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SEC now: Revenue 2025 comment letter trends · PwC's accounting podcast

0:00
SPEAKER_01: Thought Leadership from PwC's National Office.
0:07
SPEAKER_00: Hello, and welcome back to PWC's The Counting Podcast.
0:10
SPEAKER_00: I'm Heather Horn.
0:12
SPEAKER_00: Today we're continuing our SEC focused series with a discussion on revenue, another top SEC comment letter area in 2025.
0:20
SPEAKER_00: Revenue is the top line on the income statement for a reason.
0:24
SPEAKER_00: It's closely watched by investors and by the SEC staff.
0:27
SPEAKER_00: From variable consideration to disaggregated disclosures, we'll walk through common areas of comment and offer practical advice for preparers.
0:39
SPEAKER_00: Our guests today are Mike Coleman and Ryan Spencer, both partners in PWC National Office with deep experience in this area.
0:46
SPEAKER_00: And joining them once again today is our guest host is Kyle Moffat, PWC's National Office Professional Practice Leader.
0:54
SPEAKER_00: With that, let's get today's episode started.
0:57
SPEAKER_04: Welcome back to the show, everyone.
0:59
SPEAKER_04: I'm your host, Kyle Moffitt, and today we're diving into a topic that's getting a lot of attention across corporate reporting and accounting teams, SEC comment letter trends, specifically around revenue recognition and related disclosure areas.
1:12
SPEAKER_04: To help us break it all down, I'm joined by my two subject matter experts, Ryan and Mike.
1:18
SPEAKER_04: They've been neck deep in the latest SEC comment letters and have pulled together insights on what the SEC is focusing on and what comments companies should expect to receive.
1:28
SPEAKER_04: Ryan, Mike, welcome to the show.
1:30
SPEAKER_04: Glad to be here.
1:31
SPEAKER_02: Happy to join.
1:32
SPEAKER_02: Looking forward to the discussion.
1:34
SPEAKER_04: So, so Ryan, let's start with the big picture.
1:37
SPEAKER_04: You guys obviously sifted through a large data set of SEC comment letters.
1:42
SPEAKER_04: What stood out to you kind of across the board?
1:45
SPEAKER_03: Yeah, uh in the area of revenue recognition, I'll talk a little bit about how we how we measure the trends first.
1:52
SPEAKER_03: So if if one were to go to our comment letter website where we give data on on the trends, you'll see that there's there's two two ways in which we we measure the trends.
2:02
SPEAKER_03: One is based on absolute number of comments, and then one is based on the relative number of comments.
2:07
SPEAKER_03: And what do I mean by that?
2:09
SPEAKER_03: So when we talk about absolute comments, it's just what's the area that's getting the greatest number of comments.
2:14
SPEAKER_03: Right.
2:15
SPEAKER_03: And then secondly, it's it's we we also take a look at relative, and that is think about like a pie chart relative to all of the comments that are out there.
2:24
SPEAKER_03: Where does revenue recognition fall?
2:27
SPEAKER_03: So revenue recognition is the fourth, the top in the top 10.
2:31
SPEAKER_03: It's the fourth biggest comment area.
2:35
SPEAKER_03: And it lags behind non-gap, uh, mDNA and segment reporting.
2:40
SPEAKER_03: Um and both, though, have uh revenue recognition has trended up though, both an absolute number of comments from the from the prior uh prior year, as well as um as well as on a on a relative basis.
2:53
SPEAKER_03: Uh during 2025, it found itself um back and forth with segment reporting.
2:59
SPEAKER_03: Sometimes it was a third segment reporting, sometime took the fourth.
3:02
SPEAKER_03: So if we were doing this maybe in the spring, we would have been talking about it as the third, but it is the fourth overall.
3:07
SPEAKER_04: Yeah, no, I I think look, I think, I think it's important to highlight you usually what I try to say is when when companies are thinking about um just any new standard, any new rule, new standard, right?
3:19
SPEAKER_04: With the changes of the segment standard, that obviously is gonna cause an increase in the comments.
3:24
SPEAKER_04: The staff's gonna focus on it, but revenue always winds up being at the top of the list.
3:28
SPEAKER_04: And and um I know you know you you see a lot of differences kind of across sectors, like some sectors, not much, but what what are we seeing in the sectors?
3:36
SPEAKER_03: So by sector, I'd say for for pretty much all the sectors, they're generally in the top five, middle of the pack.
3:42
SPEAKER_03: A lot of them were four or five.
3:43
SPEAKER_03: The exception would be the energy and utility sector, where we see that usually in the bottom ten or sometimes not even in the in the top ten in in terms of the overall um volume of comments.
3:54
SPEAKER_03: And that's I think just due to the nature of nature of their uh nature of the industries there.
