Home RevRec Roundup 2/18/19: Weekly Revenue Recognition – ASC 606 Roundup

2/18/19: Weekly Revenue Recognition – ASC 606 Roundup

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To quickly identify ASC 606 information in the below links, click on the link, hit Control + F, enter the text “606”, “2014-09”, or “ASC” and go to your search results.

To quickly identify key areas, open each link and search for “606” or “2014-09” in the text.  

Earnings Calls

Cambrex Corporation:  Cambrex Corp Q4 2018 – Earnings Call Transcript

The Motley Fool:  Why Cambrex Corporation Is Tanking Today, by Brian Feroldi

Our thoughts:  There are 13 references to ASC 606 within this transcript so plenty of 606 content to choose from for a review.  The Motley Fool article is presented to offer context on how the market viewed the company’s results under ASC 606.

One topic that stands out is in the 1st through the 3rd references to 606 in the transcript per Greg Sargen, CFO:

“The second item I would like to discuss is the transition from recognizing revenue under ASC 605 to ASC 606. During 2018, we reported both ASC 605 and 606 results. But since we only had ASC 605 results for 2017, all guidance and year-over-year comparisons discussed on our quarterly earnings releases and calls were based on ASC 605 results for both years including profitability. Today’s discussion of our results will be a hybrid our discussion of fourth quarter and full-year 2018 results as compared to 2017 results will be based on ASC 605 results for both years. Any discussion of 2019 expected results and related comparisons to 2018 will reflect ASC 606 results for both years.”

Later in the earnings call, an analyst asked a clarifying question to fully understand how the company is positioning guidance.  It’s interesting as the analyst is still looking back at 605 in terms of how to frame guidance under 606 as follows:

David Windley – Jeffries

“Hi. Thanks for taking my question. So kind of dovetailing off the last question. As it relates to the differences, I know you won’t be reporting 605 in 2019 anymore. I’m interested though in whether there’s still a difference between how 605 would be calculated in your guidance versus the 606 the guidance that you’re actually giving, in other words are there still timing differences or has that now converged in a way that they would be more similar either way?”

Greg Sargen – CFO

“Yes, I think the latter. I think they’re pretty similar and they’ve converged that if you look at the fourth quarter, we evened out some of the imbalances that were created during the first three quarters of 2018. So I think it’s about a $20 million difference.

We’re not going to track 605 for 2019 but if we did my guess would be that we’re going to be in that plus or minus $10 million range of our results. But that’s just a speculation at this point. But I do think they will be pretty convergent.”

Tableau Software:  Tableau Software Q4 2018 – Earnings Call Transcript

Our thoughts:  This earnings call offers high volume, and high value, with respect to its ASC 606 references.  During Damon Fletcher’s (CFO) opening comments on the call, the company put forward a solid representation of the contract asset concept from ASC 606 as follows:

“Before I move on, I’d like to quickly cover our multi-year subscription contracts. For multi-year subscription sales the total revenue recognized under 606 is similar between the perpetual and subscription sale as entire licensed component of a multi-year contract is generally recognized upfront as license revenue.

Similar to our single year contracts, we generally invoice multi-year contracts on an annual basis which means that under 606 revenue includes revenue recognized, but not yet billed. This creates a contract asset under 606 similar to an unbilled receivable.

As a result, when considering our billings, it is important to recognize all the change in quarter-to-quarter contract assets in addition to the changes in deferred revenue. We are now providing our quarter end contract asset figure in our trended metrics table at the end of our press release.”

An additional exchange later in the transcript shows how analysts are asking questions regarding ASC 606’s impact on the company’s revenue guidance and the company’s response.  This is important as it shows that analysts’ questions are advancing beyond just wanting to understand the adoption impacts to more forward-looking impacts.  Companies will need to be prepared to answer such questions.

Michael Turits, Raymond James

Two questions for Damon. Maybe I’ll just drill down on the questions – just ask any thoughts on why at this point on a 606 basis that margins will be flat at 13% last year to this year? And then as far as the revenue guide at 18% nicely they kept the dollar amount for next year but is there anything 606 now where you’re benefiting from an increase either amount of term or a duration of term in terms on how growth rate is on a 606 basis?

Damon Fletcher, CFO

Sure. I’ll try to answer both of those questions. So, on the margin outlook for the year we’re going to continue to invest in our business. One of the things we’re really trying to do is as I just spoke about earlier was sustained at 20%-plus kind of growth rate. And so we’re making a number of investments both infrastructure and kind of global expansion and increasing the size of our team that handles renewables as an example and works with the customers and our customer’s success programs. Those are kind of critical areas of investments that we have to be able to sustain that long-term growth model. As far as the – what is the driver of the kind of growth rate on the revenue side and does contract duration impact that. I think it would impact that. Now when we look forward in our outlook for next year, we’re assuming kind of similar contract duration.

