The New Revenue Standard A Look at SEC Feedback in Year 1

Transcription

1 Heads Up Vlume 26, Issue 4 March 28, 2019 In This Issue Intrductin Significant Judgments Perfrmance Obligatins Cntract Csts Disaggregatin f Revenue Cntract Balances Remaining Perfrmance Obligatins Thinking Ahead The New Revenue Standard A Lk at SEC Feedback in Year 1 by Bailey Walsh, Eric Knachel, and Rb Mynihan, Delitte & Tuche LLP Intrductin Calendar-year-end public business entities (PBEs) adpted the FASB s new revenue standard (ASC ) in the first quarter f While sme cmpanies made whlesale changes t their financial statements, the effect f the new requirements was less significant fr thers. Hwever, all entities were affected by the standard s new and mdified quantitative and qualitative disclsure guidance, which significantly increased the amunt f infrmatin disclsed abut revenue activities and related transactins. This Heads Up (1) prvides a brief verview f the disclsure requirements fr PBEs under the new revenue standard, (2) highlights sme key themes regarding the applicatin f ASC 606 (related t accunting and disclsure requirements) that we nted in ur review f apprximately 400 SEC staff cmments issued t date, and (3) presents examples f thse cmments. Entities may benefit frm evaluating the trends we have bserved in ur review as they cntinue t refine the infrmatin they disclse. Fr a cmprehensive discussin f the new revenue standard, see Delitte s A Radmap t Applying the New Revenue Recgnitin Standard ( Revenue Radmap ). Als see Delitte s July 11, 2018, Heads Up fr a mre detailed discussin f the disclsure requirements under the new revenue standard and related disclsure trends identified. Fr an verview f the SEC staff s cmment letter review prcess, see Delitte s A Radmap t SEC Cmment Letter Cnsideratins, Including Industry Insights ( SEC Cmment Letter Radmap ). 1 FASB Accunting Standards Cdificatin (ASC) Tpic 606, Revenue Frm Cntracts With Custmers. 2 The new revenue standard is effective fr PBEs reprting under U.S. GAAP fr annual reprting perids (including interim reprting perids within thse annual perids) beginning after December 15, Early adptin was permitted as f reprting perids (including interim perids) beginning after December 15, Fr nn-pbes, the new revenue standard is effective fr annual perids beginning after December 15, 2018, and interim reprting perids within annual reprting perids beginning after December 15, 2019; early adptin is permitted.

2 Key Takeaways Sme ntable themes identified thrugh ur review f SEC cmments are: The disclsure f significant judgments, including the identificatin f perfrmance bligatins, the determinatin and allcatin f the transactin price, and the identificatin f the measure f prgress. The required disclsures related t perfrmance bligatins (e.g., the timing f revenue recgnitin and the principal-versus-agent analysis). The disclsures f the cnclusins t capitalize cntract csts and the related methd f amrtizatin. Such themes represented, respectively, apprximately 40 percent, 20 percent, and 10 percent f the ttal publicly available ASC 606 cmments that we reviewed. In many instances, thugh the written cmments specifically inquired abut disclsures (and requested mre f them), we bserved that the underlying reasn fr the cmments was that the accunting psitin taken by the registrants may nt have been clear t the SEC staff upn review f the disclsures prvided, r it may have been cnsidered ptentially inapprpriate. On the basis f ur review t date, we nted that registrants in the cnsumer and industrial prducts industry (which includes cnsumer prducts; retail, whlesale, and distributin; autmtive; transprtatin, hspitality, and services; and industrial prducts and cnstructin) received apprximately 45 percent f SEC staff cmments, with registrants in the technlgy, media, and telecmmunicatins (TMT) industry receiving apprximately 35 percent. Further, registrants in the life sciences and health care industry and the financial services industry each accunted fr apprximately 10 percent f the cmments issued, while registrants in the energy and resurces industry received less than 5 percent. Within certain aspects f ASC 606, we bserved that cmments were cncentrated in particular industries, as discussed belw. Under ASC 605,3 cmmn subjects f fcus f the SEC staff within filing reviews included: (1) disclsures, (2) multiple-element arrangements, (3) principal-versusagent cnsideratins, and (4) revenue recgnitin fr lng-term cnstructin-type and prductin-type cntracts (see Delitte s SEC Cmment Letter Radmap). Althugh the terminlgy and guidance fr these tpics have changed as a result f ASC 606, the staff appears t be fcusing n similar types f issues under the new revenue standard. 3 FASB Accunting Standards Cdificatin Tpic 605, Revenue Recgnitin. 2