3:59
SPEAKER_03: Right, right.
4:00
SPEAKER_04: So that that that's a good overview and and not really that surprising to me, at least, um, kind of through the when you think about the importance of the revenue, um, you know, top line of the of the financial statements, um, obviously has always been a focus area of the staff's.
4:15
SPEAKER_04: Um Mike, you you've obviously had many years of experience dealing with with some some of the more complex technical accounting consultations and revenue.
4:23
SPEAKER_04: I know um you do a lot of of presentations, um, you know, conversations with companies on the topic, and there's always a lot, you always have a treasure trove of of of experiences to share.
4:35
SPEAKER_04: Um and you were here with me about a year ago to talk about the same topic.
4:39
SPEAKER_04: So any observations about commenters in this area now as compared to last year?
4:44
SPEAKER_02: Yeah, so I would say from a topical perspective, the trends uh for revenue comments year over year are fairly consistent, nothing particularly earth-shattering.
4:54
SPEAKER_02: Um, the two biggest areas within the RevRec comments tend to relate to the basic timing and method of revenue recognition and the related revenue policy disclosures.
5:06
SPEAKER_02: So the staff is always has the desire for companies to be more specific and less generic.
5:13
SPEAKER_02: And very often we have companies out there who basically say we recognize revenue and control transfers.
5:21
SPEAKER_02: Okay, that's what the standard would require.
5:23
SPEAKER_02: And what the comment you'll generally receive if your disclosure is like that is when the control transfer to your specific facts and circumstances.
5:33
SPEAKER_02: So it's really the when and the why to get to your transactions that the staff is looking for.
5:41
SPEAKER_02: So that's the you know, the number one comment that we see in RevRE.
5:46
SPEAKER_02: What's the timing?
5:47
SPEAKER_02: And in your policy, are you explaining enough when and why?
5:52
SPEAKER_02: Again, Ryan mentioned the numbers up.
5:54
SPEAKER_02: I wouldn't read anything into that.
5:56
SPEAKER_02: It's not like there's some problematic revenue thing that's being focused on, so I wouldn't worry much about that.
6:02
SPEAKER_02: Again, it just reflects a continued focus in the area.
6:05
SPEAKER_02: And then some additional uh topical themes that we see a lot are on performance obligations, variable consideration, and then revenue disaggregation disclosure.
6:17
SPEAKER_02: But again, the timing and the policy are definitely the top two.
6:20
SPEAKER_04: Yeah.
6:21
SPEAKER_04: So so let's dig a little bit deeper into some of those themes, Mike.
6:24
SPEAKER_04: And what kinds of questions are are the SEC asking on this?
6:27
SPEAKER_02: Aaron Powell Sure.
6:28
SPEAKER_02: So let's start with one of those topic areas, which is um performance obligations, right?
6:35
SPEAKER_02: And we always say you you sort of need to get that right in order to get the whole model right.
6:40
SPEAKER_02: So that's sort of the one of the bigger pieces that you want to make sure you get right.
6:45
SPEAKER_02: So what we see the staff do is as companies' business models evolve more and more, we'll see the staff ask about performance obligations in those particular cases.
7:00
SPEAKER_02: So I'll give you an example.
7:02
SPEAKER_02: So if I'm a software company that's now doing more and more cloud-based offerings and more cloud-based functions to my customers, the staff will ask questions about all right, is that a new performance obligation?
7:16
SPEAKER_02: Is it still one type of performance obligation?
7:19
SPEAKER_02: Or now that we have services delivered in different ways, are there are there two?
7:24
SPEAKER_02: Or uh the other thing that we get in addition to businesses evolving is companies talking about new offerings.
7:33
SPEAKER_02: Let's say a company is talking about their new AI-enabled software offerings.
7:37
SPEAKER_02: So that would cause a company or cause the staff to ask, okay, are these AI-enabled features and services new performance obligations or not?
7:48
SPEAKER_02: So they'll look at, again, companies, business models that are evolving, and then any new types of products that are announced out there.
7:57
SPEAKER_02: And I use AI as an example because everybody seems to be taking a lot of people.
8:01
SPEAKER_04: Well, they keep asking you about I've seen them ask you about that question quite often.
8:05
SPEAKER_02: Trevor Burrus, Jr.: Yeah.
8:05
SPEAKER_02: So that gets the staff triggering the performance obligation question.
8:09
SPEAKER_03: Aaron Powell So when we think about that though, it's like where where is the staff getting the information to kind of the source for that and where how are they forming their questions, right?
8:18
SPEAKER_03: They will look at companies' websites, they'll look at other parts of the relevant documents, whether the 10 Q or the 10K, they'll look at the mDNA.
8:28
SPEAKER_03: There may be a discussion in there about a new product offering.
