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Half Empty, Half Full

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Posted by Graham Hulme on Apr 2, 2018 8:00:00 AM

On February 23, 2018, GE submitted its most Recent 10-K.  Beyond financial results, it revealed key details on GE’s assessment, implementation, and disclosures specific to ASC 606.

As many of you probably heard, GE’s application of ASC 606, via a full retrospective approach, led to predominately negative reactions from analysts, shareholders, the market, and the media.

The following disclosure in GE’s 10-K was the boulder coming down the hill that precipitated such negative reactions:

We will adopt the revenue recognition US GAAP new standard as of January 1, 2018. When we report our 2018 results, the comparative results for 2017 and 2016 will be updated to reflect the application of the requirements of the revenue recognition US GAAP new standard to these periods. Based on our assessment and best estimates to date, we expect a non-cash charge to our January 1, 2016 retained earnings balance of approximately $4.2 billion. We estimate that the charge will comprise approximately $1.0 billion related to commercial aircraft engines and $3.3 billion related primarily to our services businesses (predominately in Power and Aviation). Beyond those effects, we expect application of the new guidance will result in increases and decreases in revenue within our segments, which will largely offset overall and will be immaterial at a total company level. We estimate that our 2016 and 2017 restated earnings per share will be lower by approximately $0.13 and $0.16 (before any impact from U.S. tax reform), respectively, driven primarily by the required changes in accounting for long-term product service arrangements as described above. These estimates may be refined as we finalize the implementation effort required to adopt the standard. Upon adoption in 2018, our books and records will only reflect the results as required under the new standard limiting our ability to estimate the effect of the standard on our earnings. Given the inherent difficulty in this ongoing estimation of the effect of the standard on any future periods, we do not plan to continue to assess the effect on 2018.”

It’s understandable why reactions were negative to this GE disclosure.  But is this all bad?  Instead, can we look at the glass half full in terms of ASC 606?

My initial assumptions aligned with the negative output covering GE’s 10-K; the glass was half empty (realistically, probably more than half).  But after reading an article by Francine McKenna on MarketWatch, my viewpoint on GE’s disclosures changed.

There were a few key points in the article that could potentially reshape the perspective on GE’s 10-K disclosure (at least from a revenue recognition standpoint):

  • It is an outstanding working example of how ASC 606 was applied and its impact on a company’s financial results.
  • It offers a point of view that confusion around the revenue recognition US GAAP new standard, by the media, analysts, investors, and market, led to an idea that GE’s restatement was due to errors or misstatements, rather than a calculated, strategic, decision by GE to provide robust disclosure and details on the impact and changes due to the new standard. In other words, the restatement was a requirement due to correct application of the new standard; not some fundamental miss by GE.
  • GE adopted ASC 606 using a full retrospective approach rather than a modified retrospective approach. Supporting arguments can be made that in doing so, GE was more transparent regarding how ASC 606 impacted both its current and forward-looking financial results compared to other companies that took a less costly/complicated modified retrospective approach.
  • GE’s position is that application of the guidance will lead to increases and decreases in revenue within its various segments or BUs, but will be immaterial when netted out at a company level. Future financial reports will validate that assertion, but GE relayed this position in its 10-K.

Overall, McKenna’s Marketwatch article is an informative and eye-opening piece on how to view GE’s disclosures through a different lens.  It sculpted GE’s glass situation as “half full”; at least from an ASC 606 perspective.

What’s your take?  Do you see value in the details put forward by GE’s disclosure and full retrospective adoption approach?  Feel free to share your input with us at Softrax.  Happy reading!

SOFTRAX offers superior experience, knowledge, products, and services to address your company’s ASC 606 needs.  We encourage you to visit http://www.softrax.com/about/contact-us to learn more about SOFTRAX and the value we can provide for your company’s ASC 606 adoption. 

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