Michael Turits, Raymond James

Okay. Just a follow-up is it not only is duration in the same but is your percentage of term which is obviously gets that upfront recognition on 606 basis, is that the same or is there any benefit of the mix shift there?

Damon Fletcher, CFO

There – a mix shift will actually be a headwind. So if we move more customer from perpetual over to subscription which we are anticipating moving somewhere around from around the 80% in the second half of this year, to approaching 90% as a subscription in the end of 2019 that growth of 10% will have a headwind against our revenue growth rates. The vast majority of our sales are on a – on-premises are hosted in the public cloud so they our term licenses and so that will have a headwind not a tailwind.

Giga-tronics Incorporated:  Giga-tronics Q3 2019 – Earnings Call Transcript

Our thoughts:  While only having 7 references to ASC 606 in the transcript, the value in it is how the CFO offers a “preamble” at the beginning of the call as follows:

“However, before going into our financial results, we need to explain the change in our accounting standard. Effective April 1, 2018, the company was required to adopt the accounting standard called Revenue from Contracts with Customers, which is also commonly referred to as ASC 606, which changed the way the company recognizes revenue for certain contracts. Until the end of FY 2018, ending March 31, 2018, we recognized revenue when we ship and invoice a customer, and truthfully, that’s my much preferred method that I would like to do. However, we don’t have that choice. Under ASC 606, we must recognize revenue based on the percentage completion of the contract as it incurs costs.

Thus, on April 1, 2018, we were required to make balance sheet entries, including adding $1.17 million to retained earnings. This $1.17 million are the gross margins of $2.7 million in revenue. Thus, this uninvoiced revenue was taken in April 1 on to the balance sheet. You never saw that revenue, it was just added as $1.17 million into gross margins – I mean, into retained earnings on the balance sheet.

So as a result, when we ship and invoice products now, then we cannot recognize this $2.7 million of revenue because it’s already recognized with this onetime balance sheet entry. There is no cash impact because we still invoice upon shipment, but there is a P&L impact under this new reporting of 606. Now new contracts can compensate for this impact because, again, we will recognize revenue on new contracts prior to shipment, so there is an offsetting element. So it’s a matter of timing.”

The key takeaways from the above text are that the company wanted to offer as much clarity as possible in its presentation to illustrate in plain terms the impacts of ASC 606.  Also, which is interesting compared to transcripts reviewed to date, the CFO offers some color commentary on his preference and thoughts on the impacts of 606.  Worth a read per the above.

Articles

The Wall Street Journal:  Revenue Recognition Compliance Costs Are Higher Than Expected, Companies Say, by Tatyana Shumsky

Journal of Accountancy:  Finding value in revenue recognition implementation, by Ken Tysiac

Our thoughts:  These two articles focus on the results of an E&Y survey done in calendar Q4 2018 regarding ASC 606 where 300 CFOs and CIOs were surveyed.  Each article confirms observations that we are seeing in the market related to 606 as follows:

  • In almost all cases, the costs to implement the new revenue standard were higher than expected (likely due to the manual, spreadsheet-driven, approaches companies took to adopt and satisfy 606.
    • Even though public companies have a year under their belts for ASC 606, many of these companies are far from “done” on implementing repeatable, automated, and reliable processes to handle ASC 606.
    • The focus of companies going forward will be to eliminate the high effort, manual, spreadsheet approaches by adopting technological solutions (such as what SOFTRAX provides) to automate their ASC 606 processes.

MarketWatch:  Reporting on revenue recognition changes is still causing confusion—even for analysts, by Francine McKenna

Our thoughts:  The title of this article says it all and corroborates what we see during our weekly reviews of companies’ SEC filings and earnings calls.  Specifically, that reporting and presenting ASC 606 information continues to be a challenge.  Of focus is the lack of clarity that occurs when presenting ASC 606 information to ensure that consumers of companies’ financial results understand comparability between 606 results and 605 results in the prior year, current year, and for future revenue guidance.

We encourage you to visit http://www.softrax.com for information on how SOFTRAX can help your company and you handle ASC 606.

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Kristen is a CPA in Massachusetts and graduated with a Masters in Accounting from Wake Forest University. She currently works as a Sales Engineer with Softrax, focused on streamlining revenue recognition processes for businesses in all industries, large and small. She came to Softrax from the Big 4, where she worked as a consultant in the tax accounting, strategy and operations, and technology departments.