8:31
SPEAKER_03: And oftentimes the discussion or the length may be disproportionate to the amount of revenue that that new product is contributing.
8:38
SPEAKER_03: So oftentimes when a company may get a comment, like Mike suggested, you would see a response sometimes to one way to address that is to say, hey, it's it's a new offering.
8:49
SPEAKER_03: It's not material yet.
8:51
SPEAKER_03: And there are ways ultimately, we see a lot of comments resolved in this manner by updating, say, the disclosures in the financial statements, in the policies, to use words like uh we we offer XYZ to a lesser extent, or are using words like that to try to try to put everything in context because you know it may be displayed.
9:12
SPEAKER_03: If it's a new offering, it's and it's a new strategic direction, it may get a little bit more airplay in the MDNA.
9:18
SPEAKER_03: You you just want to balance that a little bit in the disclosure.
9:21
SPEAKER_03: And that's what the sometimes that gets fleshed out through the through the comment process.
9:25
SPEAKER_03: But there's there's good ways to to address that upfront, also.
9:28
SPEAKER_04: Yeah, I think you're right.
9:29
SPEAKER_04: I think even if it's not in the RevRec policy, right, just putting it in the four part or or wherever you're discussing it is kind of half the battle.
9:37
SPEAKER_04: If you can do that, likely the staff is not going to issue a comment on it.
9:41
SPEAKER_02: So in addition to identifying performance obligations, this you know, the guidance requires that you disclose remaining performance obligations.
9:52
SPEAKER_02: So the staff will often give comments about that disclosure.
9:58
SPEAKER_02: The the the goal is to tell your customer or your investor, hey, I've got performance obligations, so I've been paid and I've got things I have to do, and when is that revenue going to be recognized?
10:12
SPEAKER_02: So the staff will ask about the bans that you uh disclose of when they're going to be recognized, how are those determined?
10:19
SPEAKER_02: And the other thing that they um ask comments on is they'll look to see if your contracts are cancelable or you offer refunds.
10:28
SPEAKER_02: Because if you have a cancelable contract or offer refunds, then you might not actually have a contract yet.
10:34
SPEAKER_02: And if you put those items in your remaining performance obligations, they actually might not be remaining performance obligations.
10:41
SPEAKER_02: So they focus on that disclosure when you have cancelability and refunds.
10:45
SPEAKER_04: Right.
10:46
SPEAKER_04: That's another great point.
10:47
SPEAKER_04: So so very, very helpful.
10:49
SPEAKER_04: Um beyond just the identifying performance obligations, what other areas are we seeing, Mike?
10:55
SPEAKER_02: Sure.
10:56
SPEAKER_02: So the the next area I would talk about relates to the transaction price.
10:59
SPEAKER_02: And then here there are two overall themes: one determining the actual transaction price, and then the use of standalone selling price, SSP, for allocation.
11:11
SPEAKER_02: Um, so let's start with determining the transaction price.
11:14
SPEAKER_02: The big focus here is variable consideration.
11:17
SPEAKER_02: And you know, it sort of makes sense that you would get comments on that.
11:21
SPEAKER_02: The staff likes in areas of judgment to ask how are those judgments being made?
11:27
SPEAKER_02: And so the comments about variable consideration are about what are the estimation techniques, what are you looking at, especially when refunds and other consideration that's payable to a customer is involved, because there's a lot of estimates that would be made to them.
11:42
SPEAKER_02: So they're looking for how the company makes those estimates and are they disclosing them properly.
11:48
SPEAKER_02: The next one is determining the standalone selling price.
11:52
SPEAKER_02: So SSP, as we say.
11:54
SPEAKER_02: And SSP is what's used to allocate the consideration between multiple performance obligations.
12:01
SPEAKER_02: So here again, the focus is on what are the methods and inputs in determining what SSP is.
12:08
SPEAKER_02: Now, it's an easier exercise if you sell everything together.
12:14
SPEAKER_02: Um, and then that's a typical easy comment.
12:16
SPEAKER_02: Yeah, we sell things together and we look at that information, and that's what we disclose and tell the staff, and that's normally an easy process with the staff.
12:25
SPEAKER_02: The staff has a much keener focus when a company doesn't sell the pieces separately.
12:32
SPEAKER_02: So let me sort of give you an example.
12:34
SPEAKER_02: I'm a game company, and I'm gonna sell a game that's meant to be played online.
12:40
SPEAKER_02: And so for the price of$60, you get the game, you can play it by yourself in your basement, and then or you can connect with a whole bunch of other folks online and play.
12:49
SPEAKER_02: Um, company sells that right for$60.
12:53
SPEAKER_02: And so the question is they determine I've got the game that's sold is one performance obligation, and then the online gaming experience, connectivity, and all that is another.
