth it to gain insight as the proposal also offers an invitation to comment on two additional areas related to business combinations for 606:

  • Payment terms and their effect on the subsequent revenue recognized.
  • Costs to fulfill a performance obligation in measuring the fair value of a contract liability for a revenue contract.

 

Our thoughts:  This is a transcript of a recent podcast where the author of a solid study the firm, Intelligize, on 606.  This transcript is likely a 5 minute read but gives a solid qualitative summary of the study’s results according to its author, Rob Peters.  The last question posed regarding 606’s intersection with the new lease standard is revealing.

 

Our thoughts:  A 2 minute summary discussing that the AICPA released an updated edition of its Audit and Accounting Guide for Revenue Recognition.  This guide will offer value for companies as it will set the table for how auditors should handle ASC 606 in upcoming audits.

 

Our thoughts:  There are two visual representations (chart and graph) that represent a 2 minute read but give a solid picture SEC Comment letter counts and where the topic of ASC 606 falls in the group of letters studied.

 

We encourage you to visit http://www.softrax.com/contact-us for information on how SOFTRAX can help your company and you handle ASC 606.

 

Topics: Revenue Recognition, ASC 606, IFRS15, SEC Comments

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