3 Significant Judgments Disclsure Requirements There are many significant judgments and estimates that entities must make and disclse when they adpt the new revenue standard. ASC thrugh state: An entity shall disclse the judgments, and changes in the judgments, made in applying the guidance in [ASC 606] that significantly affect the determinatin f the amunt and timing f revenue frm cntracts with custmers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining bth f the fllwing: a. The timing f satisfactin f perfrmance bligatins (see paragraphs thrugh 50-19) b. The transactin price and the amunts allcated t perfrmance bligatins (see paragraph ) Fr perfrmance bligatins that an entity satisfies ver time, an entity shall disclse bth f the fllwing: a. The methds used t recgnize revenue (fr example, a descriptin f the utput methds r input methds used and hw thse methds are applied) b. An explanatin f why the methds used prvide a faithful depictin f the transfer f gds r services Fr perfrmance bligatins satisfied at a pint in time, an entity shall disclse the significant judgments made in evaluating when a custmer btains cntrl f prmised gds r services An entity shall disclse infrmatin abut the methds, inputs, and assumptins used fr all f the fllwing: a. Determining the transactin price, which includes, but is nt limited t, estimating variable cnsideratin, adjusting the cnsideratin fr the effects f the time value f mney, and measuring nncash cnsideratin b. Assessing whether an estimate f variable cnsideratin is cnstrained c. Allcating the transactin price, including estimating standalne selling prices f prmised gds r services and allcating discunts and variable cnsideratin t a specific part f the cntract (if applicable) d. Measuring bligatins fr returns, refunds, and ther similar bligatins. Feedback Frm the SEC T date, apprximately 40 percent f the publicly available ASC 606 SEC staff cmments relate t disclsures f significant judgments. These cmments can be brken int the fllwing fur brad categries, which are discussed in the sectins belw: (1) identificatin f perfrmance bligatins, (2) determinatin f the transactin price, (3) allcatin f the transactin price, and (4) identificatin f a measure f prgress. Identificatin f Perfrmance Obligatins The SEC staff recently stated 4 that it believes it is imprtant fr cmpanies t have clear and transparent disclsures regarding the identificatin f perfrmance bligatins and that the SEC is likely t issue a cmment if the disclsure is unclear r it appears t cnflict with the guidance. In a manner cnsistent with this statement, many f the staff s cmments n significant judgments relate t the identificatin f perfrmance bligatins. These cmments include requests fr additinal disclsure f the significant judgments made in the identificatin f perfrmance bligatins and ften questin the apprpriateness f the identified perfrmance bligatins. Fr example, in at least ne case, the staff questined whether maintenance, supprt, and warranty services represented a single perfrmance bligatin. In additin, we bserved that the staff has fcused n cntracts with prmises t prvide multiple gds and services t a custmer and has questined the cnclusin f whether such gds and services are distinct perfrmance bligatins in accrdance 4 Remarks were made at the 2018 AICPA Cnference n Current SEC and PCAOB Develpments. 3

4 with ASC thrugh We als bserved that the staff has requested additinal infrmatin t understand whether an ptin fr additinal gds r services was cnsidered a material right. On the basis f ur review t date, we bserved that registrants in the TMT industry received mre than half f the SEC cmments related t identificatin f perfrmance bligatins. Examples f such cmments are excerpted belw. Examples f SEC Cmments Yu state yur subscriptin perfrmance bligatins cnsist f licenses, PCS, and rights t cntinued delivery f unspecified upgrades, majr releases and patches. Please prvide us with yur analysis as t hw yu determined it was apprpriate t cmbine these prmises int ne perfrmance bligatin, with reference t ASC thrugh We nte yur disclsure regarding three perfrmance bligatins under yur franchise agreements. It appears that yu have cncluded that these items are nt distinct and therefre are nt separate perfrmance bligatins given yur cnclusin that they are highly interrelated. Please revise yur disclsure t clarify yur cnclusins. Reference Fr cntracts that require the use f certain equipment in rder t receive service, please tell us the significant judgements used in determining if equipment shuld be cnsidered a separate perfrmance bligatin. Please refer t ASC thrugh Please prvide us the fllwing infrmatin regarding yur cntracts that include a perpetual license and hsting services and revise yur disclsures as apprpriate: Clarify fr us whether yu have determined if the perpetual license and the hsting service are ne cmbined perfrmance bligatin and prvide us with yur analysis. Reference ASC If the perpetual license and the hsting service are ne cmbined perfrmance bligatin, tell us the perid f time ver which yu are recgnizing revenue fr the cmbined perfrmance bligatin. If this perid is lnger than yur initial hsting perid, please explain the basis fr this determinatin. Tell us if yu have identified the material right as a separate perfrmance bligatin. If yu have cmbined the material right with the perpetual license and hsting service, please tell us hw yu made this determinatin. Reference ASC Tell us the perid f time ver which yu are recgnizing revenue fr yur material right. If this perid begins prir t the time the additinal hsting services are prvided r when the material right expires, please explain t us the basis fr this determinatin. Reference ASC Determinatin f the Transactin Price Anther tpic f significant judgment under the new revenue standard is the determinatin f the transactin price, and as a result, the SEC staff has fcused its attentin n disclsures abut hw such a determinatin is made, particularly thse related t variable cnsideratin. The staff has questined registrants n multiple types f variable cnsideratin and requested additinal infrmatin abut hw, and t what extent, such cnsideratin has been included in the transactin price. Further, the staff has questined whether variable cnsideratin was cnstrained and, if s, the significant judgments that went int the determinatin f the cnstraint and when the cnstraint will be remved. Examples f such cmments are excerpted belw. Examples f SEC Cmments We nte yur disclsure that yur slar pwer system sales include perfrmance guarantees that represent a frm f variable cnsideratin and are recgnized as adjustments t revenue. Please help us better understand yur accunting fr these ptential bnus payments and/r liquidated damages. In this regard, based n yur disclsure, it is unclear t us whether these amunts are included as part f yur estimate f yur transactin price at the utset f the arrangement and then reassessed at the end f each reprting perid. Refer t ASC thrugh and ASC