13:05
SPEAKER_02: How do we split the$60?
13:07
SPEAKER_02: And so the staff will ask the question okay, what are the inputs?
13:11
SPEAKER_02: What did you look to to determine what you might sell it for separately if you sold it for?
13:18
SPEAKER_02: So now we're talking the land of, well, most c some companies are never going to do that.
13:23
SPEAKER_02: So it's an exercise in well, what information did you use to determine what the value split would be if you were selling it separately?
13:33
SPEAKER_02: And so the staff wants to know whether a company's gone through that thoughtful process.
13:38
SPEAKER_04: That's a very good example there.
13:40
SPEAKER_04: Any anything that you wanted to add there?
13:42
SPEAKER_03: Yeah, and they don't they don't sometimes just want to know that.
13:45
SPEAKER_03: They also will look to see whether that's disclosed appropriately.
13:49
SPEAKER_03: So under ASC 606, there's a requirement to disclose some of the significant judgments and estimates that go into revenue recognition.
13:57
SPEAKER_03: We do see that a fair amount in variable, uh, in variable consideration, and certainly in SSP, where is especially in situations where the disclosure might say uh we allocate revenue to the performance obligations based on upon the standalone selling price.
14:11
SPEAKER_03: Well, yeah, that that's actually what Gap requires.
14:15
SPEAKER_03: How do you go about doing doing that?
14:17
SPEAKER_03: What are the significant judgments involved?
14:19
SPEAKER_03: That's where that they they will ask to understand it, probably in those situations because you haven't told them yet.
14:26
SPEAKER_03: And after going through that process, trying to kind of flesh that out in the disclosure through the comment process.
14:31
SPEAKER_03: Right, right.
14:32
SPEAKER_02: Yeah.
14:33
SPEAKER_02: And what what we also see, which is interesting, is the staff will give those comments and give similar comments to companies in the same industry because the determination of SSP is very entity-specific, how they would go to market.
14:51
SPEAKER_02: So it's not a one-size-fits-all, but the staff does like to compare and contrast the ways companies do it, um, just to make sure that at least following the spirit of what the guidance is.
15:03
SPEAKER_02: So that's that's a phenomenon that we see, sort of the group comment letter um issuance, as it were.
15:10
SPEAKER_03: The other thing that's helpful, I think, too, is especially when you're talking about, oh, I uh say in variable consideration, there's two generally accepted methods.
15:18
SPEAKER_03: One's called the expected value method, one's called the most likely outcome method.
15:23
SPEAKER_03: A company may disclose that they generally use the expected value method.
15:28
SPEAKER_03: And I think it's those words sometimes that the staff does not like qualifiers.
15:32
SPEAKER_03: Yeah, qualify qualifiers.
15:34
SPEAKER_03: So often when I'm reviewing filings, I will I will ask and just say, hey, what's the purpose of this qualifying word?
15:40
SPEAKER_03: And sometimes uh sometimes it was just there by accident, it gets removed.
15:46
SPEAKER_03: Right.
15:46
SPEAKER_03: Or it can be enhanced with disclosure like substantial majority or in almost all cases or something like that to give the reader a sense that that's the majority of the situations.
15:56
SPEAKER_03: And we may have others, but they're small or immaterial.
15:59
SPEAKER_03: Those again, sometimes that gets fleshed out through the the comment process as well.
16:04
SPEAKER_04: Yeah, it it's you know, just listening to the the con this conversation, uh your back and forth, it it really does highlight, Mike, and kind of you were uh alluding to this, the the importance of benchmarking, right?
16:15
SPEAKER_04: Looking at, you know, comments that are being issued, listening to these types of podcasts, where you can look and say, okay, here are the comments being issued in my industry, in my sector, you know, what should I expect to see?
16:26
SPEAKER_04: And then carefully crafting your disclosures to make sure that you, you know, you don't have to get the the thing that I always say is look, it's it's not a big deal to get comments, right?
16:34
SPEAKER_04: You're going to get comments from the SEC, but it's it's always nice to have be in a position to wrap them up quickly, um, right?
16:42
SPEAKER_04: And and be thoughtful about your responses.
16:44
SPEAKER_04: And I always will say too that, hey, the last thing you want is the SEC to probe, probe, probe, probe, probe.
16:50
SPEAKER_04: And then they get stumble onto something else, right?
16:52
SPEAKER_04: And so if you have clear disclosures, concise disclosures, and you're addressing all these points you guys are making, um, I think it's it's obviously hugely important.
16:59
SPEAKER_04: So I think benchmarking to other disclosures, looking at other companies, looking at the SEC commenters is is is critical.
17:07
SPEAKER_04: Um, so we have performance obligations, transaction price.
