SEC Probes Amazon on Revenue Recognition

Correspondence just released by the SEC (and available on the Intelligize platform) reveals that the agency has recently probed Amazon about a number of accounting issues, including those related to newly overhauled revenue recognition rules. In its back-and-forth with the SEC, Amazon refused to provide information about revenue from Prime members. The company’s stance carries echoes of the SEC’s questioning of another tech giant earlier this year, in which Google parent Alphabet stonewalled the SEC on its request to break out YouTube revenue under the new rules.

Those rules effected a sea change in the way that public companies must recognize revenue earned from customer contracts. Under development for more than a decade, they are intended to be more consistent and comparable across industries than the discarded GAAP standards. Intelligize issued a report on implementation of the “rev rec” standards earlier this month, finding that only 32 of more than 4,000 public companies had chosen to become early adopters of the new rules, and that the vast majority of public companies have chosen the less taxing of two available methods of complying with them. These and other findings are consistent with the conventional wisdom that issuers have found adapting to the new standards burdensome.

The SEC has remained true to the word of Kyle Moffatt, chief accountant for the division of corporation finance, that it would work cooperatively with companies as they adjust. “We aren’t planning to beat up on companies in this first year,” he said in May. Nonetheless, the SEC did have extensive (and less-than revealing) correspondence with Alphabet, one of the few early adopters, earlier this year.

In an August letter, the SEC asked Amazon about four issues:

• The percentage of Amazon’s net sales that come from “Amazon Prime” members;
• Disclosure of increases in net sales attributable to new services like Amazon SageMaker, a machine learning service;
• How Amazon determines whether it acts as a principal or agent (and consequently whether it presents sales on a gross or net basis, respectively) in its sale of digital media content; and
• Whether Amazon recognizes revenue from AWS, advertising services, and its third-party seller services at a single point in time or on an ongoing basis as services are rendered.

While Amazon gave a complete response, its answer on the last issue—which falls most squarely under the revenue recognition umbrella—required an October follow-up in which the SEC insisted that “it continues to be unclear when revenue related to these services is recognized.”

Amazon also refused to answer the first question, downplaying Prime as “only one element” of its multifaceted offering of products and services. Amazon therefore said that “whether sales are associated with Prime membership does not reflect on or provide useful information about the nature of our net sales.” It went further to say that it would not even be possible to answer the question because “Prime membership status is not tied into our financial reporting systems.”

It will be interesting to see whether Amazon’s argument emboldens more tech companies to shield revenue information from disclosure. It will be equally interesting to see whether this newly released correspondence marks the end of a honeymoon period, portending a wave of comment letters from the SEC testing issuers’ compliance with revenue recognition rules.