Revenue recognition tips from the SEC staff

By Ken Tysiac

Labeling multiple goods and services provided to a customer as a “solution” does not eliminate a company’s responsibility to identify and report separate performance obligations under FASB’s new revenue recognition standard, SEC Professional Accounting Fellow Susan Mercier, CPA, said Monday.

“The staff is not persuaded that promises should be combined into a single performance obligation simply because a registrant labels those promises as a ‘solution’ that the ‘customer wants,’ ” Mercier said Monday at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C. “Rather, a registrant must support its assertion that its promises to transfer goods or services are not separately identifiable based on the guidance in [FASB] ASC [Paragraph] 606‑10‑25-21, which describes the objective of the analysis and provides factors to consider.”

Mercier said that related to revenue recognition, the top two consultation topics the SEC has worked on with registrants over the past year were:

  • Identifying the performance obligations in a revenue contract.
  • Determining whether an entity is a principal or an agent.

To solve challenges with identifying separate performance obligations, Mercier said that in addition to following ASC Subtopic 606-10, it’s helpful to remember the discussion in the Basis for Conclusions of Accounting Standards Update No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing.

“I think that the notion of considering if the registrant’s combined output is greater than or substantively different from the sum of the parts is helpful in many cases,” she said.

Despite her caution on “solutions,” Mercier said the SEC did not object to one company’s conclusion that software and updates provided to customers represent a single performance obligation rather than separate obligations.

“The registrant’s promises to provide the software and the updates are, in effect, inputs that together fulfill a single promise to the customer,” she said.

Meanwhile, SEC Professional Accounting Fellow Lauren Alexander, CPA, said determining whether an entity is a principal or an agent in a revenue transaction can be particularly challenging when two parties are involved in the provisions of services to a customer. It can be even more challenging when the services can only be provided by a specific service provider, she said.

“We continue to observe that applying the principal versus agent guidance may require significant judgment, especially in the case of emerging business models,” she said. “We encourage registrants to carefully consider their specific facts and circumstances and contractual terms, and any changes to these terms over time, when applying this guidance.”

Ken Tysiac ( is the JofA’s editorial director.


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