ASC Topic 606 Presentation and Disclosures. Scott A. Taub June 26, 2017

Transcription

1 ASC Topic 606 Presentation and Disclosures Scott A. Taub June 26, 2017

2 Scott A. Taub joined Financial Reporting Advisors, LLC (FRA) as a Managing Director in Based in Chicago, Illinois, FRA provides consulting services related to accounting and SEC reporting and litigation support services. Mr. Taub is a member of FASB/IASB Joint Transition Resource Group for Revenue Recognition and is a former member of the IFRS Interpretations Committee and the FASB s Valuation Resource Group. From September 2002 through January 2007, Mr. Taub was a senior official at the Securities and Exchange Commission (SEC). As a Deputy Chief Accountant and Acting Chief Accountant, he played a key role in the SEC s implementation of the accounting reforms under the landmark Sarbanes-Oxley Act, and was responsible for the dayto-day operations of the Office of the Chief Accountant, including resolution of accounting and auditing practice issues, rulemaking, oversight of private sector standard-setting efforts, and regulation of auditors. He also served as Chair of the Accounting and Disclosure committee of the International Organization of Securities Commissions (IOSCO). Mr. Taub was a Professional Accounting Fellow in the Office of the Chief Accountant between 1999 and Before joining the SEC staff, Mr. Taub was a partner in Arthur Andersen's Professional Standards Group (PSG). In that role, he consulted on complex financial reporting matters; helped establish and disseminate Andersen s policies on financial reporting matters; and represented the firm before the FASB, SEC, AICPA, and IASB. Mr. Taub consulted and authored interpretive guidance on a wide variety of reporting issues, including revenue recognition, business combinations, compensation, intangible assets, and investment accounting. Prior to joining the PSG, he was an auditor in the firm s Detroit office serving publicly held and privately owned companies in a variety of industries. Mr. Taub is a frequent speaker, having addressed numerous audiences sponsored by a variety of organizations such as the Financial Executives International, the AICPA, the Institute of Management Accountants, the Securities Regulation Institute, and the Practising Law Institute. He was the primary author of several SEC reports and publications, including reports on off-balance activities and principles-based accoi\unting standards. He is the author of the Revenue Recognition Guide, a comprehensive guide to accounting for revenue recognition published by CH, and a co-author of CCH s Financial Instruments guide. Mr. Taub attended the University of Michigan in Ann Arbor, where he received an degree in economics in 1990, and won the William A. Paton Award for his performance on the CPA exam. In 2005 Mr. Taub won the SEC s award for Supervisory Excellence. He is a licensed CPA in Illinois and is a member of the American Institute of Certified Public Accountants.

3 Pre-Adoption Disclosures Several big standards in process of adoption Revenue, leases, financial instruments Public cos. required to disclose SAB (74) Topic 11M A brief description of the new standard Date and method of adoption, including alternatives A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. Most do a great job with the first two bullets, and a poor job on the third, and it s only the third we really need Slide # 3

4 Pre-Adoption Disclosures SAB 74 (Topic 11M) disclosures: Brief description of standard, date adoption is planned Permitted methods of adoption and method registrant expects to follow, if known Effect standard is expected to have on financial statements Other significant matters that might result from adopting the new standard (e.g. changes in business practices) Each period, disclose what you ve done, what you haven t, and your best idea of how it ll play out Slide # 4

5 Pre-Adoption Disclosures Status of implementation No need to work faster than you otherwise would, but be substantive in disclosures Don t just say we re working on it Many companies disclose nothing until they are done Instead, tell where you are in the process, what you think you ve figured out, and what s left to do Don t look for excuses not to disclose anything; instead disclose as much as you can, and explain uncertainties SEC Staff announcement at EITF Meeting Sept 2016 Slide # 5

6 Transition Disclosures If adopt retrospectively Disclose changes in balance sheets and income statements for all prior periods Make disclosures normally required in back periods, except for disclosures about remaining performance obligations No disclosure in current period of revenue under old GAAP If adopt via cumulative effect (modified retrospective) No need to change prior period disclosures Include ASC 606 disclosures in year of adoption Disclosure revenue under old GAAP in first year of new GAAP If adopt in interim period 10-Q (under either method) Include annual disclosures until first 10-K is filed Slide # 6

7 Presentation (ASC ) If vendor performs (i.e., recognizes revenue) ahead of payment, recognize a contract asset If customer pays ahead of performance Contract liability for amounts probable of being kept Refund liability for other amounts Does not trigger revenue (ASC ) Recognize receivable if right to payment conditional only upon passage of time If receivable is recognized without revenue, adjust contract asset/liability No guidance in current GAAP practice varies Slide # 7

