This week’s entry will run through recent notable and instructive 10-Q filings that had frequent references to ASC 606. Additionally, we also share a high-value ASC 606 exchange between a company and an analyst during a recent earnings call.
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.
Salesforce.com, Inc.: 10-Q For the quarterly period ended October 31, 2018
Our thoughts: Starting in the “Revenue Recognition – Adoption of Topic 606” section at the bottom of page 11, and onto the top of page 12, the company provides a summary of ASC 606’s impacts.
What’s notable in this section is the company discusses how a recent acquisition caused additional complexity and judgments related to revenue recognition under ASC 606. A key point raised in this section was the company’s need to effectively do a “mini” ASC 606 adoption/review due to incorporating this new business unit. In this case, the company offered cloud-based products/services when adopting ASC 606, but then subsequently purchased a new business. That business had customers with on-premises deploys thereby leading to an additional business model to consider for ASC 606. The good detail is offered by the company on what it did to incorporate the new business under 606.
Beyond the above, the company offers textbook examples of 606 disclosures and information in the “Revenue Recognition Policy” section on pages 12 and 13, “Contract Balances” section at the bottom of page 20, “Unearned Revenue” section at the bottom of page 20 into page 21, and the “Remaining Performance Obligation (Formerly “Remaining Transaction Price”)” section on page 21. All worth a quick read.
CISCO SYSTEMS, INC.: 10-Q For the quarterly period ended October 27, 2018
Our thoughts: This filing is densely packed with over 38 references to ASC 606. What’s notable, and presented in a format that is highly intuitive for readers to convey the impacts of ASC 606, is a table the company presents on page 9 detailing the timing of revenue recognition before 606 and after 606 for its major product/service offerings.
An additional area of note is in the “Significant Judgements” section at the bottom of page 9. The company discusses how it arrives at SSP (standalone selling prices) offering its two-tier approach to do so.
While there are many other references to 606 in the filing, the next recommended area to review is the “Disaggregation of Revenue” section on page 13. The narration of considerations used by the company to disaggregate revenue at the top of this section, while brief, is helpful to set the context for the table that follows. Overall, it’s a good example of how the company critically analyzed its business model on an end-to-end basis to identify financial and operational factors that would be used to disaggregate revenue.
Daktronics, Inc.: 10-Q For the quarterly period ended October 27, 2018
Our thoughts: Starting at the top of page 10, and into page 12, is a section named “Note 4. Revenue Recognition”. The company provides an expansive narration of its ASC 606 judgments and considerations.
It offers a level of detail into its business model and practices that likely would not have occurred prior to the advent of ASC 606. This goes to points the SEC made in the past about one of the key benefits of ASC 606: more clarity for consumers of financial statements on companies and their business practices.
What is also unique about this filing is how it presents information in its “Disaggregation of Revenue” section at the top of page 13. In doing so, the company presents the information by the type of performance obligation and the timing of revenue recognition per operating segment. It’s a very interesting approach to disclose this information when compared to other filings reviewed to date.
CISCO SYSTEMS, INC.: Q1 2019 Earnings Conference Call Transcript
Our thoughts: To supplement our spotlight on this company’s 10-Q filing above, there was a good level of back and forth between the company and analysts during the company’s last earnings call specific to ASC 606 as listed below. As you’ll see, the analyst’s question probed the ongoing impacts of ASC 606 on the company. The company’s response looks to answer with a practical, working example, as follows:
- Srinivas Pajjuri — Macquarie Capital — Analyst: “First, on ASC 606, is it just a one-quarter benefit to revenue or do you expect any more in Q2 or going forward?”
- Kelly Kramer — Executive Vice President and Chief Financial Officer: “Sure. So, on the first question on ASC 606, so we will benefit from that going forward. The point was this was a little abnormal this quarter because we had two very large, large enterprise, multiyear deals that were very heavy software content that we recognized now. In the new accounting rules, you recognize upfront.
So, just to remind everybody of where we are impacted mostly by ASC 606, when we have enterprise agreements, whether these are term-based or not, we will be recognizing them upfront if, basically, the functionality of the software goes to the customers. So, a lot of the enterprise agreements we have will all be recognized upfront. Cisco ONE, for example, a lot of that is going to be recognized upfront. And even a portion of our enterprise networking, like the Cat 9K subscription, a portion of that now will be upfront even though some is still deferred. So, it’s accelerating, basically, big enterprise license agreements. So, this quarter, we had two very large ones but we will be benefiting going forward.”
- Kelly Kramer — Executive Vice President and Chief Financial Officer: “…And I’ll use the Cat 9K as an example. We’ve talked in the past where we used to sell the previous switch. Say it sold for $100.00 and we recognized that $100.00 all upfront. We’re selling the Cat — before ASC 606, we sold Cat 9K for $100.00 but 25% of it was deferred and we recognized that 25% was over, say a three-year term and then they would renew it for another three-year term. With ASC 606, that 25% was deferred, about 12% is now deferred, and the other 11% is recognized upfront but that full 25% is what we renew. And so that’s why, when you look at the software, that’s still a subscription software.”
What level of risk are you willing to accept with your company’s ASC 606 adoption? What would the costs be to your company if it gets ASC 606 wrong? What would the costs be for you? We encourage you to contact us for information on how SOFTRAX can help your company and you handle ASC 606.