5 Examples f SEC Cmments (cntinued) Yu state that yu d nt ffer refunds, rebates, credits r ther frms f variable cnsideratin; hwever, yu als indicate that the transactin price includes estimates f variable cnsideratin. Please clarify the nature f the variable cnsideratin included in yur cntracts. Refer t ASC thrugh 32-7 and ASC Yu disclse... that every... Certified listing carries a 30-day return plicy. Please tell us hw yu have cnsidered this return plicy in determining the transactin price in these arrangements. Refer t ASC thrugh Please prvide us with yur analysis regarding payments made t partners. Describe in detail the nature f these payments and further clarify when payments are classified as marketing expenses and when payments are recgnized as a reductin in revenue. Refer t ASC and 26. We nte certain advertising cntracts have guarantees f audience member views. Please clarify if these guarantees are treated as variable cnsideratin in determining yur transactin price. Refer t ASC and We nte yu cnstrain estimates f variable cnsideratin. Please explain t us the judgments used in assessing whether an estimate f variable cnsideratin is cnstrained. In this regard, describe t us the factrs that resulted in the cnstraint f variable cnsideratin and hw the cnstraint will be reslved. In additin, tell us hw yu cnsidered ASC and related t disclsures f significant judgments used in determining the transactin price. In yur Prduct Revenue disclsure... yu indicate that yu estimate variable cnsideratin using the mst likely methd. Please tell us why it is apprpriate t apply this methd rather than the expected value methd. See ASC In additin, tell us where yu have made the disclsure specified in ASC b r yur cnsideratin fr prviding this disclsure. Further, ASC and 55-65A prvide an exceptin t the inclusin f certain sales- r usage-based ryalties in the determinatin f the transactin price, stating that revenue frm a sales- r usage-based ryalty related t a license f intellectual prperty (IP) shuld be recgnized at the later f when (1) the subsequent sale r usage ccurs r (2) the perfrmance bligatin t which sme r all f the sales-based r usage-based ryalty has been allcated has been satisfied (r partially satisfied), prvided that the license f IP is the predminant item t which the ryalty relates. We bserved that the SEC staff has questined the applicatin f ASC t certain sales- r usage-based ryalty arrangements in which the license f IP is cmbined with ther gds and services and whether, in such arrangements, the license f IP is the predminant item t which the ryalty relates. The fllwing is an example f such a cmment: Example f an SEC Cmment Tell us if yu believe these arrangements cntain a functinal license f intellectual prperty and if this is the predminant item t which ryalties relate. Allcatin f the Transactin Price Anther fcus f the SEC staff s cmments n significant judgments relates t the allcatin f the transactin price. The staff has asked registrants t expand their disclsures abut the significant judgments, including the methds, inputs, and assumptins inherent in the allcatin prcess. Fr example, the staff has requested that registrants enhance their disclsures t clarify that a perfrmance bligatin represents a series and the methd used t allcate cnsideratin t each distinct gd r service in the series. In additin, the staff has questined hw registrants determined the stand-alne selling price f a gd r service, including the applicatin f the residual apprach as well as hw the registrants cnsidered a range f transactins in determining the stand-alne selling price. Further, registrants in the 5