8 Presentation (ASC ) Line between contract asset and receivable If payment is due in advance of performance, generally don t gross up until actual due date, even if due after only the passage of time If payment is due after performance, reclass contract asset to receivable if payment is due after only passage of time Invoice date is not the trigger While standard says contract asset and contract liability, entities may use different terms in financials However, captions cannot confuse contract assets and receivables, so Unbilled receivables for contract asset is probably not OK Slide # 8

9 Disclosures (ASC ) Topic 606 has a large number disclosure requirements, compared to almost none today Objective: Allow users to understand nature, amount, timing and uncertainty of revenues and cash flows from customer contracts Disclosures fit into two broad categories: Qualitative Quantitative Specific disclosures required for interim periods Not as extensive as annual, but quantitative information still required Slide # 9

10 Disclosures: Information about Amounts in the Financial Statements Revenue from contracts with customers (as distinct from any other revenue) Receivables, contract assets and contract liabilities: Opening and closing balances Losses from impairments of receivables or contract assets Assets from costs to obtain or fulfill contracts Closing balances How amounts to capitalized were determined Amortization and impairment Slide # 10

11 Disclosures: Disaggregated Information Revenue disaggregated into categories (by segment) that reflect different responses to economic factors Customer type, contract duration, timing of transfer of goods/services, type of fee, etc. Multiple breakdowns may be necessary Private companies may just use over time vs. point in time Slide # 11

12 Disclosures: Factual Information Information about promised goods and services Nature of performance obligations, highlighting situations in which company acts as agent Events that satisfy performance obligations Warranty and similar provisions Information about payment terms Fixed or variable, and nature of variability Timing of payment becoming due in comparison to transfer of goods and services Rights of refund and return Slide # 12

13 Disclosures: Information about the Transaction Price Methods, inputs and assumptions used to determine transaction price in Step 3, including: Whether there is a financing component, and how determined How variable consideration is estimated, and the company determined what amounts are probable of becoming due How non-cash consideration was measured How refund and return obligations were measured Private companies need only discuss how probable amount of variable consideration was determined Slide # 13

14 Disclosures: Information about Allocation of the Transaction Price How standalone selling prices were estimated Whether allocation is based on relative standalone selling prices or adjusted in some way How discounts and variable consideration were allocated Slide # 14

15 Disclosures: Information about Satisfaction of Performance Obligations For performance obligations satisfied over time Methods used Explanation of why those methods are appropriate (private companies may omit) For performance obligations satisfied at a point in time Judgments made in determining the right point in time (private companies may omit) For bill-and-hold arrangements, specific discussion of when performance obligations are satisfied Slide # 15

16 Disclosures: Information about Changes in Contract Balances (Public companies only) Revenue recognized that was included in contract liability at beginning of period (i.e., that was prepaid in prior period) Revenue recognized related to performance obligations satisfied in prior period (e.g., due to changes in variable consideration) Explanation of changes in contract balances due to: Adjustments in estimates of progress toward completion Changes in estimates of variable consideration Other events not related to performance or payment Note: Rollforward not required, but may be most efficient Slide # 16

17 Disclosures: Information about Open Contracts (public companies only) Amount of transaction price allocated to remaining unsatisfied performance obligations Explanation of when these amounts are expected to be recognized May be done qualitatively or quantitatively Discussion of any amounts not included in transaction price because they are not probable of becoming due Slide # 17

18 Disclosures Interim (ASC A) Quantitative disclosures required on interim basis: Disaggregated revenue Opening and closing balances of contract assets and liabilities Amount of revenue recognized in current period that was included in the contract liability balance Amounts related to remaining performance obligations Adjustments to revenue in current period related to performance that was satisfied in a prior period Slide # 18

19 Questions? 19

20 SEC HOT TOPICS Scott A. Taub June 26,

21 Agenda Politics and the SEC Disclosure Framework/Effectiveness Non-GAAP Measures A Few Other Hot Topics Working with the SEC Disclosures Under Topic

22 Politics and the SEC 22

23 Congress Congress created the SEC and has set out the SEC s mission and powers through various pieces of legislation 1933 Securities Act requires registered securities offerings 1934 Securities Exchange Act set up the SEC 1940 Investment Companies Act gave SEC regulation of funds 1940 Investment Advisers Act requires advisers to register 2002 Sarbanes-Oxley Act 2010 Dodd-Frank Act 2012 Jumpstart Our Business Startups Act 2015 Fixing America s Surface Transportation Act Many other pieces of legislation with smaller effects on SEC 23