17:10
SPEAKER_04: I know the next topic, which I'm always excited to hear about, is gross versus net.
17:14
SPEAKER_04: Mike, you know, take take that on for me.
17:16
SPEAKER_02: Yeah, sure.
17:17
SPEAKER_02: Um, gross versus net, principal versus agent, you know, the they're synonymous.
17:23
SPEAKER_02: Um and always an area of high comments.
17:28
SPEAKER_02: Um, and and they tend to be high comments because it's very judgmental.
17:34
SPEAKER_02: Like that's a theme that we'll see in revenue.
17:37
SPEAKER_02: Where there's more judgment that you apply, the staff's gonna ask for more comments.
17:41
SPEAKER_02: So in this scenario, we know gross versus net when there's three parties delivering a good or service.
17:49
SPEAKER_02: Judgment involves which party controls that good or service right before it goes to the end customer.
17:57
SPEAKER_02: And oftentimes one of the key comments that we see is very similar to the revenue recognition timing policy note comment.
18:09
SPEAKER_02: Companies will often disclose we record revenue gross because we're acting as the principal.
18:16
SPEAKER_02: That's all they'll say.
18:18
SPEAKER_02: And typically in those scenarios, the staff is going to ask, why are you acting as the principal?
18:26
SPEAKER_02: What why do you control the product before?
18:30
SPEAKER_02: And it's really looking for a company to articulate, there's lots of indicators of how you might control the good or service before it gets to the customer.
18:41
SPEAKER_02: So it's really the which factors are you relying on to get to that judgment?
18:48
SPEAKER_02: Now, oftentimes companies, you know, have this zeal to try to articulate every indicator lines to being the principal.
18:58
SPEAKER_02: Most of the time it's not every indicator.
19:01
SPEAKER_02: So and it doesn't have to be.
19:03
SPEAKER_02: But what you really want to do is you want to say, you know, the the comment will be focused on what are you really relying on?
19:13
SPEAKER_02: And then the disclosure in your comment should be we are the principal, we're acting as the principal because we control for these reasons.
19:23
SPEAKER_02: And these are the heavy reasons that we rely on as to why we're the we're the principal.
19:28
SPEAKER_02: So that's probably the biggest comment that they get in the area.
19:33
SPEAKER_02: The the other thing to note, um, and I think companies sometimes forget this, and it happens more in a good seller than a service, is the answer may drive what presentation in your income statement is.
19:52
SPEAKER_02: So let me just explain that.
19:53
SPEAKER_02: So if I'm selling a good a tangible good, so a vendor makes it, I buy it.
20:00
SPEAKER_02: You know, I always do this on a podcast.
20:02
SPEAKER_02: I use air quotes, and I don't know why I use air quotes, but I'm using airport.
20:06
SPEAKER_02: It gives me context.
20:08
SPEAKER_02: I'm putting air quotes around buy and and the reseller will buy the good and then resell it.
20:14
SPEAKER_02: So if they actually do control it before it goes to the end customer and they are the principal, they've sold the product.
20:21
SPEAKER_02: Okay.
20:22
SPEAKER_02: And that would go into their product sell line.
20:24
SPEAKER_02: If they didn't buy it, and it was really they were acting as the agent in getting the good from the vendor to the seller, they're no longer selling a product.
20:35
SPEAKER_02: They are now doing a selling service commissioned likely for the vendor.
20:41
SPEAKER_02: And that probably goes in a different line on your ecosystem than saying it's all in product.
20:48
SPEAKER_02: So that's like the second thing that you tend to get if you if you're an agent, but you're an agent in product, it's uh how much products like are there services in that product disclosure?
20:59
SPEAKER_02: So we'll get that and in that sort of uh gross versus net adjacent.
21:03
SPEAKER_04: Yep.
21:04
SPEAKER_04: Anything that you wanted to add there, Ryan, before we we jump to kind of getting into maybe other topics.
21:11
SPEAKER_04: Um but I guess the the one thing that for for me that that that really stands out thinking about kind of the the gross versus net, to your point, it it really is taking a step back as you're preparing your disclosures, taking a step back if you do have new service offerings, you're you are taking a critical look at what is, what are you actually doing?
21:31
SPEAKER_04: What are you selling?
21:32
SPEAKER_04: What is the service you are providing?
21:34
SPEAKER_04: Because I think as the staff is keen on, like especially in this case, the income statement, right?
21:41
SPEAKER_04: That presentation.
21:42
SPEAKER_04: So um I think it's it's important to be mindful of all the impacts kind of throughout the filing, throughout the document, because certainly that's what the staff will focus on.
21:50
SPEAKER_03: Yeah, there are there are a large number of companies out there that do have revenue streams that are recognized as the principal gross and also will have revenue streams that are.
