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Revenue Recognition - ASC 606 Roundup: 3/20/2019

Posted by Graham Hulme on Mar 22, 2019 9:39:44 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.  

 

This week’s blog focuses on recent examples where companies made revenue recognition errors leading to restatements.

SEC Filings

Notable takeaways:

  • The company made an error applying its revenue recognition policy leading to a need to restate financial results from 2017 forward.
  • Due to these issues, the company did not file its annual report on time. This led to a notification from Nasdaq of its non-compliance and the potential that it will be delisted if not resolved.
  • What’s most striking is the line, “At this time, the Company does not have an estimate of when all efforts will be completed and when their Form 10-K for the fiscal year ended September 29, 2018, as well as other amended and restated reports, will be filed.”
  • The cause of the issue, and having an ability to quickly address the issue, would both be addressed by a purpose-built revenue recognition application such as SOFTRAX Revenue Manager. This is due to the fact that policies are built into the application and automatically enforced on incoming transactions. No human interaction needed; no judgements required each and every time. The application takes care of it. 

 

Notable takeaways:

  • The company will restate its first, second and third quarter 2018 financial statements in connection with the recognition of revenues from license agreements that were not recognized previously.
  • This is an example where the company appears to have incorrectly identified the number of performance obligations in its contracts with customers. In this case, it originally recognized revenue in 2018 for one performance obligation, but subsequently identified it should have broken the performance obligations out to (i) the license together with research and development services and (ii) a contingent performance obligation regarding future manufacturing.
  • The company states, In connection with the restatement, the Company has determined that a material weakness exists in its internal control over financial reporting related to accounting for revenue recognition. Management, with the oversight of the Audit Committee of the Board of Directors, has updated, and will continue to update, the Company’s revenue recognition processes and controls with respect to complex revenue contracts, and intends to implement additional control procedures.”
  • While we do not know the specifics, it’s possible that a cause of this issue was the fact that revenue recognition policies were done manually, via spreadsheets, but by multiple team members without proper oversight. These environments introduce a high probability and risk for errors.  This is exactly what SOFTRAX Revenue Manager will prevent as it automates, simplifies, and standardizes all revenue recognition policies and activities taking away the potential for these errors.

 

Notable takeaways:

  • This sentence in the filing sums things up, Specifically, during the preparation of the 2018 annual consolidated financial statements, the Company determined that the systems, processes and controls related to sales cut off were not sufficient to accurately record revenue in the correct reporting period. As a result, the Company identified errors, relating to revenue, cost of revenue, inventory and accounts receivable, which resulted in the overstatement of revenue and expenses for the Restated Periods as well as corresponding balance sheet accounts as of September 30, 2018. The errors described above were material to the Restated Periods and will be corrected in the restatement of our financial statements for the Restated Periods.”
  • This is an interesting case as the revenue recognition issue sits above the technical accounting considerations that ASC 606 introduces. This is a fundamental control issue in terms of when the company did or did not allow sales cut offs to hit. Thus, revenue was recognized incorrectly.
  • A basic premise of SOFTRAX Revenue Manager is control over the date and period assigned to incoming transactions and how those will manifest in deferred versus recognized revenue. These are hard policies built into the application yet controlled by “at your fingertips” setups that business users own.  No special coding or customizations need. 

 

Notable takeaways:

  • The company overstated it revenues for 2018 due to two types of errors:
    • Improperly recognizing revenues for subscriptions that had been refunded through a third party
    • Improperly recognizing revenues for accounts that were in a suspended state
  • The company identified material weaknesses in processes and internal controls during this review.  It also called out a need to automate more of its subscription processes from billing and revenue recognition standpoints.
  • Overall, it reads like the company had manual, error-prone, processes in place to handle revenue recognition which could have led to this issue.
  • Here’s a supporting article on this filing: MoviePass Owner Says Q3 Revenue Overstated

 

 

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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