Jason Milch



Report on New Revenue Recognition Standard Details Continuing Compliance Issues; Highlights Increased SEC Scrutiny of Companies with Complex Payment Structures

RESTON, Va. (July 10, 2019) – Over the past year, public companies have attempted to comply with transformative new accounting rules for recognizing revenue from customer contracts, known as ASC Topic 606. Companies involved in collaboration and licensing agreements with milestone, royalty or sales-based payments generally attracted heightened scrutiny from the SEC. This is according to the second report in a two-part series released today by Intelligize, provider of powerful analytical tools for SEC compliance and transactional professionals. The report, entitled Impact of Revenue Recognition Standards on Public Companies: Analyzing Adoption Progress, uses public company filings, SEC comment letters and other data from the Intelligize research platform to detail the Commission’s investigative priorities and highlight significant compliance trends.

The new revenue recognition rules, which went into effect for public companies on January 1, 2018, cut across all industries and have been called the regulatory change with the most profound impact on corporate finance since the Sarbanes-Oxley legislation at the start of the century. Part II of Intelligize’s research series checks back in on the early and standard adopters discussed in Part I to see how the adoption process has gone, and where SEC review has focused.

Intelligize also pinpoints notable revenue recognition compliance activities within certain target industry sectors, the S&P 500, emerging growth companies (EGCs) and unicorns. Researchers found that determining performance obligations, the timing of recognition, the transfer of control of goods or services, and the establishment of a principal or agent role all seemed to come under additional SEC scrutiny.

“The new revenue recognition accounting standard has taken significant work to implement, and has required companies to make certain judgment calls that were not previously necessary,” said Rob Peters, the report’s lead author and a senior director at Intelligize, whose research platform provides news, regulatory insights, and powerful analytical tools for accounting, compliance and transactional professionals. “At least in the short term, this has led to more aggressive review from the SEC.”

For Part II of its in-depth look at revenue recognition, Intelligize evaluated the expanded set of companies now under SEC review, enabling broader insight into what the SEC wanted in companies’ Topic 606 disclosures. There appeared to be more emphasis on how companies measured the various steps of their contracts and a willingness to delve deeper into these questions. Notably, contracts that include more complicated payment structures, such as ongoing subscriptions, tended to receive multiple comments as the SEC investigated the underlying justifications. Researchers advised that this area will be a continued focal point for the SEC moving forward.

Among other things, Intelligize’s report examined Topic 606 comments to the S&P 500, looking at a total of 116 letters to 46 different companies in 32 industries. Researchers then focused on four particular industry sectors representative of the SEC’s focus and the companies’ interpretations. These sectors were airlines, advertising, broadcast and streaming, and pharmaceuticals. In each case, and as analyzed at length in the report, at least one company received multiple rounds of questions.

In its first white paper on the new revenue recognition standard, Intelligize identified 32 early adopters – companies that elected to adopt Topic 606 during the 2017 calendar year. Researchers found that nearly one-third of early adopter companies had received comment letters from the SEC related to revenue recognition. In its new white paper, Intelligize checked back with these early adopters and discovered that, of those companies that received an initial SEC comment letter focused on the revenue recognition standard, none of them has received a subsequent comment letter. The relative lack of follow-on comments to the early adopters suggests the revised disclosure promised in their response letters may have been sufficient for the review process.

The report also turned a microscope on EGCs, companies with revenues under $1 billion which either had not gone public or just had its initial public offering (IPO). The classification as an “emerging growth company” is an important one, as EGCs are permitted to adopt new or revised accounting standards on the same, less ambitious schedule as private companies. Several EGCs decided not to take advantage of the deferred compliance. Two of these EGCs received multiple rounds of SEC comments.

Earlier this year, Intelligize released a report looking at the IPOs of unicorn companies. Turning their attention back to unicorns for this latest report, researchers 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 non-public entities. In reviewing the comment letters to these companies, researchers noted a predominance of SEC comments focused on trying to understand several companies’ treatment of revenue from subscription-based services.

“As technology continues to move the U.S. and global economies in the direction of service-based businesses, we anticipate that we will continue to see an influx of IPOs from companies that derive significant portions of their revenues from the sale of ongoing subscriptions — either as standalone services or associated with an accompanying hardware-based offering,” said Peters. “The SEC’s Topic 606 comments to Lyft, SVMK and Elastic, for example, are a clear indication of the types of issues the Staff will continue to grapple with and must be sorted-out as the volume of public companies with subscription-based revenues continues to increase.”

The study’s other significant findings include:

  • Among S&P 500 companies, the SEC looked extensively at the identification of performance obligations, variable consideration and royalties.
  • While the pharmaceutical industry led the way overall with 49 revenue recognition-related comment letters, followed closely by 43 for the prepackaged software SIC Code, the highest number of Topic 606 letters to S&P 500 companies came from the advertising industry.
  • In analyzing the transition methods of unicorns, researchers found that of the 25 unicorns that adopted the new revenue recognition standard between January 1, 2018, and April 30, 2019, more than twice as many (14) utilized the full retrospective method as used the modified retrospective method (6).

About Intelligize

Intelligize is the leading provider of best-in-class content, exclusive news collections, regulatory insights, and powerful analytical tools for compliance and transactional professionals. Intelligize offers a web-based research platform that ensures law firms, accounting firms, corporations and other organizations stay compliant with SEC regulations, build stronger deals and agreements, and deliver value to their shareholders and clients. Headquartered in the Washington, DC metro area, Intelligize serves Fortune 500 companies, including Starbucks, IBM, Microsoft, Verizon and Walmart, as well as many of the top global law and accounting firms. In 2016, Intelligize became a wholly-owned subsidiary of LexisNexis®, a leading global provider of content-enabled workflow solutions designed specifically for professionals in the legal, risk management, corporate, government, law enforcement, accounting and academic markets. For more information, visit


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