6 TMT industry received apprximately 65 percent f the SEC cmments related t allcatin f the transactin price. Examples f such cmments are excerpted belw. Examples f SEC Cmments We nte... that yur cntracts satisfy the allcatin requirements in ASC In future filings, please expand yur disclsure f the nature f yur perfrmance bligatin t clarify that yur perfrmance bligatin is a series and hw yu allcate variable cnsideratin t each distinct service in the series. Please tell us why the standalne selling price f sftware is typically estimated using the residual apprach and hw yu met ne f the criteria in ASC (c). T the extent yu have determined the selling price fr yur sftware is highly variable; please prvide a cmprehensive, quantitative discussin f such variability t supprt yur cnclusins. We nte the minimum and maximum amunts; hwever, it is unclear t us hw yu cnsidered transactins within this range. Please prvide us with mre details f yur analysis. In this regard, please tell us whether a significant number f transactins fell within a smaller prtin f this range. Reference ASC (c). Please disclse the methds, inputs and assumptins used t allcate the transactin service fee charged t the car dealer t the identified perfrmance bligatins. Refer t ASC c. Identificatin f a Measure f Prgress Fr perfrmance bligatins satisfied ver time, the SEC staff has reminded registrants t satisfy the requirements in ASC t disclse: (1) [t]he methds used t recgnize revenue and (2) [a]n explanatin f why the methds used prvide a faithful depictin f the transfer f gds r services. The fllwing are examples f such cmments: Examples f SEC Cmments [F]r thse cntracts that d meet the ver time recgnitin criteria please tell us and disclse the nature f the input methd yu will use t recgnize revenue as yu prduce the specified units. Als, disclse why this methd prvides a faithful depictin f the transfer f the gds. See ASC Revise future filings t disclse why fr perfrmance bligatins that yu satisfy ver time the methd used prvides a faithful depictin f the transfer f gds r services. Refer t ASC Perfrmance Obligatins Disclsure Requirements The new revenue standard intrduces varius quantitative and qualitative requirements related t perfrmance bligatins. Under ASC , an entity must disclse the fllwing: a. When the entity typically satisfies its perfrmance bligatins (fr example, upn shipment, upn delivery, as services are rendered, r upn cmpletin f service) including when perfrmance bligatins are satisfied in a bill-and-hld arrangement. b. The significant payment terms (fr example, when payment typically is due, whether the cntract has a significant financing cmpnent, whether the cnsideratin amunt is variable, and whether the estimate f variable cnsideratin is typically cnstrained in accrdance with paragraphs thrugh 32-13). c. The nature f the gds r services that the entity has prmised t transfer, highlighting any perfrmance bligatins t arrange fr anther party t transfer gds r services (that is, if the entity is acting as an agent). d. Obligatins fr returns, refunds, and ther similar bligatins. e. Types f warranties and related bligatins. 6

7 In additin, under ASC A, an entity must disclse revenue recgnized in the reprting perid frm perfrmance bligatins satisfied (r partially satisfied) in previus perids (fr example, changes in transactin price). Feedback Frm the SEC In additin t cmments related t the significant judgments inherent in the identificatin f perfrmance bligatins as discussed abve, the SEC staff has als issued cmments related t certain disclsure requirements (under ASC ) fr the identified perfrmance bligatins. These cmments can be categrized int fur primary tpics: (1) timing f revenue recgnitin, (2) significant payment terms, (3) significant financing cmpnents, and (4) the nature f gds r services, including principal-versus-agent cnsideratins. These tpics are discussed belw. Timing f Revenue Recgnitin One f the key cnsideratins related t the timing f revenue recgnitin under the new revenue standard is whether a perfrmance bligatin is satisfied at a pint in time r ver time. Fr instance, in a scenari in which a registrant is cnstructing an asset fr a custmer by using the custmer s specificatins, the SEC staff has questined hw the registrant cnsidered the criteria in ASC thrugh in determining whether revenue shuld be recgnized at a pint in time r ver time. Further, the staff has issued cmments related t the identificatin f the apprpriate pint in time at which t recgnize revenue. On the basis f ur review t date, we bserved that registrants in the TMT industry received mre than half f the SEC cmments related t timing f revenue recgnitin. The fllwing are examples f such cmments: Examples f SEC Cmments Fr sales made thrugh yur indirect distributin channels, please clarify whether the perfrmance bligatin f prviding sftware licenses is satisfied upn shipment r when the sftware is made available fr dwnlad, t yur indirect distributin partners r t the end user. Tell us hw yu cnsidered the guidance in ASC and ASC C in determining the pint in time at which yu recgnize revenue and disclse any significant judgements made in evaluating when cntrl is transferred. Refer t ASC We nte yur disclsure that revenue fr OEM serial prductin cntracts requiring custmizatin is generally recgnized at a pint in time. Please explain t us why yu believe these cntracts d nt meet the criteria fr ver time recgnitin, specifically the criteria that they have n alternative use and yu have enfrceable right f payment. See guidance at ASC Significant Payment Terms The SEC staff has requested that registrants disclse significant payment terms (e.g., when payment typically is due, whether the cnsideratin amunt is variable, and whether the variable cnsideratin is typically cnstrained). Examples f such requests are reprduced belw. Examples f SEC Cmments Revise t disclse significant payment terms fr sales f mileage credits t credit card cmpanies, htels, and car rental agencies pursuant t ASC (b). Please tell us hw yu cnsidered and cmplied with the disclsures requirement utlined in ASC (b) with respect t significant payment terms. 7

