ASC Topic 606 Presentation and

Disclosures

Scott A. Taub

June 26, 2017

Scott A. Taub joined Financial Reporting Advisors, LLC (FRA) as a Managing Director in 2007. Based in Chicago,

Illinois, FRA provides consulting services related to accounting and SEC reporting and litigation support services. Mr.

Taub is a member of FASB/IASB Joint Transition Resource Group for Revenue Recognition and is a former member

of the IFRS Interpretations Committee and the FASB’s Valuation Resource Group.

From September 2002 through January 2007, Mr. Taub was a senior official at the Securities and Exchange

Commission (SEC). As a Deputy Chief Accountant and Acting Chief Accountant, he played a key role in the SEC’s

implementation of the accounting reforms under the landmark Sarbanes-Oxley Act, and was responsible for the day-

to-day operations of the Office of the Chief Accountant, including resolution of accounting and auditing practice

issues, rulemaking, oversight of private sector standard-setting efforts, and regulation of auditors. He also served as

Chair of the Accounting and Disclosure committee of the International Organization of Securities Commissions

(IOSCO). Mr. Taub was a Professional Accounting Fellow in the Office of the Chief Accountant between 1999 and

2001.

Before joining the SEC staff, Mr. Taub was a partner in Arthur Andersen's Professional Standards Group (PSG). In

that role, he consulted on complex financial reporting matters; helped establish and disseminate Andersen’s policies

on financial reporting matters; and represented the firm before the FASB, SEC, AICPA, and IASB. Mr. Taub consulted

and authored interpretive guidance on a wide variety of reporting issues, including revenue recognition, business

combinations, compensation, intangible assets, and investment accounting. Prior to joining the PSG, he was an

auditor in the firm’s Detroit office serving publicly held and privately owned companies in a variety of industries.

Mr. Taub is a frequent speaker, having addressed numerous audiences sponsored by a variety of organizations such

as the Financial Executives International, the AICPA, the Institute of Management Accountants, the Securities

Regulation Institute, and the Practising Law Institute. He was the primary author of several SEC reports and

publications, including reports on off-balance activities and principles-based accoi\unting standards. He is the author

of the Revenue Recognition Guide, a comprehensive guide to accounting for revenue recognition published by CH,

and a co-author of CCH’s Financial Instruments guide.

Mr. Taub attended the University of Michigan in Ann Arbor, where he received an degree in economics in 1990, and

won the William A. Paton Award for his performance on the CPA exam. In 2005 Mr. Taub won the SEC’s award for

Supervisory Excellence. He is a licensed CPA in Illinois and is a member of the American Institute of Certified Public

Accountants.

Slide # 3

Pre-Adoption Disclosures

Several big standards in process of adoption

Revenue, leases, financial instruments

Public cos. required to disclose SAB (74) Topic 11M

A brief description of the new standard

Date and method of adoption, including alternatives

A discussion of the impact that adoption of the standard is

expected to have on the financial statements of the

registrant, unless not known or reasonably estimable.

Most do a great job with the first two bullets, and a

poor job on the third, and it’s only the third we really

need

Slide # 4

Pre-Adoption Disclosures

SAB 74 (Topic 11M) disclosures: Brief description of standard, date adoption is planned

Permitted methods of adoption and method registrant expects to follow, if known

Effect standard is expected to have on financial statements

Other significant matters that might result from adopting the new standard (e.g. changes in business practices)

Each period, disclose what you’ve done, what you haven’t, and your best idea of how it’ll play out

Slide # 5

Pre-Adoption Disclosures

Status of implementation

No need to work faster than you otherwise would, but be

substantive in disclosures

Don’t just say “we’re working on it”

Many companies disclose nothing until they are done

Instead, tell where you are in the process, what you think

you’ve figured out, and what’s left to do

Don’t look for excuses not to disclose anything; instead

disclose as much as you can, and explain uncertainties

SEC Staff announcement at EITF Meeting Sept 2016

Slide # 6

Transition Disclosures

If adopt retrospectively Disclose changes in balance sheets and income statements

for all prior periods

Make disclosures normally required in back periods, except for disclosures about remaining performance obligations

No disclosure in current period of revenue under old GAAP

If adopt via cumulative effect (modified retrospective) No need to change prior period disclosures

Include ASC 606 disclosures in year of adoption

Disclosure revenue under old GAAP in first year of new GAAP

If adopt in interim period 10-Q (under either method) Include annual disclosures until first 10-K is filed

Slide # 7

Presentation (ASC 606-10-45)

