Now a few years active and more than half a decade since its announcement, ASC 606 remains a key focus. Implementation issues remain a concern and many still have questions. In discussions at the conference, highlights from the Office of the Chief Accountant (OCA) included the following:
Though the past year left one thing at the top of mind for standards makers and business leaders, the 2020 AICPA Conference on Current SEC and PCAOB Developments discussed a wide range of topics that went far beyond the pandemic. From current accounting and financial reporting standards to SEC reporting, future standards, and more, the conference remained focused on the bigger picture.
Over the coming days, we will be breaking down the topics discussed, but today, we will look at the key focuses of accounting and financial reporting.
Revenue Recognition Questions Discussed at SEC and PCAOB Developments Conference
Discussed in much more detail by Deloitte, attendees and SEC respondents looked at the following three considerations on how the revenue recognition standard affected them.
Identification of Performance Obligations
Discussing the complexities of software in ASC 606, the consultation looked at a business intelligence platform to determine whether a software license and related updates could be combined into a single performance obligation.
In the example, the software’s core functionality is to enable real-time analysis of data aggregated from multiple sources, including third-party systems. To maintain functionality, software must receive updates, hardware changes, and more.
The SEC staff did not object to the registrant’s conclusion that the software license and related updates should be combined into a single performance obligation because the software license and updates are highly interdependent or interrelated given that they significantly affect one another and there is considerable two-way dependency between them.
Principal-versus-Agent Guidance: Facilitating an Advertiser’s Purchase of Advertising Space from A Publisher
The next topic discussed involved a registrant that operates a platform facilitating an advertiser’s purchase of advertising space from a publisher. The question was whether this registrant was a principal or agent.
The registrant identifies a specific advertiser’s digital advertisement and then bids on potential advertising space through an auction process. Upon winning an auction, the registrant obtains an exclusive right to the potential advertising space and immediately preloads the identified advertiser’s ad to the publisher’s site. If a valid user reaches the stage in the publisher’s app at which the potential ad would be displayed, the preloaded ad is displayed in the advertising space and a revenue transaction occurs.
As part of its assessment, the registrant also considered the indicators of control and determined that it was not primarily responsible for fulfillment and did not have inventory risk, but did have discretion over pricing since the publisher could not set or influence the price charged to advertisers.
The SEC staff did not object to the registrant’s conclusion that it was an agent in the transaction and should recognize revenue on a net basis.
Principal-versus-Agent Guidance: Sale of a Commodity Produced by a Related Party
In another example, this question involved a registrant that sells a commodity produced by a related party, asking whether or not they had the right to direct the use of and obtain substantially all of the remaining benefits of the product from the producer. In this, the registrant needed to know whether they were an agent or principal in the transaction.
The registrant can determine how to source the commodity to fulfill its contracts with customers. When the registrant sources the commodity from the related-party facility, the registrant takes possession and legal title of the product and, subject to certain geographic restrictions, has the right to redirect the product to different customers during transportation.
The registrant proposed to account for its commodity sales sourced from the related-party producer on a net basis in accordance with its view that it did not control the product and was acting as an agent in the transaction.
Although the registrant did not believe that any of the indicators of control were determinative, it argued that inventory risk was mitigated by an insurance policy covering the risk of damage or loss and ultimately concluded that because of the fixed-percentage commission, it did not receive substantially all of the benefits from the sale of the commodity.
However, the SEC staff objected to the registrant’s conclusion that it did not have the right to direct the use of and obtain substantially all of the remaining benefits of the product from the producer and therefore concluded that the registrant was the principal in the transaction.
Stay Ahead of the Changes: Attend 2020 Year End Technical Review for CPE Credits
Each year accountants and auditors must adjust to and implement numerous updates to accounting standards and requirements that are outlined by various bodies including the AICPA, FASB, COSO, PCAOB, SEC and others.
Join us on January 28 for our monthly free CPE webinar on the year-end technical accounting changes, presented by CPE Partner Illumeo. This update will provide an overview of the most significant pronouncements, standards and advisories that have resulted from actions of these bodies. We will take a look at the most significant issues that may impact the auditing profession in Q1 of 2021 as well as trending areas important to the accounting profession.