bg-img15.jpg
Collected Resources

Below, the SOFTRAX team has collected notable examples of SEC Comment Letters that companies received specific to revenue recognition issues, along with corresponding responses.

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.

Our thoughts have also been provided for each example.


CorVel Corporation: SEC Comment Letter

CorVel Corporation: Form 10-Q, dated February 7th, 2020

The SEC put forward the following key questions to the company regarding its adherence to ASC 606 requirements as follows:
  1. “In the second table in this section you disclose that you recognized $16,372,000 of revenue in fiscal 2019 from the beginning of the period. Please address the following:
    • Tell us how you could recognize $16,372,000 of revenue from the beginning of the period when your deferred revenue at that time was only $15,316,000.
    • Tell us how your disclosure complies with the guidance in ASC 606-10-50-8b.
    • Tell us whether the difference in the first bullet above relates to a cumulative catchup adjustment or to a change in transaction price and, if so, your consideration for disclosing this information under ASC 606-10-50-10b or 50-12A, respectively.
  2. You disclose that your remaining performance obligations of $34.7 million at March 31, 2019 consist of your deferred revenues as well as certain unbilled receivables that are considered contract assets. As by definition, contract assets represent the right to consideration in exchange for goods or services already transferred to a customer, please tell us how your "certain unbilled receivables" can relate to remaining incomplete performance obligations at any given time. In your response describe for us which unbilled receivables are included in your remaining performance obligations.

The SOFTRAX Viewpoint:  The company’s answer to the first question acknowledges both qualitative and quantitative inconsistencies.  This is a prime example where companies are working so hard to get accurate financial statements prepared in time for public reporting requirements that analysis of such financial statements can suffer.  Manual efforts by multiple team members, spanning multiple days and spreadsheets, not only cut into valuable time that could be used for analysis, but also opens up the door for inconsistencies/errors.  Companies that automate revenue recognition via SOFTRAX Revenue Manager free up key resources and time to focus on strategic analysis which prevents such inconsistencies/errors.

In terms of the second question, the company needed to clarify its understanding and implementation of the contract assets versus remaining performance obligations sections of the ASC 606 guidance.  When doing so, having a clean, automated, revenue system will allow the company to present its contract asset and remaining performance obligations positions accurately and efficiently.


Applied Materials, Inc., SEC Comment Letter

Applied Materials, Inc. Form 10-K, dated October 27th, 2019

The SEC Comment Letter questioned the company in the following areas:

  • Identification of performance obligations in its contracts with customers
  • Focus on customer acceptance provisions and how it affects when customers obtain control over provided goods and services
  • Request for information on disaggregating revenue by over time versus point in time

The SOFTRAX Viewpoint:  Volumes of articles have been published about ASC 606 and the level of judgement and subjectivity it introduces on companies’ revenue recognition.  The SEC’s question in this scenario drills into the heart of such key areas of the guidance.  This is a solid example where there’s a need for the company to explain how it married its qualitative and quantitative processes to reach conclusions in its reported financial statements.  It’s likely the company had to go through a manually intensive process to find all relevant emails, documents, spreadsheets, etc., as well as to conduct multiple meetings across different teams to answer the SEC’s questions.  Companies that automate revenue recognition processes streamline and avoid these manual efforts as the application will audit all activities, decisions, policies, and assignment of such policies.  Thus, there’s no need for an all-hands approach to answer this type of question from the SEC. Rather, a single member of the company’s accounting team and go into the revenue management application, hit a button to run a report, and produce a document that can be used to quickly craft an accurate response.

 

Activision Blizzard, Inc., SEC Comment Letter

Activision Blizzard, Inc. Form 10-K, dated February 28th, 2019

The SEC Comment Letter centered on the following topics:

  • Identification of performance obligations in its contracts with its customers.
  • Additional disclosures regarding how it determines Standalone Selling Prices for performance obligations.

The SOFTRAX Viewpoint:  This is a prime example of the SEC digging into a company’s significant judgments related to revenue agreements with multiple deliverables.  Having an audit trail that captured the key decisions and judgments on representative transactions will greatly assist companies in addressing, if not avoiding, questions in these areas.  With that said, automation will only take a company so far as it the judgments are made by key people within the company.  In this case, the company had to answer the question and commit to future disclosures that adequately explain justifications for how performance obligations are identified, how standalone selling prices are determined, and proving these are processes that are repeatable versus a case-by-case approach.  It’s in these areas that a product such as SOFTRAX Revenue Manager can bridge the gap between a company’s significant judgments and apply repeatable, automatic, application of processes that enforce those judgments.

icon-24.png

Speak with an expert and walk through our software solutions in real time

Schedule Demo