If vendor performs (i.e., recognizes revenue) ahead of payment, recognize a “contract asset”

If customer pays ahead of performance “Contract liability” for amounts probable of being kept

“Refund liability” for other amounts

Does not trigger revenue (ASC 606-10-55-51)

Recognize receivable if right to payment conditional only upon passage of time If receivable is recognized without revenue, adjust contract

asset/liability

No guidance in current GAAP – practice varies

Slide # 8

Presentation (ASC 606-10-45)

Line between “contract asset” and “receivable” If payment is due in advance of performance, generally don’t

gross up until actual due date, even if due after only the passage of time

If payment is due after performance, reclass contract asset to receivable if payment is due after only passage of time

Invoice date is not the trigger

While standard says “contract asset” and “contract liability”, entities may use different terms in financials However, captions cannot confuse contract assets and

receivables, so “Unbilled receivables” for “contract asset” is probably not OK

Slide # 9

Disclosures (ASC 606-10-50)

Topic 606 has a large number disclosure requirements, compared to almost none today

Objective: Allow users to understand nature, amount, timing and uncertainty of revenues and cash flows from customer contracts

Disclosures fit into two broad categories: Qualitative

Quantitative

Specific disclosures required for interim periods Not as extensive as annual, but quantitative information still

required

Slide # 10

Disclosures: Information about

Amounts in the Financial Statements

Revenue from contracts with customers (as distinct from any other revenue)

Receivables, contract assets and contract liabilities: Opening and closing balances

Losses from impairments of receivables or contract assets

Assets from costs to obtain or fulfill contracts Closing balances

How amounts to capitalized were determined

Amortization and impairment

Slide # 11

Disclosures: Disaggregated

Information

Revenue disaggregated into categories (by segment) that reflect different responses to economic factors Customer type, contract duration, timing of transfer of

goods/services, type of fee, etc.

Multiple breakdowns may be necessary

Private companies may just use over time vs. point in time

Slide # 12

Disclosures: Factual Information

Information about promised goods and services Nature of performance obligations, highlighting situations in

which company acts as agent

Events that satisfy performance obligations

Warranty and similar provisions

Information about payment terms Fixed or variable, and nature of variability

Timing of payment becoming due in comparison to transfer of goods and services

Rights of refund and return

Slide # 13

Disclosures: Information about the

Transaction Price

Methods, inputs and assumptions used to determine transaction price in Step 3, including: Whether there is a financing component, and how

determined

How variable consideration is estimated, and the company determined what amounts are probable of becoming due

How non-cash consideration was measured

How refund and return obligations were measured

Private companies need only discuss how probable amount of variable consideration was determined

Slide # 14

Disclosures: Information about Allocation

of the Transaction Price

How standalone selling prices were estimated

Whether allocation is based on relative standalone selling prices or adjusted in some way

How discounts and variable consideration were allocated

Slide # 15

Disclosures: Information about Satisfaction

of Performance Obligations

For performance obligations satisfied over time Methods used

Explanation of why those methods are appropriate (private companies may omit)

For performance obligations satisfied at a point in time Judgments made in determining the right point in time

(private companies may omit)

For bill-and-hold arrangements, specific discussion of when performance obligations are satisfied

Slide # 16

Disclosures: Information about Changes in

Contract Balances (Public companies only)

Revenue recognized that was included in contract liability at beginning of period (i.e., that was prepaid in prior period)

Revenue recognized related to performance obligations satisfied in prior period (e.g., due to changes in variable consideration)

Explanation of changes in contract balances due to: Adjustments in estimates of progress toward completion

Changes in estimates of variable consideration

Other events not related to performance or payment

Note: Rollforward not required, but may be most efficient

Slide # 17

Disclosures: Information about Open

Contracts (public companies only)

Amount of transaction price allocated to remaining unsatisfied performance obligations

Explanation of when these amounts are expected to be recognized May be done qualitatively or quantitatively

Discussion of any amounts not included in transaction price because they are not probable of becoming due

Slide # 18

Disclosures – Interim (ASC 270-10-50-1A)

Quantitative disclosures required on interim basis: Disaggregated revenue

Opening and closing balances of contract assets and liabilities

Amount of revenue recognized in current period that was included in the contract liability balance

Amounts related to remaining performance obligations

Adjustments to revenue in current period related to performance that was satisfied in a prior period

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Questions?

