By Francine McKenna, MarketWatch
A senior Securities and Exchange Commission official told an audience in New York last week that more companies can expect a comment letter about how they have implemented new revenue recognition rules.
As the new accounting standards took effect in the first quarter of 2018, companies have taken different tacks in explaining how some revenues would be reported going forward, and why they are higher or lower than what investors may have expected.
Companies with a December 31 year-end have already explained how the new rules, effective for most public companies on Jan 1, would impact results. The disclosures grew more detailed each quarter of the past year until the 2017 annual reports explained the financial impact on business units and product categories for 2017, 2016, and future quarters.
Kyle Moffatt, the chief accountant for the SEC’s division of corporation finance, told the accountants gathered at Baruch College’s financial reporting conference last Thursday that he is wrapping up a review of letters to companies that adopted the new standard in January.
“We aren’t planning to beat up on companies in this first year,” said Moffatt. He said he had just looked at a few letters that are almost ready to go out that focus on the judgments made by companies regarding revenue recognition disclosure.
The first quarter 10Q filings have started “trickling in” with most large companies due to file by May 10. “It is too early to say what the result will be with respect to more or less letters, but the staff will be taking a look at some of those filings,” said Moffatt.
Letters have already been sent to companies that early adopted the new standard and companies that have completed their initial public offerings this year.
MarketWatch reported in February that the SEC had published its correspondence with Alphabet Inc. /zigman2/quotes/205453964/composite GOOG +1.66% which adopted the new rules early as of January 2017. The SEC sought a better understanding of the company’s approach to financial reporting, in particular about transparency around its reporting of YouTube revenue. In its first letter to the company last July, the SEC asked about Alphabet’s segment reporting and its approach to revenue recognition, specifically about its fast-growing YouTube advertising business.
Letters to Ford Motor Company /zigman2/quotes/208911460/composite F +3.68% and Radius Health Inc. /zigman2/quotes/200442286/composite RDUS +4.25% requested more clarification around the disclosure of significant contract payment terms. In both cases, the companies promised to provide more information and detailed disclosures in the future.
Companies that adopted the new standard beginning this January have been mentioning the impact of the new revenue recognition rules in their first-quarter reports.
For example, MarketWatch reported that big banks have been taking decidedly different approaches in explaining how some revenues would be reported going forward, and why they are higher or lower than what investors may have expected.
On Monday Tesla /zigman2/quotes/203558040/composite TSLA +5.14% took advantage of the new revenue rules to revise the estimate in its first-quarter filing of the impact of the new rules on its accumulated deficit for prior years.
In its first quarter earnings press release , Yum Brands /zigman2/quotes/209029767/composite YUM +0.26% blamed the new revenue standard for flat core operating profit growth, since it now is required to recognize upfront fees such as initial and renewal fees it receives from franchisees over the period of the franchise agreement.
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Yum also must record incentive payments it makes to franchisees as a reduction of revenue over the period of the franchise agreements. That’s a change from prior practice. For the full year, Yum anticipates that on a non-cash basis, the new revenue recognition standard will negatively impact its core operating profit growth, a non-GAAP metric, by 2 to 3 percentage points.
Moffatt, and the SEC’s chief accountant Wesley Bricker, said they have been getting a lot of questions from companies and their lawyers about reporting and disclosure of the impact of the tax reform act. In particular, Moffatt said there have been calls and letters asking what can be done to adjust results for the impact of the new tax law, on a non-GAAP basis.
Moffatt said he would “be concerned” if a company wanted to adjust for one impact of the act, such as the lower tax rate, and not the other such as the international tax or the loss of availability of net operating loss tax offsets. “We would say that would be inappropriate,” said Moffatt.
Moffat also said he and Bricker have significant concerns with companies that ask if they can apply the new lower 21% tax rate to prior years in non-GAAP pro forma financial statements, presumably for comparability with 2018 financial information.