22:00
SPEAKER_03: net like you know so-called platform marketplace companies will be one example of that depending on the depending on the the circumstances and what they they offer.
22:09
SPEAKER_03: I that's why I I think similar to what I said before uh we will see comments in this area where this where the disclosure might say if these facts exist we're uh gross as the principal if these facts exist we're net as the agent without really giving any sense of the magnitude of that and how it impacts the financial statements.
22:30
SPEAKER_03: For example, you may only in terms of your throughput or your volume, maybe only 5% of it is is as an agent and the rest of it is is as a principal.
22:40
SPEAKER_03: So trying to give some and again it gets fleshed out through the process, but giving some indication of the relative magnitude and what streams and maybe even considering that from a as Mike said the disaggregated revenue perspective or how do you present that that that's that's important to think about.
22:57
SPEAKER_03: The other thing that's important to mention here too is even though there I I would say generally there's an a view that that principal because it's higher amount of revenue that there's a bias when you're saying that you're you're a you're a principal for you to get questions in that area about why you're you're not an agent I I will say there are comments out there from time to time where a company may be disclosing for certain streams that they are an agent and therefore net and the staff will ask just the other way why tell me why you're net and not gross.
23:32
SPEAKER_03: So I think it goes it goes both ways and so it's important to be mindful of that.
23:36
SPEAKER_03: It's not like you just sort of get a pass on your disclosure say or your policy because you're you're net.
23:41
SPEAKER_03: Right.
23:41
SPEAKER_04: You know that I think that that's another great point.
23:43
SPEAKER_02: And and while we don't tend to like to forecast too much, I will tell you um there's a lot more questions these days about companies that are reselling services.
23:55
SPEAKER_02: Right?
23:56
SPEAKER_02: That has been a trend as far as industry goes um and businesses evolving to a lot more services that they're selling and oftentimes companies will say I'm reselling a service.
24:09
SPEAKER_02: It's an interesting it's it's much easier to conceptualize when you resell a product how you control it.
24:15
SPEAKER_02: When you resell a service it's a little bit more difficult because oftentimes that service may still reside at the vendor.
24:24
SPEAKER_02: And they're involved in the delivery somehow on an ongoing basis.
24:29
SPEAKER_02: So it's a little trickier so the expectation is the staff will ask a lot more questions about again what are you relying on when you sell a service to say that you control the service that may be delivered by somebody else to that to that person.
24:46
SPEAKER_04: Yeah so so we've already kind of gotten to to some of the presentation and disclosure um but Ryan any anything else that you wanted to add on the comments that we're seeing in that space?
24:57
SPEAKER_03: Aaron Ross Powell Yeah if I put presentation and disclosure together I'll I'll cover some of the some of the bigger areas.
25:02
SPEAKER_03: One one is uh remaining performance obligations Mike talked about that earlier we do see comments in that area especially he you mentioned the time bands are you we'll see we'll see comments that say hey we note that you disclose that 25% of your remaining performance obligations will be recognized within the next year and the remainder thereafter.
25:23
SPEAKER_03: Well the staff in those cases may look to the standard and ask companies hey should should there be more specificity or why is there not more specificity in a time ban.
25:33
SPEAKER_03: Maybe you could tell me about years one, two or three, right?
25:35
SPEAKER_03: So it depending on the situation there may be a little bit of a uh negotiation or judgment involved in terms of what's the right uh bands there but but that's a common common one we will we will see in that area.
25:48
SPEAKER_03: I mentioned earlier just the overall general principle based disclosure requirement for judgments and estimates in revenue.
25:56
SPEAKER_03: So um we'll we'll see that come up from time to time.
25:59
SPEAKER_03: I I did want to highlight the disaggregated revenue disclosures as uh as well though.
26:05
SPEAKER_03: So uh ASC 606 the RevRec standard requires companies to disaggregate revenue by revenue streams based on if they have different factors around like nature, timing and uncertainty of of the the cash flows related to that revenue stream.
26:21
SPEAKER_03: And I I will say what I often see or when a company may get the comment about hey why aren't you disaggregating revenue I often see say the first response back will say well this is how the this is these are how my executives look at the revenue streamed or this is how uh the chief operating decision maker that this the of the company which is uh borrowed from the segment segment yeah yeah yeah this is how they look at it and as a result this is how we've chosen to disaggregate it.
26:47
SPEAKER_03: Well the that's only one factor under the under the under the standard there's a number of other factors um that that go into play there in terms of how you've communicated it externally are there differences in terms of the timing of the of the the rev recognition how how does it deal with different economic cycles perhaps so when going through that it's always important um ultimately and and in order to get through that process successfully um it's it's usually important to go through all of those factors with a good analysis as to how you did how you determined the those uh the different categories to break to break it down it's a it's a highly judgmental area Mike I mean maybe you can comment on it but it's highly judgmental and which is which is why it's kind of ripe for for asking because they're really looking for the how how the company went through the thought process.