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SEC HOT TOPICS

Scott A. Taub

June 26, 2017

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Agenda

Politics and the SEC

Disclosure Framework/Effectiveness

Non-GAAP Measures

A Few Other Hot Topics

Working with the SEC

Disclosures Under Topic 606

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Politics and the SEC

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Congress

Congress created the SEC and has set out the SEC’s mission and

powers through various pieces of legislation

1933 Securities Act requires registered securities offerings

1934 Securities Exchange Act set up the SEC

1940 Investment Companies Act gave SEC regulation of funds

1940 Investment Advisers Act requires advisers to register

2002 Sarbanes-Oxley Act

2010 Dodd-Frank Act

2012 Jumpstart Our Business Startups Act

2015 Fixing America’s Surface Transportation Act

Many other pieces of legislation with smaller effects on SEC

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Congress – Recent Laws

Sarbanes-Oxley and Dodd-Frank Required Many New Rules• SOX had PCAOB, internal control reporting, rules on

independence, non-GAAP measures, etc.• Dodd-Frank had new reporting on conflict minerals and

payments to governments by extractive industry

Congress has challenged rules that it told SEC to write

SEC must justify cost-benefit of new rules even though mandated by law

More recently, the JOBS Act and FAST Act have gone the other way, reducing reporting requirements

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Commissioners

No more than 3 Commissioners from one party

Currently only 3 of 5 seats are filled

Chair Jay Clayton (nominated by President Trump) and Michael Piwowar Republican; Kara Stein Democrat

President Obama nominated people to fill the other two slots, but Trump has not done so

Previous Chair Mary Jo White resigned when Trump took office

Historically, the Chair always resigns when a President of a different party is elected

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Staff

Senior staff turn over quickly, regardless of politics Low pay compared to private sector High aggravation (dealing with politics, regulated entities,

etc.) Increased marketability after stint at SEC

Election led, as expected, to a change of many senior staff Chairman always offers resignation if President party

changes Chief Accountant Wes Bricker only of the few

Division/Office heads who was at SEC under previous Chair

Most others are very new

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Disclosure Effectiveness

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Disclosure Framework/Effectiveness

“Disclosure Overload” has long been a concern At least of preparers, and sometimes of users and

regulators

FASB Disclosure Framework Project began 2012 “…to improve the effectiveness of disclosures in

notes to financial statements by clearly communicating the information that is most important to users of each entity’s financial statements.”

Although not the primary goal, “the Board hopes that a sharper focus on important information will result in reduced volume in most cases”

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Disclosure Framework/Effectiveness

Exposure Draft on preparer’s decision process

Clarify that materiality of disclosures should be evaluated item by item

Even disclosures “required” by GAAP can be deemed immaterial

Not making such a disclosure wouldn’t be an “error”

Might well reduce disclosures, if everybody gets comfortable making judgments

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Disclosure Framework/Effectiveness

Proposed Concepts Statement on FASB’s process for deciding disclosure requirements

Proposes categories that may be appropriate for disclosure, but leaves decisions to specific projects

To test concepts, FASB has projects to consider 4 areas of disclosure

Income taxes, pensions, inventory, fair value measures

So far, appears to be heading towards more disclosure, not less, although disclosures are better focused

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Disclosure Framework/Effectiveness

SEC Disclosure Effectiveness Initiative

Started in part due to Congressional mandates

Focus is decidedly on reducing unnecessary disclosures, so that important information isn’t buried

Long proposal issued that would eliminate and streamline many disclosure requirements

Some duplicative, some unnecessary due to changes in markets, some covered by GAAP, some outdated

Stands to substantively reduce disclosure requirements, if preparers embrace changes

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Disclosure Framework/Effectiveness

SEC Staff is also considering reducing or making more flexible the requirements for financial statements

Concept release issued asking for ways change rules for non-issuer statements (acquirees, investees)

SEC staff encouraging registrants to take advantage ability to ask for waivers (Reg S-X, Rule 3-13) if there are reasons required financial statements would be too difficult

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Non-GAAP Measures

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Required Disclosures in SEC Filings

Regulation G: “A registrant…shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure … contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure… not misleading.”