24 Congress Recent Laws Sarbanes-Oxley and Dodd-Frank Required Many New Rules SOX had PCAOB, internal control reporting, rules on independence, non-gaap measures, etc. Dodd-Frank had new reporting on conflict minerals and payments to governments by extractive industry Congress has challenged rules that it told SEC to write SEC must justify cost-benefit of new rules even though mandated by law More recently, the JOBS Act and FAST Act have gone the other way, reducing reporting requirements 24

25 Commissioners No more than 3 Commissioners from one party Currently only 3 of 5 seats are filled Chair Jay Clayton (nominated by President Trump) and Michael Piwowar Republican; Kara Stein Democrat President Obama nominated people to fill the other two slots, but Trump has not done so Previous Chair Mary Jo White resigned when Trump took office Historically, the Chair always resigns when a President of a different party is elected 25

26 Staff Senior staff turn over quickly, regardless of politics Low pay compared to private sector High aggravation (dealing with politics, regulated entities, etc.) Increased marketability after stint at SEC Election led, as expected, to a change of many senior staff Chairman always offers resignation if President party changes Chief Accountant Wes Bricker only of the few Division/Office heads who was at SEC under previous Chair Most others are very new 26

27 Disclosure Effectiveness 27

28 Disclosure Framework/ Effectiveness Disclosure Overload has long been a concern At least of preparers, and sometimes of users and regulators FASB Disclosure Framework Project began 2012 to improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information that is most important to users of each entity s financial statements. Although not the primary goal, the Board hopes that a sharper focus on important information will result in reduced volume in most cases 28

29 Disclosure Framework/ Effectiveness Exposure Draft on preparer s decision process Clarify that materiality of disclosures should be evaluated item by item Even disclosures required by GAAP can be deemed immaterial Not making such a disclosure wouldn t be an error Might well reduce disclosures, if everybody gets comfortable making judgments 29

30 Disclosure Framework/ Effectiveness Proposed Concepts Statement on FASB s process for deciding disclosure requirements Proposes categories that may be appropriate for disclosure, but leaves decisions to specific projects To test concepts, FASB has projects to consider 4 areas of disclosure Income taxes, pensions, inventory, fair value measures So far, appears to be heading towards more disclosure, not less, although disclosures are better focused 30

31 Disclosure Framework/ Effectiveness SEC Disclosure Effectiveness Initiative Started in part due to Congressional mandates Focus is decidedly on reducing unnecessary disclosures, so that important information isn t buried Long proposal issued that would eliminate and streamline many disclosure requirements Some duplicative, some unnecessary due to changes in markets, some covered by GAAP, some outdated Stands to substantively reduce disclosure requirements, if preparers embrace changes 31

32 Disclosure Framework/ Effectiveness SEC Staff is also considering reducing or making more flexible the requirements for financial statements Concept release issued asking for ways change rules for non-issuer statements (acquirees, investees) SEC staff encouraging registrants to take advantage ability to ask for waivers (Reg S-X, Rule 3-13) if there are reasons required financial statements would be too difficult 32

33 Non-GAAP Measures 33

34 Required Disclosures in SEC Filings Regulation G: A registrant shall not make public a non-gaap financial measure that, taken together with the information accompanying that measure contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-gaap financial measure not misleading. An SEC filing including a non-gaap financial measure must include: the most directly comparable GAAP financial measure(s) set forth with equal or greater prominence a reconciliation to the most comparable GAAP figure the reasons why management believes the non-gaap measure provides useful information to investors a statement disclosing the additional purposes (if any) for which management uses the non-gaap measure 34

35 Prohibited Disclosures in SEC Filings Titles or descriptions for non-gaap financial measures that are the same as or confusingly similar to those used for GAAP measures Non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement EBIT and EBITDA are expressly exempt from this prohibition Adjustments of a non-gaap performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when (1) it is reasonably likely to recur within two years or (2) there was a similar charge or gain within the prior two years The adjustment may still be OK using a different description However, May 2016 updated guidance emphasizes that this may still be misleading! (Question ) 35

