Home ASC 606 Will You Take the Letter “Q” or “K” for $650 million?

Will You Take the Letter “Q” or “K” for $650 million?

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Posted by Graham Hulme on Jun 26, 2018 9:45:00 AM

Over the past months, we reviewed public companies’ filings to understand how they planned, implemented, and adopted ASC 606. As the ASC 606 adoption date has come and gone, and many companies are filing their first 10-Q’s under ASC 606, an important point to consider is the extent to which the SEC will do in-depth comparisons between a company’s 10-K filing before adopting ASC 606 and its 10-Q filing after adopting ASC 606. This specific point stood out when we were comparing Amazon’s 10-K filing, where Amazon stated its ASC 606 plan and expected impacts, to its recent 10-Q filing which was its first under ASC 606.

For example, Amazon’s most recent 10-K had a section titled “Accounting Pronouncements Not Yet Adopted” on page 491 that stated the following:

“In May 2014, the FASB issued an ASU amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We will adopt this ASU on January 1, 2018 with a cumulative adjustment that will increase retained earnings by approximately $650 million rather than retrospectively adjusting prior periods. The cumulative adjustment will primarily relate to unredeemed gift cards. We will begin to recognize revenue from estimated unredeemed gift cards over the expected customer redemption period, which is substantially within nine months, rather than waiting until gift cards expire or when the likelihood of redemption becomes remote, generally two years from the date of issuance. Other changes relate to Amazon-branded electronic devices sold through retailers, which will be recognized upon sale to the retailer rather than to end customers. We also will change how we recognize and classify Amazon Prime memberships, which are currently considered arrangements with multiple deliverables that are allocated among products sales and service sales. Upon adoption of the ASU, Amazon Prime memberships will be accounted for as a single performance obligation recognized ratably over the membership period and will be classified as service sales. Other changes that we have identified relate primarily to the presentation of revenue. Certain advertising services will be classified as revenue rather than a reduction in cost of sales, and sales of apps, in-app content, and certain digital media content will primarily be presented on a net basis.”

The above paragraph provides specific data points and statements that can be compared to what’s put forward in Amazon’s 10-Q. It’s clear based on the above that Amazon was solid in its understanding of how ASC 606 would be applied and impact its business.

Let’s pivot to the “Accounting Pronouncements Recently Adopted” section of Amazon’s recent 10-Q on page 82 to compare:

“In May 2014, the FASB issued an Accounting Standards Update (“ASU”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this ASU on January 1, 2018 for all revenue contracts with our customers using the modified retrospective approach and increased retained earnings by approximately $650 million. The adjustment primarily relates to the unredeemed portion of our gift cards, which are now recognized over the expected customer usage period rather than waiting until gift cards expire or when the likelihood of redemption becomes remote. Other changes relate to our accounting for revenue related to Amazon-branded electronic devices sold through retailers, which are now recognized upon sale to the retailer rather than to end customers, and the recognition and classification of Amazon Prime memberships, which are now accounted for as a single performance obligation and recognized ratably over the membership period as service sales. Previously, Prime memberships were considered to be arrangements with multiple deliverables and were allocated among product sales and service sales. Other changes relate primarily to the presentation of revenue. Certain advertising services are now classified as revenue rather than a reduction in cost of sales, and sales of apps, in-app content, and certain digital media content are presented on a net basis.The impact of applying this ASU for the three months ended March 31, 2018 primarily resulted in a decrease in product sales and an increase in service sales driven by a reclassification of Prime membership fees of approximately $845 million, which are now accounted for as a single performance obligation and recognized over the membership period. Service sales also increased by approximately $560 million due to the reclassification of certain advertising services that were previously classified as a reduction of cost of sales.”

Per a review of the above, compared to the 10-K, it’s clear Amazon made a concerted effort to stay tight on its messaging and presentation of the impacts of ASC 606. This is a smart play to avoid the potential for SEC questions/comments in the event there were differences between the 10-K and 10-Q without adequate details to explain those differences.

While Amazon did a solid job in the above area of its 10-Q filing, the open question is whether it provided enough qualitative and quantitative information on its ASC 606 adoption in other areas of the filing to satisfy the SEC. Compared to filings reviewed to date on our end, Amazon’s 10-Q does not contain as many ASC 606 specific call-outs and disclosures. How the SEC comments and responds to Amazon’s 10-K will be a good bellwether as to whether its future filings, as well as other companies’ future filings, will need supplemental details specific to ASC 606.

In summary, both the “Q” and the “K” letters are important when discussing ASC 606. Parties that review filings will likely compare a company’s pre-ASC 606 adoption filings to get a read on what they assumed, planned, and stated versus what happened in the first few filings after adopting ASC 606. Any differences between “forecasted” and “actual” ASC 606 results/impacts will likely need qualitative and quantitative details to proactively address questions that reviewers might have on the deltas. So, for now, we recommend you mind your “Ks” and “Qs”.

 

What do you think? Do you expect reviewers to analyze the “forecasted” and “actual” ASC 606 information in filings this way? If so, how much importance do you place on this area? Your input is highly valued so we would appreciate hearing from you!

 

SOFTRAX provides 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 and revenue recognition management needs.

Topics: Revenue RecognitionFinancial ReportingASC606SEC Comments