The time has come for public companies to adopt the new revenue recognition standard. Early adopters have already given us an indication of what the audit risks will be, and they've also been the guinea pig for comments from regulators. As expected, the adoption and application of the new guidance is an item that the Securities and Exchange Commission (SEC) is paying attention to, already having sent comment letters to several early adopters. The ongoing public company adoption and comment process is important for private companies as well. The questions the SEC raised will influence how certain types of contracts are approached and the types of information that will be expected to comply with the disclosure requirements.

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April 2018
Three Questions Regulators May Have About Your Revenue Recognition Adoption
The time has come for public companies to adopt the
new revenue recognition standard. Early adopters have
already given us an indication of what the audit risks will
be, and they’ve also been the guinea pig for comments
from regulators. As expected, the adoption and application
of the new guidance is an item that the Securities and
Exchange Commission (SEC) is paying attention to,
already having sent comment letters to several early
adopters. The ongoing public company adoption and
comment process is important for private companies as
well. The questions the SEC raised will influence how
certain types of contracts are approached and the types
of information that will be expected to comply with the
disclosure requirements.
How Did You Determine Your Variable
Consideration?
Price concessions, rebates, liquidation damages and
penalty or incentive provisions will likely result in variable
consideration. Entities must estimate the amount of
variable consideration they expect to receive as part of
the transaction price using either the expected value
(probability of the provision being used by the customer)
or the most likely amount (when there’s two possible
outcomes). Variable consideration is then reassessed at
the end of each reporting period.
Regulators have shown a particular interest in how entities
calculate their variable consideration estimates. The SEC
questioned a solar systems company about its variable
consideration and whether it appropriately reassessed its
estimates.
Entities should be very clear about their choice of method
and their reassessment schedule in their disclosures.
An investment group received a question about how it
determined its rebates for its customers, which it did not
include as a reduction in its transaction price.
Organizations that determine that their variable
consideration does not affect the transaction price should
have enhanced disclosures about how they reached that
conclusion.
How Did You Calculate the Revenue
Recognized Over Time?
Revenue is recognized over time when the entity satisfies
performance obligations over time. The amount of
revenue recognized will depend on the amount of control
that has been transferred to the customer, which entities
can determine using either an input or an output method.
The SEC wanted to know more about how the solar
company handled its over time payments. It asked
for additional information on how the satisfaction of
performance obligations and the timing of payment
affected the solar company’s contract asset and liability
balances. The SEC also asked the solar company to
revise its future disclosures to be explicit about why it
chose the method of recognizing revenue over time that it
did. Entities should be very clear whether the input method
or the output method was used and why.
The investment company also received comments about
its subscription services, which met the requirements for
a performance obligation satisfied over time and which
the investment company recognized monthly. The SEC
wanted more information in the company’s disclosures

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Copyright ©2018, Mayer Hoffman McCann P.C. All rights Reserved.
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please
contact your MHM auditor to further discuss the impact on your audit or audit report.
related to remaining performance obligations or the
application of optional exemptions, which in this case,
meant the investment company needed to explicitly
say there were no remaining performance obligations
to be satisfied. If using a subscription-based service,
companies should be clear about how that affects
remaining performance obligations in the event regulators
have additional questions.
What Amount of Disaggregated Revenue
Information is Appropriate?
Public companies are also required to disclose information
about revenue at a disaggregated level in order to depict
how economic factors affects the nature, amount, timing
and uncertainty of cash flows. This disclosure has different
requirements and objectives compared to the segment
disclosures that may already be included in the financial
statements. An automaker received a question about this
very issue and in follow-up response the SEC staff noted
that the company presented information outside of its
financial statements at a more disaggregated level then
within the financial statements raising questions about
how the company considered this other information when
concluding on the appropriate level of disaggregation.
Another company received similar questions about its
disaggregation of revenue and how categories were
selected considering that the disaggregation excluded
categories of revenue that were discussed as important in
other areas of the document.
These comment letters provide important considerations
for public companies as they prepare their first quarter
disclosures under the new revenue recognition guidance.
Be Prepared
Early comment letters from the SEC can provide valuable
insight to companies who are preparing their financial
statements and required disclosures under the new
standard. They are especially helpful when considering
the approach to meeting the disclosure requirements
in the new revenue recognition standard. Keep in mind
that public companies will be required to make all of
the disclosures required in each quarter’s financial
statements for revenue recognition and other newly
adopted accounting standards. Regulators will likely be
looking for detail, particularly in the first year of adoption.
It is recommended to have through documentation of the
contemporaneous decision making made for revenue
recognition and the items included in disclosures. The
analysis is best done by including all information and
considerations relevant to the decision-making process,
even if some of the information is not supportive of the
final decisions reached.
For More Information
If you have any comments, questions, or concerns about
adopting revenue recognition, please contact Mark
Winiarski of MHM’s professional standards group. Mark
can be reached at mwiniarski@cbiz.com or 816.945.5614.