Revenue judgments must be well-reasoned, SEC’s Bricker says

Judgments related to revenue accounting and reporting are being scrutinized carefully by SEC staff members as financial statement preparers implement new standards, SEC Deputy Chief Accountant Wesley Bricker said Thursday.

Companies around the world are implementing the new revenue recognition standards issued by FASB and the International Accounting Standards Board. The standards are designed to promote comparability across industries and jurisdictions, and their principles-based focus eliminates much of the industry-specific guidance that U.S. GAAP preparers have used in the past.

This presents opportunities for judgments, which Bricker said need to be reasonable. He said at the 2016 Baruch College Financial Reporting Conference in New York that SEC staff will continue to respect well-reasoned, practical judgments that are grounded in the standard’s principles and consider the usefulness of information to investors.

“Conversely, aggressive interpretations that appear to be taken to achieve a specific outcome, such as preserving existing reporting, will not be well-received,” Bricker said in his prepared remarks, “particularly when that outcome is inconsistent with the principles of the new standard.”

Appropriate applications of judgment will often identify and define the issue, gather facts and information, perform analysis, identify alternatives, reach a decision, and complete documentation and rationale for the conclusion, Bricker said.

Bricker said management, auditors, and others should continue to refer interpretive issues related to the standard to the boards’ Transition Resource Group, which was designed to assist with the transition to the standard.

He also encouraged consultation with the SEC’s Office of the Chief Accountant, particularly when a registrant has unusual, complex, or innovative transactions for which no clear guidance exists or when a preparer finds it is applying the guidance differently from the manner in which Transition Resource Group members believed the guidance should be applied.

Issues the Office of the Chief Accountant has discussed with registrants include:

• Addressing the application of the definition of a “contract” within the standard. Bricker said that while a future contract might appear to be likely or even compelled economically or by regulation, the SEC staff believes it would be inappropriate to recognize revenue for a contract before the contract exists with enforceable rights and obligations.
• Noting that the standard explicitly limits what contracts may be combined. The SEC staff objected to a registrant’s proposal to extend the contract combination guidance beyond contracts with the same customer or related parties of the same customer.
• Observing that FASB did not intend to change practice with respect to the timing of loss recognition for contracts in the scope of ASC Subtopic 605-35 (as amended). The SEC staff did not object to a registrant’s proposal to continue to apply its current accounting policy for loss contracts.

Bricker also encouraged investors to consider the company-specific impacts of the new guidance. These could include the company’s implementation plan and the audit committee’s monitoring of progress on the plan; possible changes of accounting policies and the resulting impact on financial results; how corporate policies such as sales commissions, compensation plans, and contracting approaches will be affected; and the income tax accounting implications of the standards.

“The new revenue standard has the potential to change not only the top line, but also the bottom line and analysis that depends on the financial statements,” Bricker said.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.