An SEC filing including a non-GAAP financial measure must include:

the most directly comparable GAAP financial measure(s) set forth with equal or greater prominence

a reconciliation to the most comparable GAAP figure

the reasons why management believes the non-GAAP measure provides useful information to investors

a statement disclosing the additional purposes (if any) for which management uses the non-GAAP measure

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Prohibited Disclosures in SEC Filings

Titles or descriptions for non-GAAP financial measures that are the same as or confusingly similar to those used for GAAP measures

Non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement

• EBIT and EBITDA are expressly exempt from this prohibition

Adjustments of a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when (1) it is reasonably likely to recur within two years or (2) there was a similar charge or gain within the prior two years

• The adjustment may still be OK using a different description

• However, May 2016 updated guidance emphasizes that this may still be misleading! (Question 102.03)

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Guidance of General Applicability

“For lack of a better way to say it, we are going to crack down…The pendulum has swung.” Mark Kronforst, Chief Accountant of Division of Corporation Finance, May 2016

The May 17, 2016 C&DIs begin by reminding us that “certain adjustments, although not explicitly prohibited, [can] result in a non-GAAP measure that is misleading” and violate Rule 100(b) of Regulation G. (Question 100.01)

The C&DIs then proceed to give examples of non-GAAP measures that may be misleading

• A non-GAAP measure can be misleading if it is presented inconsistently between periods (Question 100.02)

• A non-GAAP measure can be misleading if it excludes charges, but does not exclude any gains (Question 100.03)

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Guidance of General Applicability (continued…)

New guidance prohibits presenting a performance measure that excludes normal, recurring cash operating expenses necessary to operate a registrant’s business. (Question 100.01)

SEC Comment Examples

it is unclear why you would adjust a performance measure for the cash payments for interest, income taxes and capital expenditures… Similar concerns apply to your earnings release furnished on Form 8-K.

your non-GAAP measures appear to exclude certain normal, recurring, cash operating expenses which is inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016

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Guidance of General Applicability (continued…)

Non-GAAP measures that substitute individually tailored accounting methods for those of GAAP could be misleading (Question 100.04)

E.g., GAAP requires revenue over time despite up front payment –cannot provide “non-GAAP revenue” with it recognized up-front

• OK to present “billing” or “bookings” but can’t call it revenue or take it down to margin, op. income

In an acquisition, company records acquired deferred revenue at a discount – cannot adjust to include full price as revenue

Change in business plan speeds up depreciation – No adjustment to show depreciation based on original schedule

You present AFFO available to common shareholders, that includes adjustments for straight line accrued rent, net capital lease rent adjustment and below market rent amortization, which is inconsistent with the updated Compliance and Disclosure Interpretations…

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Guidance on Per Share Measures

“[N]on-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission” (Question 102.05)

“Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure. …staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure”

Comment Letter Example

Your disclosures indicate that the non-GAAP measure is a performance metric; however, considering the nature of the adjustments the measure appears to represent a liquidity measure. In this regard, it is unclear why you would adjust a performance measure for the cash payments for interest, income taxes and capital expenditures. Please explain to us in detail why you believe that “Adjusted Free Cash Flow” is useful as a performance measure. Also, explain why the measure is titled “Adjusted Free Cash Flow” if it is not intended to be a cash flow measure. Similar concerns apply to your earnings release furnished on Form 8-K.

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Guidance on Per Share Measures (continued…)

The C&DIs caution against presenting specific non-GAAP measures on a per share basis:

Free cash flow “is a liquidity measure that must not be presented on a per share basis” (Question 102.07)

EBIT and EBITDA, even when discussed in the context of a performance measure, “must not be presented on a per share basis.” (Question 103.02)

Others not mentioned should be evaluated based on substance:

Adjusted EBITDA may also be a liquidity measure, depending upon the nature of the adjustments

Any measure that adds back stock compensation could be a liquidity measure, if the reason it is added back is “non-cash”

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What If I Still Want to Present My Measure

Leaving it out of your 10-Q and 10-K doesn’t help

Regulations on whether a measure is permissible are essentially the same

Also, if the measure is material to investors, it belong in 10-Q and 10-K; if it isn’t, you shouldn’t be reporting it at all

However, if your reason for presenting the measure is strong enough, the SEC staff will allow, even if it appears to violate the staff guidance

Staff guidance says these things “may be misleading”

Concentrate on disclosure of “Why is this measure useful?”

Not just “analysts use it”, but why they use it

E.g., if your CEO’s compensation is based on the measure

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Guidance on Equal or Greater Prominence

GAAP measure must be disclosed with equal or greater prominence. Examples of prohibited presentations (Question 102.10):

Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures

Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure

A non-GAAP measure that precedes the most directly comparable GAAP measure (including in a headline or caption)

We note that Core (Non-GAAP) Diluted Earnings per Share precedes the most directly comparable GAAP measure in the headlines to the earnings release filed as Exhibit 99.1.

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Guidance on Equal or Greater Prominence (continued…)

Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure

Providing tabular disclosure of non-GAAP financial measures without preceding tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table

Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence

Comment Letter Example

We have read your response to comment 1 in our letter dated May 19, 2016. It is unclear from your response whether the comparable GAAP measures will be disclosed before the non-GAAP measures, which is inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016.

