An Intelligize report released today delves into the data from securities filings to find out how publicly traded companies and the Securities and Exchange Commission (SEC) are adapting to the new accounting standard for recognizing revenue (Topic 606) to depict the transfer of promised goods or services to customers.
Based on data retrieved from the Intelligize platform, researchers were able to draw conclusions about the impact of the changes to Topic 606 that went into effect at the start of 2018. The new accounting standard for revenue from contracts with customers came as the result of more than a decade’s worth of work by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB). Eschewing the rules-based guidance of the past, the new version of Topic 606 created a principles-based standard for determining revenue from customer contracts.
Given the widespread use of contracts in business, the new standard has dramatically affected financial accounting. Not surprisingly, the SEC has been forced to step up its reviews of Topic 606 reporting in light of the change.
In November, we published our first whitepaper on the new revenue recognition standard. That study looked specifically at how early adopters were addressing the changes. Our latest effort digs into the financial reporting of all public companies from the last 15 months. The SEC sent out a total of 548 comment letters on Topic 606 in the time period covered in the study. Overall, the Commission appears keen on learning more about how companies measure the steps of their contracts and issues such as performance obligations, the timing of recognition and transferring control of goods and services.
While the new version of Topic 606 did away with formal industry-specific guidance, our study found that, in practice, the SEC still tends to zero in on similar questions for companies within the same sector. Additionally, the data indicate the Commission frequently came back with multiple comments in the case of complicated contract payment structures. Licensing agreements with milestone, royalty or sales-based payments tended to get a close look from the Wall Street regulator, for example. In general, the greater the number of revenue streams, the greater the volume of Topic 606-related comment letters.
We also pinpointed notable revenue recognition compliance activities within the S&P 500, emerging growth companies (EGCs) and unicorns. Notably, we found that more than half of unicorns were early adopters of the new revenue recognition standard, despite the fact that most of these companies – as EGCs – were eligible to adopt on the delayed schedule afforded to non-public entities. In reviewing the comment letters to these companies, we noted a predominance of SEC comments focused on trying to understand how several of them treat revenue from subscription-based services.
Following up on the first Intelligize whitepaper on revenue recognition, we also re-examined the progress of so-called early adopters. This group includes more than 30 companies that began using the revised Topic 606 standard in 2017. Roughly a third of the early adopters received comment letters on revenue recognition during the time period from the first study. Since then, however, none received a comment letter from the Commission related to Topic 606. In other words, it sounds as though the SEC’s message came through to them, loud and clear.
For more information, download the entire report from Intelligize.