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SEC Comments Begin for Early Adopters of Revenue Recognition

by   |   September 24, 2017

Some people don’t believe in blazing trails and adopting public reporting standards before you have to. They think you’re sticking your neck out, and will become a guinea pig for SEC comments or fodder for plaintiff’s lawyers or whatever.

A case in point might be First Solar, Inc. First Solar adopted FASB’s new revenue recognition standard early when it filed its first quarter 10-Q on May 5, 2017.  On August 3, 2017, it received a comment letter from the SEC, which included comments on its Form 10-Q and its transition to the new revenue recognition standard.

I’m happy to say First Solar appears to have easily passed the SEC comment process (No, I do not know them or represent them). First Solar responded on August 17, 2017, and on August 24, 2017, the SEC indicated its review was complete.

For those issuers who plan to adopt the new revenue recognition standard in the first quarter of 2018, and who are hoping for an SEC pass because they were recently reviewed, the First Solar fact pattern suggests otherwise. First Solar responded in 2016 to SEC comments on its 2015 Form 10-K, yet they were reviewed again in 2017.  This demonstrates the SEC may not put issuers into a pass category because they were reviewed within the last three years as required by Sarbanes-Oxley.

The SEC comments on the First Solar 10-Q were anything but superficial. The comments requested:

  • We note your disclosure that your solar power system sales include performance guarantees that represent a form of variable consideration and are recognized as adjustments to revenue. Please help us better understand your accounting for these potential bonus payments and/or liquidated damages. In this regard, based on your disclosure, it is unclear to us whether these amounts are included as part of your estimate of your transaction price at the outset of the arrangement and then reassessed at the end of each reporting period. Refer to ASC 606-10-32-5 through 32-10 and ASC 606-10-32-14.
  • Please help us better understand how you reflect consideration in the form of a non-controlling interest as part of your transaction price. In this regard, clarify for us which amounts are included in your estimate of fair value at contract inception and why any profit associated with the non-controlling interest is deferred. Refer to ASC 606-10-32-21 through 32-24.
  • Revise future filings to disclose why for performance obligations that you satisfy over time the method used provides a faithful depiction of the transfer of goods or services. Refer to ASC 606-10-50-18.

For the vast majority of issuers that have not yet transitioned to the new revenue recognition standard, you may wish to consider the following SEC comments when preparing your third quarter Form 10-Q:

  • You state that you are continuing to assess the effect the adoption of ASC 606 will have on your results of operations, financial position and related disclosures. Please revise future filings to provide qualitative financial statement disclosures of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the accounting policies that you expect to apply, if determined, and a comparison to your current revenue recognition policies. Describe further the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of ASC 606 is expected to have on your financial statements, please also disclose such amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.
  • You disclose that the new revenue standard could change the amount and timing of revenue and costs under certain arrangement types, but you have not completely determined what effect, if any, the new guidance will have on the financial statements and related disclosures. Please revise to provide qualitative financial statement disclosures of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the accounting policies that you expect to apply, if determined, and a comparison to your current revenue recognition policies. Also, further describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 is expected to have on your financial statements, please also disclose such amounts. Please refer to ASC 250-10-S99-6 and SAB Topic 11.M.