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Guidance on Equal or Greater Prominence (continued…)

Also Prohibited:

Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures

We note that you present here and within the appendix (on pages A-2 and A-3) full non-GAAP (“Adjusted Pro Forma”) income statements for the three months ended March 31, 2016 and 2015. This disclosure is inconsistent with the updated non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016 (refer to 102.10).

Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence

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Key Takeaways

Do not assume that what was OK before is OK now

Eliminate non-GAAP income statements

Any non-GAAP EBITDA-related EPS is suspect

Any adjustment of an accounting principle is risky

• However, you may be able to support if the reason for presenting the measure is strong enough

Pay attention to the equal or greater prominence examples

• Don’t report or discuss the non-GAAP measure first, even if you consider the non-GAAP measure to be the “key” measure

• Discussion can’t focus primarily on non-GAAP measures

• Applies in earnings releases as well, not just filings

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A Few Specific Hot Topics

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Segment Reporting

Entity-wide Disclosures Revenues by product line and geography Long-lived assets by geography Exception for impracticability, but must be disclosed

•Hard to imagine why this would be impracticable

Who is CODM -- Consider whether it is COO Who makes resource allocation decisions? If CEO rarely looks at disaggregated reporting, maybe

he/she isn’t CODM If CEO has only one operational direct report (COO),

maybe he/she isn’t CODM

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Segment Reporting

What Information is Regularly Reviewed?

Frequency: 4 times a year is regular, less may be

Review may not be in form of “reporting package”

Staff thinks CODM’s direct reports provide numbers for their part of business

If a portion of business is highlighted in press release or earnings call, staff will think CODM reviews

Aggregation

Must be consistent with principles of ASC 280

All criteria must be met, including similar economics

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Income Statement Presentation

Disaggregation of revenue and cost of sales

Products v. services, for example

Required by Regulation S-X, yet many don’t do it

Explain expense line items

What is in cost of sales, selling, G&A?

•SEC staff believe there is much diversity and little disclosure, so investors are in the dark

If an expense (e.g., legal, amortization, impairment) gets its own line item, explain and do it consistently

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Loss Contingencies

Loss Estimates Estimates don't require "precision" or "confidence“Don’t look for excuses not to disclose, but seek to

disclose as much as you can, while explaining uncertainties

Disclosures can be in aggregate If you say “not material”, SEC will ask how you figured

that out

Disclosure of AccrualsDisclosure that an accrual was made is required Amount may be necessary if large so as to make sure

readers understand what is driving results Be ready to explain why it isn’t if you don’t disclose

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Loss Contingencies

No exception in GAAP for “Prejudicial Information” If that’s your argument for not disclosing, you’ll lose

the argument

Lots of details; little informationWe don’t need a list of when every motion was filed.

We just need a true assessment of case. 75% of what’s there doesn’t need to be, but the

important information isn’t

My Suggestion Accounting personnel should write first draft of

disclosure, not lawyers

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Discuss Key Judgments in MD&A

If it worried you, investors should know about it

Shows you aren’t hiding anything

Opportunity to explain your actions and your good faith attempts to apply standards

“No such thing as a fully-disclosed fraud”

Disclosure is an opportunity, not a riskNumbers only tell part of the storyHard to change numbers; easy to change words “Disclosure is too important to be left to lawyers”

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They’re From the Government – They’re Here to Help

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The SEC Comment Letter Process

Division of Corp. Finance Reviews Each Company at least Every 3 Years Not always a comment letter

Comment letters generally seek information Respond fully and completely, not lazily or vaguely Work with the staff to understand concerns and explain your

position Ask for the issue to move up the ladder if need be

Comment letters and responses become public approx. 20 days after comment process ends Doesn’t mean you can shortchange your response Request confidentiality of specific information You can review other comment letters

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Consultations with OCA

Take advantage of opportunity Just like you, SEC wants accounting to be right the first time

and avoid restatements Easier to address issues in pre-filing situation

Guidance for submissions on SEC web site

What to expect Initial contact from OCA within 4 days of submission

2-4 weeks to work through the issue Opportunity for conference call and/or meeting to further

explore issue if desired

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Working with the SEC on Accounting Matters -- Tips

Get auditors, lawyers, advisors involved early

Take your time drafting the submission The SEC staff knows nothing about your issue

Explain why your proposed accounting is best, not just why it is acceptable

Don’t forget disclosures The SEC will want to see them Transparent disclosures make any accounting treatment

easier to understand and accept

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Questions?