Implementing the New Revenue Recognition Rules in 2018 Steven B. Stokdyk January 9, 2018 Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in France, Italy, Singapore, and the United Kingdom and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in South Korea as a Foreign Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia. Copyright 2018 Latham & Watkins. All Rights Reserved.
Overview of New Revenue Recognition Rules New revenue recognition standards IFRS 15 and ASC 606, issued in a joint effort by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), generally become effective in 2018 These new rules are designed to standardize revenue recognition across industries as well as harmonize practices between GAAP and IFRS 1
When the Rules Take Effect The rules became effective for U.S. public companies for annual reporting periods beginning after December 15, 2017 For calendar year reporting companies, the rules are effective as of January 1, 2018 and must be applied in the 10-Q for the first quarter of 2018 Plan for a longer time for audit committee to review 2
Two Methods of Implementing the New Rules There are two methods by which companies may adopt the new rules Under the Full Retrospective Method, companies must restate the revenue and expenses of all historical reporting periods presented in financial statements reflecting the effects of the new rules Under the Modified Retrospective Method, companies need not restate prior periods, but must reflect the cumulative effect of the new rules in its financial statements in its 10-Q for the first quarter of 2018 3
Selected Examples Examining the filings and disclosures from these large public companies may be helpful: Companies adopting the full retrospective method: GE, Microsoft, Apple Companies adopting the modified retrospective method: Ford, Facebook, Alphabet Inc. 4
Communications to the Market Provide qualitative and quantitative disclosure of changes Explanatory disclosure can help both within SEC filings as well as in investor webcasts, conference calls, etc. Determine any revisions to non-gaap measures Evaluate guidance Consider impact on MD&A trends 5
SEC Review SEC has indicated they will continue to monitor disclosure closely Historical comments have included: Qualitative disclosures of the potential impact ASC 606 will have on their financial statements Description of the expected effects of the accounting policies Comparison to the current revenue recognition policies Description of the status of the implementation process Description of any significant implementation matters yet to be addressed Disclosure of the quantitative impact that adoption of ASC 606 is expected to have, if determinable 6
Effect on Debt Covenants Review credit agreements and indentures to see if covenants or definitions need to be waived or amended Also look at language that references changes in GAAP Companies are considering static GAAP, which would require two sets of books 7
Tax Matters Consider tax implications Impact on taxable income Effect of new rates Deductibility of interest Repatriation of cash 8
Other Matters Disclose implementation risks and changes in business practices going forward Possible changes to commercial agreements Internal controls and certifications 9
Effect on Incentive Compensation Companies should consider what impact the new rules will have on incentive compensation, particularly in scenarios where a revenue-based plan may already be mid-cycle when the new rules are adopted For example, whether a company should amend its compensation plans, vesting and amounts payable under compensation plans, how to communicate any changes in executive compensation to investors, etc. 10
Capital Markets Considerations Companies that choose to adopt the full retrospective method may have limited access to the capital markets until they have restated required prior periods Such companies may have to restate their 2017, 2016 and 2015 financial statements when filing a Form S-3 following the filing of their 10-Q for the first quarter of 2018 Only applies to takedowns from existing shelves if adoption of new rules constitutes a fundamental change The SEC recommends that such companies seek to use the available impracticability exemption for relief from these restatement requirements if necessary 11
Contact Information Steven Stokdyk Partner, Latham & Watkins LLP (Los Angeles) Email: steven.stokdyk@lw.com Phone: +1.213.891.7421 12
Questions? Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in France, Italy, Singapore, and the United Kingdom and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins operates in South Korea as a Foreign Legal Consultant Office. Latham & Watkins works in cooperation with the Law Office of Salman M. Al-Sudairi in the Kingdom of Saudi Arabia. Copyright 2018 Latham & Watkins. All Rights Reserved.
Disclaimer Although this presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. Any opinions or conclusions provided in this presentation shall not be ascribed to Latham & Watkins or any clients of the firm. The presentation is not created or designed to address the unique facts or circumstances that may arise in any specific instance, and you should not and are not authorized to rely on this content as a source of legal advice and this seminar material does not create any attorney-client relationship between you and Latham & Watkins. Copyright 2017 Latham & Watkins. All Rights Reserved. 14