36 Guidance of General Applicability For lack of a better way to say it, we are going to crack down The pendulum has swung. Mark Kronforst, Chief Accountant of Division of Corporation Finance, May 2016 The May 17, 2016 C&DIs begin by reminding us that certain adjustments, although not explicitly prohibited, [can] result in a non- GAAP measure that is misleading and violate Rule 100(b) of Regulation G. (Question ) The C&DIs then proceed to give examples of non-gaap measures that may be misleading A non-gaap measure can be misleading if it is presented inconsistently between periods (Question ) A non-gaap measure can be misleading if it excludes charges, but does not exclude any gains (Question ) 36

37 Guidance of General Applicability (continued ) New guidance prohibits presenting a performance measure that excludes normal, recurring cash operating expenses necessary to operate a registrant s business. (Question ) SEC Comment Examples it is unclear why you would adjust a performance measure for the cash payments for interest, income taxes and capital expenditures Similar concerns apply to your earnings release furnished on Form 8-K. your non-gaap measures appear to exclude certain normal, recurring, cash operating expenses which is inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17,

38 Guidance of General Applicability (continued ) Non-GAAP measures that substitute individually tailored accounting methods for those of GAAP could be misleading (Question ) E.g., GAAP requires revenue over time despite up front payment cannot provide non-gaap revenue with it recognized up-front OK to present billing or bookings but can t call it revenue or take it down to margin, op. income In an acquisition, company records acquired deferred revenue at a discount cannot adjust to include full price as revenue Change in business plan speeds up depreciation No adjustment to show depreciation based on original schedule You present AFFO available to common shareholders, that includes adjustments for straight line accrued rent, net capital lease rent adjustment and below market rent amortization, which is inconsistent with the updated Compliance and Disclosure Interpretations 38

39 Guidance on Per Share Measures [N]on-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission (Question ) Whether per share data is prohibited depends on whether the non-gaap measure can be used as a liquidity measure, even if management presents it solely as a performance measure. staff will focus on the substance of the non-gaap measure and not management s characterization of the measure Comment Letter Example Your disclosures indicate that the non-gaap measure is a performance metric; however, considering the nature of the adjustments the measure appears to represent a liquidity measure. In this regard, it is unclear why you would adjust a performance measure for the cash payments for interest, income taxes and capital expenditures. Please explain to us in detail why you believe that Adjusted Free Cash Flow is useful as a performance measure. Also, explain why the measure is titled Adjusted Free Cash Flow if it is not intended to be a cash flow measure. Similar concerns apply to your earnings release furnished on Form 8-K. 39

40 Guidance on Per Share Measures (continued ) The C&DIs caution against presenting specific non-gaap measures on a per share basis: Free cash flow is a liquidity measure that must not be presented on a per share basis (Question ) EBIT and EBITDA, even when discussed in the context of a performance measure, must not be presented on a per share basis. (Question ) Others not mentioned should be evaluated based on substance: Adjusted EBITDA may also be a liquidity measure, depending upon the nature of the adjustments Any measure that adds back stock compensation could be a liquidity measure, if the reason it is added back is non-cash 40

41 What If I Still Want to Present My Measure Leaving it out of your 10-Q and 10-K doesn t help Regulations on whether a measure is permissible are essentially the same Also, if the measure is material to investors, it belong in 10- Q and 10-K; if it isn t, you shouldn t be reporting it at all However, if your reason for presenting the measure is strong enough, the SEC staff will allow, even if it appears to violate the staff guidance Staff guidance says these things may be misleading Concentrate on disclosure of Why is this measure useful? Not just analysts use it, but why they use it E.g., if your CEO s compensation is based on the measure 41

42 Guidance on Equal or Greater Prominence GAAP measure must be disclosed with equal or greater prominence. Examples of prohibited presentations (Question ): Omitting comparable GAAP measures from an earnings release headline or caption that includes non-gaap measures Presenting a non-gaap measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-gaap measure over the comparable GAAP measure A non-gaap measure that precedes the most directly comparable GAAP measure (including in a headline or caption) We note that Core (Non-GAAP) Diluted Earnings per Share precedes the most directly comparable GAAP measure in the headlines to the earnings release filed as Exhibit

43 Guidance on Equal or Greater Prominence (continued ) Describing a non-gaap measure as, for example, record performance or exceptional without at least an equally prominent descriptive characterization of the comparable GAAP measure Providing tabular disclosure of non-gaap financial measures without preceding tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table Providing discussion and analysis of a non-gaap measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence Comment Letter Example We have read your response to comment 1 in our letter dated May 19, It is unclear from your response whether the comparable GAAP measures will be disclosed before the non-gaap measures, which is inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17,

