Revenue recognition tilts toward modified transition approach

By Ken Tysiac

A majority of S&P 500 companies chose the simplicity of the modified retrospective transition for their revenue recognition standard implementation, a new white paper shows.

FASB’s new revenue recognition standard, which took effect at the beginning of 2018 for public companies, presented financial statement preparers with two options for transition. The full retrospective transition provides investors with more information because it requires the presentation of the three previous years’ financials under the new rules.

The modified retrospective transition does not require the historical restatement but mandates that two sets of accounting records should be maintained during the year of adoption. Thirty-five of 40 (87.5%) S&P 500 companies analyzed that did not early adopt the revenue recognition standard chose the modified retrospective transition method, according to a white paper by Intelligize, a firm that provides analytics to compliance and transactional professionals.

Among the small number (32) of S&P 500 companies that early adopted the revenue recognition standard, 10 chose the modified retrospective method, 15 elected the full retrospective transition, three did not use a transition method, and four did not disclose their transition method. (A few companies did not use a transition method because they previously had no revenue.)

The 87.5% number for the non-early adopters gave the modified retrospective approach a significant advantage overall.

“I think it was the cost and simplicity of using that method [that made it attractive],” Rob Peters, an Intelligize senior director, said in a phone interview. “In the end I think it was far simpler for them to say, ‘Let’s just do it this way. We’ll save some money, and we’ll get it done a lot quicker.’”

Performance obligation concerns

The Intelligize analysis also scrutinized SEC comment letters on early adopters, finding that measurement of performance obligations generated 69.7% of all comments.

Identifying performance obligations is the second step in the new five-step revenue recognition process. The comment letters related to judgment issues on the timing of satisfaction of performance obligations and obligations satisfied at a point in time rather than over time.

“Those are areas that had the most subjectivity from an accounting standpoint, where issuers had to really take a look at the measurements and make some judgments,” Peters said.

The comment letters may provide valuable insight to private company finance executives who are scheduled to implement the standard next year. Some of the most interesting comment letters included:

  • An analysis in a comment letter to General Dynamics noting that the company recognized revenue at a point in time for the manufacture of business-jet aircraft in its Aerospace group. The SEC sought information and disclosures on the significant judgments that were evaluated to determine that the appropriate point in time to recognize revenue was generally when the customer accepts the fully outfitted aircraft.
  • A request for explanation from Alphabet (Google’s parent company) on how categories to present disaggregated revenue information were selected, particularly related to how results are impacted by increases in mobile searches and growth in YouTube revenue.
  • An analysis of Microsoft’s conclusion that desktop applications and cloud services are not distinct.
  • A request for enterprise software provider Workday Inc. to discuss sales commissions. The letter stated that prior to the adoption of Topic 606, direct sales commissions were capitalized when they could be associated specifically with non-cancelable subscription contracts, and under Topic 606 all incremental sales commissions were capitalized. The SEC sought information on additional commission fees the company is now capitalizing, and how Workday determined that the fees are incremental costs of obtaining a contract.
  • A discussion with data management software and service provider Commvault Systems Inc. about whether the performance obligation of providing software licenses is satisfied upon shipment or when the software is made available for download to indirect distribution partners or to the end user for sales made through indirect distribution channels.

“[With] the amount of judgment that goes into the performance obligations and how they’re measured, I think the SEC really wanted to assist users in understanding what goes into it, and make it a little smoother for the transition period,” Peters said.

For more information on FASB’s revenue recognition standard, please visit the AICPA’s webpage devoted to the topic.

Ken Tysiac ( is the JofA’s editorial director.

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