8 Significant Financing Cmpnents The SEC staff has als issued cmments requesting that registrants clarify hw they reached the cnclusin that their cntracts did nt include a significant financing cmpnent, as well as requesting future disclsure if a registrant elected the practical expedient in ASC that permits an entity nt t recgnize a significant financing cmpnent if the time between the transfer f a gd r service and payment is ne year r less. Examples f such cmments are excerpted belw. Examples f SEC Cmments Given that the majrity f yur revenue is generated frm lng-term cntracts, please prvide us with yur analysis n if they cntain a significant financing cmpnent. If a material prtin f yur cntracts cntain a significant financing cmpnent, please revise t disclse this infrmatin pursuant t ASC (b). If yu relied upn the practical expedient based pursuant t ASC , disclse this pursuant t ASC and cnfirm the timing between prgress payments and transfer f cntrl and payment was nt expected t exceed ne year. Yur... cntracts d nt include a significant financing cmpnent because the primary purpses f yur invicing terms is t prvide custmers with simplified and predictable ways f purchasing yur prducts and services, nt t receive financing. [Y]u disclse yur... cntracts entitle yu t receive advance payment at the beginning f the cntract but yu d nt typically cnsider this t be a significant financing cmpnent. Please explain t us hw yu determined that the payment terms f yur cntracts d nt cntain a significant financing cmpnent under ASC thrugh Address hw yu cncluded that the difference between the prmised amunt f cnsideratin and the cash selling price is prprtinal t the reasns fr that difference. Nature f Gds r Services, Including Principal-Versus-Agent Cnsideratins Fr each identified perfrmance bligatin, registrants are required by ASC (c) t disclse [t]he nature f the gds r services that the entity has prmised t transfer, highlighting any perfrmance bligatins t arrange fr anther party t transfer gds r services (that is, if the entity is acting as an agent). The SEC staff has ften referenced ASC when cmmenting that the registrant shuld prvide greater detail f the nature f the gds r services that the registrant has prmised t transfer. Further, the staff has requested that registrants clarify whether they are presenting revenue n a grss r net basis and t explain hw the cnclusin t reprt revenue n a grss r net basis was reached. There are many significant judgments registrants have t make in reaching a cnclusin abut whether they are principals r agents. As a result, the staff has stated that registrants shuld be mindful f the requirement in ASC t disclse the judgments, and changes in the judgments, made in applying the guidance in [ASC 606] that significantly affect the determinatin f the amunt and timing f revenue frm cntracts with custmers. Examples f cmments related t principal-versus-agent cnsideratins are excerpted belw. Examples f SEC Cmments We nte frm... yur 2017 Frm 10-K (Cmpetitin) that yu prvide transprtatin services t third-party lgistics prviders that determine bth the mde f transprtatin and the carrier. Please tell us the nature f these arrangements in further detail and explain t us whether yu are the principal r agent pursuant t ASC thrugh Further, t the extent these arrangements are material, disclse whether yu present revenues earned frm thirdparty lgistics prviders n a grss r net basis pursuant t ASC (c). 8