27:37
SPEAKER_02: Yeah one of the things I'll highlight and and Ryan mentioned there's a bunch of clarifications that the standards are trying to get at and it's like uncertainty and changes in timing, risk and cash flow.
27:50
SPEAKER_02: Right.
27:50
SPEAKER_02: And I I I point on the cash flow ones because sometimes we'll have companies go, oh yeah, here's my changes in cash flow and they'll show between the customer the gross cash flow changes as their disaggregation.
28:05
SPEAKER_02: So I paid this incentive and then I got this fee and then and the staff very quick to say yeah cash flow net cash flow exactly because you can't explode out the back and forth payments with much as you want to as much as you want to show that.
28:19
SPEAKER_02: Yeah.
28:20
SPEAKER_02: The staff is very quick to say if you can't present that as its own revenue gross on the income statement, you can't do it in the footnotes.
28:29
SPEAKER_02: In the footnotes and companies will point to yes but that's a change in cash flow.
28:32
SPEAKER_02: That's what the 606 is talking about we remind them net cash flow like so with your customer.
28:38
SPEAKER_03: That's a great point.
28:39
SPEAKER_03: Yeah the other thing I wanted to mention here is is there's a requirement in Article 5 of Regulation SX to the extent it's applicable to to uh a company and and a large percentage of companies Article 5 is going to be applicable to um it it requires the breakdown of revenue between products and services.
28:58
SPEAKER_03: And in certain industries we've seen where that can be sometimes um ch challenging or you get comments in that area.
29:05
SPEAKER_03: So for example take a software company that maybe um delivers its offerings in two ways it it does it provides licenses and delivers licenses and code to companies to um run on their own infrastructure and then they may also provide that that software through a software as a service or a SaaS based offering completely hosted.
29:30
SPEAKER_03: Well generally generally speaking the staff through the comment letter process would say that those what we you know those those licenses that are going to be delivered on pre on the customer's premises usually they're usually their point in time recognition and they'll say well that's that the the staff will say that's akin to a product revenue and they will say while your software as a service revenue is more aligned with the service and therefore you shouldn't combine them on the same line.
29:58
SPEAKER_03: You should break them out.
29:59
SPEAKER_03: We do see and I've seen an uptick over the course of the last year we do see comments in that area where the staff is clearly articulating that view through the comment process and asking companies how they considered it because they'll see them lump it all say in a line audien called subscription or something like that and they they're and and they'll they'll they'll ask about how how 503 was considered sometimes it's sometimes it's maybe not material.
30:24
SPEAKER_04: It's not greater than 10%, which is the the threshold in in the in the rule, but that comes up yeah I think it what in and what that highlights right is is that you know you have you know 503 of SX, an SEC rule that is has was written well prior to you know the the standard, right?
30:42
SPEAKER_04: And so when when you're looking at how you're applying it or whatever, the staff certainly is going to take the view of, hey look, we're gonna interpret how we think you know 503 of SX should look versus okay here's what GAP requires what ASC 606 requires.
30:58
SPEAKER_04: But Mike you were as as as Ryan was kind of expl providing that explanation you're kind of like I'm not really a big fan.
31:03
SPEAKER_04: I I wanted to kind of get your I didn't say I was a fan I didn't say I was a fan of it.
31:07
SPEAKER_02: I didn't say that I didn't say you were but I you both kind of had looks on your faces of like well yeah is it fit for purpose is yeah right because it's product service and I think you know oftentimes you get the feel that the staff use it as a proxy for point in time overtime.
31:24
SPEAKER_03: Yeah.
31:25
SPEAKER_03: Right.
31:25
SPEAKER_02: And it's like well actually take licenses aside there are services that are point in time and there are products that are overtime.
31:31
SPEAKER_02: So it's not as easy as that.
31:34
SPEAKER_02: So you know if you have those scenarios then the question always gets to is there some disclosure about the point in time overtime maybe that should be a revenue disaggregation disclosure or something to that effect.
31:48
SPEAKER_02: But you know there's always been a struggle about what do you do with licenses.
31:53
SPEAKER_02: Yeah.
31:53
SPEAKER_02: And even when you have in the software world, you know, post-customer contract support, if it's largely upgrades, well aren't upgrades another form of license and product?
32:05
SPEAKER_02: And so shouldn't that be in the same line?
32:08
SPEAKER_02: So it's very squishy.
32:12
SPEAKER_02: Well it says products and services and there's always this question well what about licenses?
32:17
SPEAKER_02: What do you do with them?
