Don’t Rely on Old Revenue Reporting Prototypes for New Rules

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By Steve Burkholder

Dec. 6 — Companies should not presume that their current accounting for revenue will be the same as forthcoming major new revenue reporting rules that go into effect in 2018, an accountant at the Securities and Exchange Commission said.

That was a prominent message that the SEC staff offered Dec. 5 in an effort to guide companies’ financial reporting in the right direction as the deadline gets closer. The revenue recognition rules—ASC 606—were issued in 2014.

Huge Shift Coming

Globally, many thousands of companies will shift to accounting standards of the Financial Accounting Standards Board (ASU 2014-09; ASC 606) and the International Accounting Standards Board (IFRS 15) on revenue.

Revenue is the most important line in a company’s financial statements and a long-time leading topic of SEC enforcement. Public companies will be expected to soon make preliminary disclosures on the potential impact of the new rules.

However, surveys and ad hoc polling at conferences suggest that many companies aren’t prepared to apply the 2014 FASB standard or begun a detailed assessment of their revenue-generating contracts and how accounting policies might change.

Gross-Vs.-Net Presentation

Ruth Uejio, a professional practice fellow in the SEC’s Office of Chief Accountant, offered a cautionary note on gross-versus-net presentation, which can have deep impact on amounts of revenue to be booked. The decision on gross-versus-net hinges on whether a company is a principal or agent in a transaction, with the former leading to gross presentation and the latter resulting in net display.

“Over the past few years, including 2016 year to date, revenue recognition has been the number one topic of consultation with OCA,” Uejio said, referring to requests for information about accounting treatment that the Office of Chief Accountant fields from companies and accountants. “Among revenue consultations, over 30% relate to gross versus net revenue presentation matters.”

She said that FASB and its advisory panel, the Transition Resource Group, have issued reminders that where a company lands in applying the future rules may differ from conclusions under the current accounting rules.

“As industry lines merge and business models evolve, it is important for everyone involved to understand that the gross versus net revenue presentation questions that the ‘technology’ companies have dealt with for a number of years are questions that others may now need to address,” Uejio said by way of example.

No Safe Harbors

Uejio also said that accountants shouldn’t look to the revenue rules for an easy route, with regard to gross-versus-net presentation, when using judgments to land on an accounting policy that can have deep impacts on recording revenue.

“I caution a registrant from viewing either gross or net reporting as a default or a safe harbor, since there is no such default or a safe harbor in the new revenue standard,” said the SEC staff accountant. “The specific facts and circumstances of an arrangement must drive the final accounting conclusion.”

Warning on Anticipated Contracts

Sylvia Alicea, another SEC professional practice fellow, sounded a warning on a linchpin issue in revenue recognition: using the proper definition of a contract with a customer that generates revenue.

She referred Dec. 5 to a specific scenario pertaining to an expected future contract related to “loss leader” pricing and what could result in premature recognition of revenue—long a leading target of SEC enforcement.

“Some companies use a loss leader pricing strategy in which a good is sold at a price that is intended to ‘lead’ to the subsequent sale of other goods or services,” Alicea said. Those later sales typically result in higher volumes or greater profits.

“One important accounting question for this type of arrangement is—can future anticipated contracts for the subsequent sale of goods or services be considered part of the existing revenue arrangement?” she said.

“I observe that the definition of a contract in Topic 606 encompasses enforceable rights and obligations,” Alicea added. “While a future contract might appear to be likely or even compelled economically or by regulation, in my view it would be inappropriate to account for a contract before the contract exists with both enforceable rights and obligations.”

To contact the reporter on this story: Steve Burkholder, reporting from Washington, at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

For More Information

The texts of the speeches by the SEC staff’s Uejio and Alicea are posted, under the heading for Dec. 6, 2016, at

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