9 Examples f SEC Cmments (cntinued) We nte yur descriptin f varius gds and services related t yur cruise fferings, which may include rund-trip airfare and pre-cruise htel packages. Prvide us with yur analysis regarding hw yu determined grss reprting fr pre-cruise and pst-cruise services was apprpriate pursuant t ASC thrugh 39. Please specifically address hw yu cnsidered the definitin f cntrl and hw yu are directing any third party prviders. Yur disclsure indicates that transactin fees cllected frm yur custmers are recgnized as revenue n a grss basis because yu are the principal in respect f prcessing payments. Please describe the services prvided by each party invlved in the payment prcessing transactin and tell us hw yu determined yu cntrl each service befre it is transferred t the custmer. Reference ASC thrugh 40. We nte yur disclsure that when mre than ne party is invlved in prviding services t a custmer, yu generally act as the principal and reprt revenue n a grss basis. Please tell us which arrangements invlve third parties and tell us hw yu determined yu cntrl each service befre it is transferred t the custmer. In additin, we nte yur disclsure... regarding agent cmmissins. Please help us understand the nature f these agent services. Reference ASC thrugh 40. Please explain t us the prcess by which interchange fees are earned and explain [yur] rle in the payment prcessing system. Tell us whether a prtin f the interchange fee received by the cmpany is remitted t a third party. If s, tell us whether revenue frm these fees is presented net r grss f the amunts remitted t the third party and explain hw yu arrived at that determinatin. Cntract Csts Registrants in the TMT industry received apprximately 75 percent f the SEC cmments related t cntract csts. Disclsure Requirements Under the new revenue standard and in accrdance with ASC , 5 entities capitalize certain csts assciated with btaining 6 and fulfilling a revenue cntract. These csts are subsequently amrtized. Accrdingly, entities are required t disclse: The judgments used t determine the amunt f csts incurred t btain and fulfill a cntract. The methd used t determine amrtizatin fr each reprting perid. The clsing balances f assets recgnized frm the csts incurred t btain r fulfill a cntract, by asset categry. The amrtizatin and impairment lss recgnized in the reprting perid. Feedback Frm the SEC Nearly 10 percent f the SEC staff s publicly available cmments n ASC 606 relate t the accunting r disclsure requirements fr cntract csts. Thugh we nted instances in which the staff requested that registrants prvide additinal infrmatin in their disclsures abut the csts they are capitalizing in accrdance with ASC , the majrity f the staff s cmments related t the incremental csts t btain a cntract represented requests fr additinal disclsure abut (1) the methd being used t amrtize the capitalized csts and (2) hw the selected amrtizatin perid crrelates t the perid f benefit. We als bserved that when additinal cmmissins are paid upn renewal, the staff has questined (1) whether such cmmissins are cmmensurate with the initial cmmissins and (2) hw such renewals are cnsidered in the amrtizatin perid. Examples f cmments n the amrtizatin f csts t btain a cntract are excerpted belw. 5 FASB Accunting Standards Cdificatin Subtpic , Other Assets and Deferred Csts: Cntracts With Custmers. 6 Entities may elect t use the practical expedient in ASC , which permits them t expense incremental csts f btaining a cntract if such csts will be amrtized ver a perid f ne year r less (see Delitte s Revenue Radmap fr mre infrmatin). 9

10 Examples f SEC Cmments Please revise t disclse the methd by which yu amrtize the initial cmmissin csts ver the five-year perid f benefit. Refer t ASC It appears that a prtin f yur sales cmmissins is expensed upn delivery f the sftware license and a prtin related t services is deferred. If s, please revise t clarify hw yur amrtizatin expense reflects the transfer f the license and services t yur custmer. Refer t ASC and (b). Please tell us, and revise t clarify if apprpriate, whether additinal sales cmmissins are paid upn cntract renewal and, if s, whether such amunts are cmmensurate with the initial cmmissins. Please als disclse hw cmmissins paid fr renewals are cnsidered in yur five year perid f benefit fr the initial cmmissin. Finally, please disclse the perid f time ver which yu amrtize cmmissin csts related t cntract renewals[.] Refer t ASC and (b). Yu disclse that deferred cmmissins paid upn the acquisitin f an initial cntract and any subsequent renewals are amrtized ver an estimated perid f benefit based upn the weighted-average term f cntracts and related prduct and service delivery perids. Please explain further what yu mean by the weighted average term f cntracts and related prduct and service delivery perids. In additin, please clarify hw yu are accunting fr cmmissins paid n renewals. Refer t ASC Disaggregatin f Revenue The SEC has cmmented specifically n the cnsistency f the disaggregatin disclsures when cmpared with: Reprts reviewed by the chief perating decisin maker. Investr presentatins. Earnings calls. Mnthly sales reprts. MD&A sectin f Frm 10-K. Disclsure Requirements Under the new revenue standard, an entity is required by ASC and 50-6 t disaggregate revenue fr disclsure purpses int categries as fllws: The categries must depict hw revenue and cash flws are affected by ecnmic factrs. The disclsures must cntain sufficient infrmatin t cnvey the relatinship between disaggregated revenue and each disclsed segment s revenue infrmatin. As discussed in paragraph BC336 f ASU , 7 because the mst useful disaggregatin f revenue depends n varius entity-specific r industry-specific factrs, the Bards decided that Tpic 606 shuld nt prescribe any specific factr t be used as the basis fr disaggregating revenue frm cntracts with custmers. Instead, ASC prvides examples f categries that may be apprpriate fr an entity s disclsures in the financial statements, such as type f gd r service, gegraphical regin, market r type f custmer, type f cntract, cntract duratin, timing f transfer f the gd r service, and sales channels. When selecting the types f categries fr disaggregated revenue, an entity shuld cnsider hw and where it has cmmunicated infrmatin abut revenue fr varius purpses, including (1) disclsures utside the financial statements, (2) infrmatin regularly reviewed by the chief perating decisin maker fr evaluating the financial perfrmance f perating segments, and (3) ther infrmatin that is similar t the types f infrmatin identified in (1) and (2) and that is used by the entity r users f its financial statements fr evaluating its financial perfrmance r making decisins abut resurce allcatin. 7 FASB Accunting Standards Update (ASU) N , Revenue Frm Cntracts With Custmers. 10