32:19
SPEAKER_02: So um we've seen a lot of different things and it's just a matter of when you get the comment just articulating why you group them together and be as transparent as you can can be that I think that's great advice you know with the transparency is key.
32:34
SPEAKER_03: I think companies will talk about how they go to market and why they look at is it similar to that that may not always carry the day, but it does help to basis in these there's a basis in terms of how they how they it's funny you you you picked up on my face as we were going through the discussion.
32:51
SPEAKER_02: Yeah because there are times when you'll have companies that are frustrated because you know I wish I would just fix that and add licenses in there.
32:57
SPEAKER_02: I'm like well be careful what you wish for in that one because I don't know if that's a good thing or a bad thing.
33:02
SPEAKER_02: Exactly right exactly that that's right.
33:05
SPEAKER_03: I don't know if you necessarily want licenses in there because the some of the comments I have seen it says well we notice you have licenses you should have a separate line called licenses thanks love it.
33:15
SPEAKER_03: Right right but I I I just wanted to highlight it because it is yes it's a dated role but it comes it just it comes up a lot.
33:22
SPEAKER_04: Yeah no it does it does so so I want to kind of get to to to the next part of this here and it really is that we've talked a lot about process.
33:31
SPEAKER_04: We've talked a lot about kind of providing advice about you know how to engage with the staff but um Ryan can you talk a little bit about just kind of what what we're seeing?
33:40
SPEAKER_04: I mean are are we seeing amendments to filings?
33:43
SPEAKER_04: Are we see seeing things wrapped up quickly like generally broadly what are what are we seeing in that kind of engagement with the staff?
33:50
SPEAKER_03: Yeah so the the vast majority of comments are usually resolved through a little bit of clarification, uh a commitment to update or revise the disclosure going forward.
34:06
SPEAKER_03: We don't it it it's uh I'd say it's pretty rare where after going through that process you're actually identifying that there's misstatements that need to need to be addressed, right?
34:18
SPEAKER_03: Most of the time it's um oftentimes the staff might be asking as we've talked about an immaterial revenue stream.
34:25
SPEAKER_03: So sometimes it's just educating the staff through the process that hey good question, but this is immaterial for us and and it's it's really not gonna really not gonna matter at this point in time either way and we'll continue to monitor it.
34:38
SPEAKER_03: So we we do mostly see I I would say most of them get resolved through clear through a clarification process.
34:46
SPEAKER_02: Yeah I I think in a lot of cases again where you have business models that evolve and new products there's that newness where the staff is trying to understand okay how's the industry dealing with this evolve business or this new product?
35:01
SPEAKER_02: Well they ask comments not to say they're wrong just to understand the lay of the land and so that they know what models are out there and and how they should be looking at this com focus.
35:12
SPEAKER_04: All right so guys really do appreciate you you taking the time I I did want to close though with a question for each of you um and and I know um you'll you'll you'll both be able to come up with with a response pretty quickly I'm I imagine um as you as you think about you know companies that are you know getting close to to year end you know any takeaways any any suggestions recommendations that you have for preparers to the listeners on on what they should be thinking about in this space uh for this topic um and when they're preparing their their their year end 10K filings yeah sure uh we we talked about a little bit during this this podcast but I would say make sure as you're thinking about your revenue disclosures and trying to address potential comments that could could come being very mindful of what you are disclosing in other uh parts of your document or externally on your website, press releases, et cetera because I think that that's the source for a lot of the comments.
36:16
SPEAKER_03: And so anyone who's I think it's important for those who are uh responsible for updating and refreshing the revenue disclosures to make sure that they're doing that in the context of the bigger posture of the company and what they have disclosed publicly because um oftentimes that's where the staff's gonna they'll they'll go through the front of the document the the mDna the business section and and I'm I'm certain they'll just circle parts of this and say I didn't see this that's discussed.
36:47
SPEAKER_03: I mean I saw I saw one recently where they were talking about a customer reward program in the front but you go to the you go to the policy note and there's no discussion of variable consideration.
36:56
SPEAKER_03: Now maybe there's a valid reason for that but those are the types of things that I think are important for those those who are responsible for the for the policy drafting to make sure that they've they've thought through that.
37:07
SPEAKER_03: So as you approach your end I think it's it's important to to consider that.
37:11
SPEAKER_02: Yeah and then the internal alignment like so when you're looking at your revenue disclosures, well what's your segment disclosures and are those disclosing different things.
37:23
SPEAKER_02: So not just elsewhere where they're speaking externally about what they do, the staff continually wants that consistency and alignment.
37:31
SPEAKER_02: So just making sure you understand whether you're contradicting you have contradicting disclosures between revenue policy segments etc.
37:41
SPEAKER_04: Great advice appreciate the both of you joining me today.
37:45
SPEAKER_04: Thank you.
37:45
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38:00
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