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By Denise Lugo
Snapchat’s parent, Snap Inc., which generates substantially all of its revenue through the sale of advertising products, says it doesn’t expect material consequences to its consolidated financial statement from forthcoming revenue recognition rules.
Snap, which recently filed a $3 billion initial public offering, will enter the public company marketplace when the new accounting rules for reporting revenue go into effect for public issuers. The company is still evaluating a transition approach for adopting the rules.
“Because it’s a top line item, it has a big impact on a company’s net income and profitability,” Brian Marshall, a Partner in the National Accounting Standards Group at RSM US LLP told Bloomberg BNA. He was discussing revenue. Investors scrutinize revenue to determine the growth and trends of a company. Getting the new accounting right is therefore highly important.
“The bulk of their revenue is driven by ads, and they rely heavily on advertisers who are placing big ticket ad campaigns with them, which is a little bit different of a model than Facebook,” Jessica Liu, senior analyst with Forrester Research Inc. told Bloomberg BNA. “Snapchat is quite challenged in the sense that their ad-targeting capabilities and their ad measurement is not up to snuff—I could say the same thing about the entire industry as a whole—but I think Snapchat is lagging with what they can deliver to advertisers,” she said.
Snap’s filing reveals huge losses over year-end revenue.
It had a net loss of $515 million in 2016 on revenue of $404 million, according to its Feb. 2 filing with securities regulators. The year prior, it posted a loss of $373 million on revenue of $59 million.
Snap hasn’t yet responded to an email for comment.
The new accounting rules, Revenue from Contracts with Customers (ASC 606), were issued in May 2014 by FASB, but become effective in 2018 for public companies. Private companies won’t have to apply them until 2019 annual statements and 2020 interim filings.
The revenue standard replaces numerous, industry-specific requirements. Areas of it converge with international accounting rules. It requires a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards.
Among other provisions, companies must provide enhanced disclosures that focus on the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers.
The most significant portion of the rules for Snap’s holdings relate to the principal versus agent analysis that would determine whether to record revenue on a gross basis or on a net basis, the filing states.
“The way you look at this guidance, there’s a number of indicators that you would have to evaluate to determine if you are the principal in the transaction or an agent,” said Marshall, whose comments weren’t specific to Snap per se. “If you’re a principal you’re primarily responsible for what’s being delivered to the customers, so the best picture to show would be the full amount of revenue,” he said.
Snap said its advertising sold directly to advertisers—termed Snap-sold revenue—will be reported on a gross basis. Certain partners that provide content on Snapchat—partner-sold revenue—will be reported on a net basis, consistent with its current revenue recognition policies, the filing states.
The company also said it controls the Snap-sold advertising campaign before it is transferred to the customer because it provides the advertising campaign on Snapchat and has discretion in establishing the price of the advertisements.
The partner controls significant aspects of the partner-sold advertising campaign before it is transferred to the customer. The partner has discretion in establishing price with the advertiser, Snap said.
Critical to adopting the rules is the transition method a company chooses to follow. Snap is still evaluating whether to follow a full retrospective transition method or a modified retrospective transition method to apply the rules, according to its filing.
Full retrospective application requires a company to adjust all prior periods from 2016 for revenue compared to what was actually recognized and do a cumulative-effect adjustment. By contrast, a modified retrospective approach won’t require prior period adjustment, but a company would have to provide additional disclosures.
“If a company did the full retrospective approach it would have comparability for all three years— ’16, ’17, ’18 when you’re looking at an income statement,” Marshall said. By contrast, a modified retrospective approach doesn’t require adjustment to its prior periods. A company would apply the new guidance as of Jan. 1, 2018.
“Modified retrospective transition sounds like a lot less work than full retrospective, but from a comparability requirement, there is an additional disclosure,” he said. There’s not necessarily a better approach, it really is about what would benefit your users, Marshall said.
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A copy of Snap Inc's SEC filing can be found at: https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm
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