11 Feedback Frm the SEC The SEC staff has issued cmments asking registrants t clarify hw they determined that the categries in which they present disaggregated revenue infrmatin were sufficient. The staff has reminded registrants that they shuld cnsider infrmatin disclsed utside the financial statements. Further, the staff has questined whether the selected categries are apprpriate given the registrants business mdel and whether the categries depict hw revenue and cash flws are affected by ecnmic factrs. Registrants in the cnsumer and industrial prducts industry received apprximately 70 percent f the SEC cmments related t disaggregated revenue. Althugh cmments n disaggregatin cnstituted apprximately 5 percent f the ttal publicly available ASC 606 cmments, the staff recently stated 8 that it anticipates that disaggregated revenue disclsures will cntinue t be a fcus in the cming year. The fllwing are examples f such cmments: Examples f SEC Cmments We nte yur presentatin f disaggregated revenue by majr surce.... With respect t the disclsure requirements f ASC , please tell us hw yu cnsidered the guidance in paragraphs ASC thrugh in selecting the apprpriate categries t use t disaggregate revenue. Yu present vehicles, parts, and accessries as a majr surce f revenue. Please explain t us why the aggregatin f revenue frm parts and accessries with revenue frm vehicles is apprpriate pursuant t ASC We nte frm yur disclsures that parts and accessries appear t be subject t return frm custmers, whereas this des nt appear t be the case fr vehicles. It als appears these categries may have ther different characteristics, such as type f gd, pricing and dllar magnitude f cntributin t margins. We nte yu prvide ther infrmatin utside yur financial statements regarding the nature, amunt, timing, and uncertainty f revenue and cash flws arising frm yur cntracts with custmers, including but nt limited t: Mnthly sales reprts which include unit sales by brand, by vehicle type, and between retail and fleet sales. These reprts als include a discussin f underlying trends fr key vehicles and sme infrmatin n transactin prices. A Strategic Update... which includes a discussin f plans t shift allcatin f capital frm cars t SUVs and trucks and t expand electric vehicles revenue pprtunities. An earnings call... which includes a discussin f the strng perfrmance f cmmercial vehicles as well as cnsumers mving away frm passenger cars and int utilities and trucks and yur increasing investments in these areas as a result. Given the infrmatin cited abve, it appears ther infrmatin abut yur autmtive segment s revenue (beynd gegraphical infrmatin) is used by the cmpany and users f yur financial statements t evaluate yur financial perfrmance r t make resurce allcatin decisins. In this regard, please tell us hw yu cnsidered the presentatin and use f such infrmatin pursuant t ASC (c) when determining the apprpriate disaggregated revenue categries that depict hw the nature, amunt, timing and uncertainty f cash flws are affected by ecnmic factrs and in the cntext f meeting the verall disclsure bjective f ASC Please tell us what cnsideratin yu gave t disaggregating revenue by type f custmer and timing f revenue recgnitin. Refer t ASC c and f. 8 See ftnte 4. 11

