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Revenue Recognition - ASC 606 Roundup: 5/13/2019

Posted by Graham Hulme on May 13, 2019, 8:00:00 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.

To quickly identify key areas, open each link and search for “606” or “2014-09” in the text.  

Recent Earnings Calls Transcripts

Notable takeaways:

Key ASC 606 references:

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“Revenue for the first quarter was $48.4 million higher than our expected range of $41 million to $47 million due to the structure of licensing agreements signed in the quarter. As we’ve mentioned previously ASC 606 has a material difference in the timing of revenue recognition for our fixed fee ASC 606 has a material difference in the timing of revenue recognition for our fixed fee licensing arrangements.”

Our thoughts: 

It’s clear the company wants readers of the financial statements to understand that 1.)contracts were intentionally structured to handle ASC 606 and 2.)these new contract structures allowed the company to recognize more revenue in ASC 606 than what would have been the case in the past.

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“At the end of Q1, we had contract assets worth $629.4 million which reflects the net present value of unbilled AR related to licensing arrangements for which the company has no future performance obligations. I expect this number to continue to trend down as we bill and collect for these contracts. It’s important to note that this metric doesn’t represent the entire value of our existing licensing agreements as several customers have royalty-based agreements that allow us to recognize revenue each quarter under ASC 606.”

Our thoughts: 

This is a solid example where a company takes the time to identify a new concept introduced in ASC 606, contract assets, in terms of defining it and then explaining how they anticipate the metric to behave over time.  It’s a better example we’ve seen of a company using a practical, plain-English, approach to explain the concept and how it will impact the company going forward.

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“Now let me turn to our guidance for the second quarter on Slide 10. As a reminder, our forward-looking guidance reflects our current best estimates and our actual results could

differ materially from what I’m about to review. Going forward, we’ll only provide financial outlook under ASC 606. Future revenue under ASC 606 will be volatile from financial period to period due to the timing and structure of our licensing arrangements.

To offer additional transparency, we’ve also been providing information on licensing billings, which is an operational metric that reflects amounts in both to our licensing customers during the period adjusted for certain differences. As you see in the supplemental information we provided on Slide 17 of our earnings deck, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. We’ll continue to provide licensing billing as another operational metric to help our investors understand the underlying performance of our company.”

Our thoughts: 

Forward-looking guidance is a challenge for companies in ASC 606 as many are just trying to get their arms wrapped around how to state their actuals under the new rev rec standard.  In this case, the company sets expectations that revenue results could be “volatile”.  While it is qualitative in nature, it does set an expectation they can marry quantitative results to in future presentations of financial results. 

Also note that the company made a proactive decision to include an additional operational metric specific to “license billings” as means to provide context on its revenue results.  As stated, it provides another bridge for users to marry prior understandings of ASC 605 presentation of revenue results with what will occur under the new ASC 606 standard.

Articles

Our thoughts:  This is a 2 to 3 minute read, but well worth the time.  Many think of the SEC as a governing and authoritative body that focuses on public companies.  This article details how the SEC is expanding its focus into private companies.  Specifically, this cites an example where a private company prepared false accounting statements where revenue was overstated so the CEO could benefit financially.  This is an example where the SEC executed an enforcement action against a private company regarding a private transaction.  Worth a review.

We encourage you to visit http://www.softrax.com 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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