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.
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.
The SEC Comment Letter questioned the company in the following areas:
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.
The SEC Comment Letter centered on the following topics:
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.