12 Cntract Balances Disclsure Requirements Under the new revenue standard, in accrdance with ASC thrugh 50-10, registrants must disclse the fllwing infrmatin abut cntract balances: The pening and clsing balances f receivables, cntract assets, and cntract liabilities frm cntracts with custmers, if nt therwise separately presented r disclsed. The amunt f revenue recgnized in the reprting perid frm the beginning cntract liability balance. An explanatin f the significant changes in the cntract... balances during the reprting perid (by using quantitative and qualitative infrmatin). An explanatin f hw the timing f satisfactin f [the entity s] perfrmance bligatins... relates t the typical timing f payment... and the effect that thse factrs have n the cntract asset and the cntract liability balances. Feedback Frm the SEC The SEC staff has issued cmments t registrants asking them t include additinal infrmatin in their disclsures abut hw cntract balances are derived. Examples f these cmments are reprduced belw. Examples f SEC Cmments Tell us yur significant payment terms and hw the timing f satisfactin f perfrmance bligatins relates t the timing f payment and the effect n the cntract asset and liability balances. Disclse the infrmatin required by ASC and 50-12(b) [9] in future filings. Yu disclse that there are circumstances where custmer incentives issued may exceed the reductin f revenue recrded ver the cntract term, and result in a recrded cntract asset. Please prvide examples f the types f incentives that wuld drive the generatin f these cntract assets and describe hw thse incentives wuld exceed the reductin f revenue ver the cntract term. Refer t ASC thrugh 15. Please tell us hw yu have cnsidered shipments in transit at perid-end as cntract liabilities and remaining perfrmance bligatins. In this regard, if yu recgnize revenue in bth segments based n time based metrics as stated in the first paragraph in this nte, it wuld appear that a prtin f revenue fr all in-transit shipments wuld qualify as remaining perfrmance bligatins and cntract assets/liabilities. Remaining Perfrmance Obligatins Disclsure Requirements ASC requires an entity t disclse the fllwing abut its remaining perfrmance bligatins: The aggregate amunt f the transactin price allcated t the perfrmance bligatins that are unsatisfied (r partially unsatisfied) as f the end f the reprting perid. 9 Nte that ASC discusses hw the timing f the satisfactin f an entity s perfrmance bligatins is related t the typical timing f payment and the effect such timing has n the cntract asset and the cntract liability balances. ASC (b) discusses significant payment terms (fr example, when payment typically is due, whether the cntract has a significant financing cmpnent, whether the cnsideratin amunt is variable, and whether the estimate f variable cnsideratin is typically cnstrained... ). 12

13 An explanatin f when the entity expects t recgnize as revenue the amunt disclsed in accrdance with [the requirement abve], which the entity shall disclse in either f the fllwing ways: 1. On a quantitative basis using the time bands that wuld be mst apprpriate fr the duratin f the remaining perfrmance bligatins 2. By using qualitative infrmatin. Several practical expedients are available fr the disclsure f remaining perfrmance bligatins (see Delitte s Revenue Radmap fr details). Under ASC , if a PBE elects t apply the practical expedients related t the disclsure f remaining perfrmance bligatins, it is required t disclse which f the practical expedients it is applying as well as certain ther qualitative infrmatin. Feedback Frm the SEC We bserved instances in which the SEC staff questined hw registrants have cmplied with the disclsure requirements f ASC thrugh regarding infrmatin abut remaining perfrmance bligatins. Fr instance, the staff has questined hw registrants have cmplied with the requirement f ASC (b) t disclse when the registrant expects t recgnize amunts recrded as deferred revenue. Examples f such cmments are excerpted belw. Examples f SEC Cmments Please tell us hw yu cnsidered the requirements in ASC t t disclse infrmatin abut remaining perfrmance bligatins r applicatin f ptinal exemptins. In that regard, we nte that in yur Frm 10-K fr the perid ended December 31, 2017 yu state that yu sell prduct t yur largest custmer, representing 22% f ttal sales fr the year, under a lng-term cntract. Yu further state that fr yur ther custmers yu typically sell t them under cntracts with ne t tw year terms. Please tell us and disclse the transactin price allcated t the perfrmance bligatins that are unsatisfied as f September 30, 2018 and explain when yu expect t recgnize such amunt. Refer t ASC This wuld appear t include amunts referred t as Other Backlg as prvided in the Frm 8-K furnished n Nvember 11, If yu are applying the practical expedient in please tell us and disclse. Refer t Thinking Ahead The adptin f the new revenue standard has led t a nticeable increase in the amunt and type f infrmatin entities have disclsed abut revenue activities and related transactins. Althugh we bserved sme cnsistency in their disclsures, cmpanies interpretatins f the requirements and the amunt f infrmatin t disclse have varied. We encurage registrants t cntinue t refine their accunting fr revenue and the infrmatin they disclse as accunting standard setters clarify guidance and regulatrs issue mre cmments. We believe that registrants shuld take this pprtunity t revisit their disclsures in advance f quarterly filings in 2019 while keeping in mind that certain disclsures are nt required fr interim filings in year 2 f adptin (see Sectin 14.6 f Delitte s Revenue Radmap fr details). In additin, lking ahead t future filing cycles, cmpanies will benefit frm mving tward a repeatable and sustainable prcess f assessing and preparing the new revenue standard disclsures. 13

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