44 Guidance on Equal or Greater Prominence (continued ) Also Prohibited: Presenting a full income statement of non-gaap measures or presenting a full non-gaap income statement when reconciling non-gaap measures to the most directly comparable GAAP measures We note that you present here and within the appendix (on pages A-2 and A-3) full non-gaap ( Adjusted Pro Forma ) income statements for the three months ended March 31, 2016 and This disclosure is inconsistent with the updated non-gaap Compliance and Disclosure Interpretations issued on May 17, 2016 (refer to ). Excluding a quantitative reconciliation with respect to a forward-looking non-gaap measure in reliance on the unreasonable efforts exception in Item 10(e) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence 44

45 Key Takeaways Do not assume that what was OK before is OK now Eliminate non-gaap income statements Any non-gaap EBITDA-related EPS is suspect Any adjustment of an accounting principle is risky However, you may be able to support if the reason for presenting the measure is strong enough Pay attention to the equal or greater prominence examples Don t report or discuss the non-gaap measure first, even if you consider the non-gaap measure to be the key measure Discussion can t focus primarily on non-gaap measures Applies in earnings releases as well, not just filings 45

46 A Few Specific Hot Topics 46

47 Segment Reporting Entity-wide Disclosures Revenues by product line and geography Long-lived assets by geography Exception for impracticability, but must be disclosed Hard to imagine why this would be impracticable Who is CODM -- Consider whether it is COO Who makes resource allocation decisions? If CEO rarely looks at disaggregated reporting, maybe he/she isn t CODM If CEO has only one operational direct report (COO), maybe he/she isn t CODM 47

48 Segment Reporting What Information is Regularly Reviewed? Frequency: 4 times a year is regular, less may be Review may not be in form of reporting package Staff thinks CODM s direct reports provide numbers for their part of business If a portion of business is highlighted in press release or earnings call, staff will think CODM reviews Aggregation Must be consistent with principles of ASC 280 All criteria must be met, including similar economics 48

49 Income Statement Presentation Disaggregation of revenue and cost of sales Products v. services, for example Required by Regulation S-X, yet many don t do it Explain expense line items What is in cost of sales, selling, G&A? SEC staff believe there is much diversity and little disclosure, so investors are in the dark If an expense (e.g., legal, amortization, impairment) gets its own line item, explain and do it consistently 49

50 Loss Contingencies Loss Estimates Estimates don't require "precision" or "confidence Don t look for excuses not to disclose, but seek to disclose as much as you can, while explaining uncertainties Disclosures can be in aggregate If you say not material, SEC will ask how you figured that out Disclosure of Accruals Disclosure that an accrual was made is required Amount may be necessary if large so as to make sure readers understand what is driving results Be ready to explain why it isn t if you don t disclose 50

51 Loss Contingencies No exception in GAAP for Prejudicial Information If that s your argument for not disclosing, you ll lose the argument Lots of details; little information We don t need a list of when every motion was filed. We just need a true assessment of case. 75% of what s there doesn t need to be, but the important information isn t My Suggestion Accounting personnel should write first draft of disclosure, not lawyers 51

52 Discuss Key Judgments in MD&A If it worried you, investors should know about it Shows you aren t hiding anything Opportunity to explain your actions and your good faith attempts to apply standards No such thing as a fully-disclosed fraud Disclosure is an opportunity, not a risk Numbers only tell part of the story Hard to change numbers; easy to change words Disclosure is too important to be left to lawyers 52

53 They re From the Government They re Here to Help 53

54 The SEC Comment Letter Process Division of Corp. Finance Reviews Each Company at least Every 3 Years Not always a comment letter Comment letters generally seek information Respond fully and completely, not lazily or vaguely Work with the staff to understand concerns and explain your position Ask for the issue to move up the ladder if need be Comment letters and responses become public approx. 20 days after comment process ends Doesn t mean you can shortchange your response Request confidentiality of specific information You can review other comment letters 54

55 Consultations with OCA Take advantage of opportunity Just like you, SEC wants accounting to be right the first time and avoid restatements Easier to address issues in pre-filing situation Guidance for submissions on SEC web site What to expect Initial contact from OCA within 4 days of submission 2-4 weeks to work through the issue Opportunity for conference call and/or meeting to further explore issue if desired 55

56 Working with the SEC on Accounting Matters -- Tips Get auditors, lawyers, advisors involved early Take your time drafting the submission The SEC staff knows nothing about your issue Explain why your proposed accounting is best, not just why it is acceptable Don t forget disclosures The SEC will want to see them Transparent disclosures make any accounting treatment easier to understand and accept 56

57 Questions? 57