Alternatively, many companies who were questioned about marketing promises were able to respond that the provisions in question were merely marketing incentives, not material rights, and were accounted for as such (see Delta below). The Company determined that it is the principal because it is primarily responsible for satisfying the performance obligation, it has general inventory risk upon product returns, it has physical loss inventory risk while inventory is in-transit, and it establishes pricing. … We do not provide a significant service in integrating the outdoor features and the delivered home. First, I create a training sample of comment letters. A comment letter, which is a letter sent by the Division of Corporation Finance staff containing comments on disclosures a company has made in an SEC filing, can come out of the blue, require a significant amount of work that includes executive and board involvement and result in changes to disclosures and internal processes. 0000000736 00000 n First, Varonis determined that it could not use the adjusted market assessment approach because its software licenses are “highly differentiated” from and do not have direct correlations with competitors’ products. v Executive Summary. In addition, the Company considered that another entity would not need to substantially re-perform the work that the Company has completed to date if the other entity were to fulfill the remaining performance obligation to our customer, as described in ASC 606-10-55-6. As we wind down 2018 and turn our attention toward year-end disclosures, it is helpful to review U.S Securities and Exchange Commission (SEC) comment letter trends to improve financial statement disclosures and identify potential deficiencies. 0000030976 00000 n The issuance of a sample comment letter signals that the SEC may begin to issue direct warnings to companies that are not in compliance with SEC rules regarding the filing of XBRL exhibits. Please tell us how you evaluated other methods to estimate standalone selling price of your software licenses. 0000001573 00000 n The sample letter (available here) identifies a number of sample comments that the SEC may provide to issuers conducting securities offerings amid market and price volatility. JetBlue first explained that the revenue from these arrangements was not material but proceeded to explain its thought process anyway: The operating carrier for each flight segment is the principal as the operating carrier controls the services before being transferred to the customer. the customer would not be compelled to exercise the termination option because the penalties and/or required payments are significant in the context of the contract). Preface. Be sure to read the comment letter carefully to understand exactly what the SEC is asking, paying particular attention to whether the comment is requesting updates in future disclosure, supplemental information, or revision to a current filing. Third, Varonis determined that the residual approach could be used because the other two performance obligations in the contract are sold on a standalone basis. ii. upon completion of delivery to the receiver’s location) rather than over time is appropriate. These areas of ASC 606 require significant judgment on the part of the companies who are interpreting the standard, so the many questions from the SEC are not surprising. Consequently, we do not have directly observable standalone selling prices for the vast majority of our software license offerings. Groupon stated that “products are shipped in Groupon-branded packaging, the customer has no knowledge of the vendor from which the Company acquired the merchandise inventory, and the Company has back-end inventory risk for any product returns.” For pre-purchased inventory, the company has front-end inventory risk as well. Our analysis of SEC comment letters issued in relation to Form 10-K and Form 10-Q filings identifies the frequency of topical areas addressed by the SEC staff and how their focus areas changed over time. For additional guidance on the appropriate accounting for any of these topics, consider referencing the related articles linked throughout this article. The Company then agrees to attend a scheduled surgery (via a sales representative) with its products as requested by the hospital or surgeon. The number of comments in the SEC staff’s initial comment letter can range from just a few to 70 or more. This edition of SEC Comment Letter Examples — Income Taxes contains extracts of SEC staff comments on topics including a registrant’s assessment of the realizability of deferred tax assets (DTAs), undistributed earnings of foreign subsidiaries, foreign tax rate, uncertain tax positions, and disclosures. Unlike Varonis, Inc. (the previous example), National Instruments does not use the residual method, likely because its sales are not characterized by the same volatility that Varonis described. Product revenue is reported gross and service revenue is reported net. Identifying which goods or services are distinct allows a company to correctly identify each performance obligation. Groupon explained that its product revenue transactions are distinctly separate from its service revenue transactions where third-party sellers use its site to sell products. Second, I classify comment letters in the training sample as important if the firms’ abnormal returns are significantly negative following comment letter disclosure. Minimum guaranteed royalties are unlikely to be paid if Hunan is unable to obtain approval to sell products in China. 192 22 If the customer is required to pay penalties or pay the remainder of the contract value, an assessment is made to determine if the termination option is substantive (i.e. Appendix B discusses best practices for managing unresolved SEC comments, and Appendix C provides helpful tips on searching the SEC’s EDGAR database for comment letters. Following the best practices in Appendix B often leads to a • SEC Comment Letter Examples — Income Taxes (August 2011). 2 SEC Comment Letters — Including Industry Insights Business Combinations Purchase Price Allocation Example of an SEC Comment [P]lease provide for us the total purchase price of the 2012 acquisitions, details of the purchase price allocation including the fair … If you receive an SEC comment letter, handle your response in the same way you’d handle a major internal project. In best-case scenarios, a comment letter only requires a response. Comments are based primarily on a company’s disclosure and other public information, such as information on the company’s website, in press releases, or discussed on analyst calls. Companies care about these letters because the letters provide insight into how the SEC interprets the standard. Further, the License is predominantly for the commercialization of an FDA-approved product and, therefore, similar to the license of a brand. �w4��6�D�: -�J`KT�r]�~��LJ��|�1�2�cc1�&S)S�H4�-�e����В� C+,��c�}� H��=��� �0@ځ�v5�C�9��f.�t����v�hʁ$%���|�q�z@z�r�f� ���g��gt 0 J 0000004670 00000 n Yesterday, Corp Fin posted a sample comment letter containing the types of comments that Corp Fin staff might, depending on the particular facts and circumstances, issue to companies seeking to raise capital in securities offerings amid the current market and price volatility. A good example is a comment about your segment disclosure. Take, for example… As part of your response, please tell us your consideration of the guidance outlined in ASC 606-10-25-27 and ASC 606-10-55-5 and 6 in determining your accounting treatment. Recent SEC Comment Letter on KPIs. Receiving a comment letter from the Securities and Exchange Commission (SEC) can be a daunting experience. SEC staff comment letters regarding non-GAAP financial measures You might recall that, in 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures … In a June 2019 thread with Trip.com Group Ltd., the SEC suggested that commission revenue should really be accounted for as variable consideration and questioned why Trip.com is not accounting for it that way: We note that you recognize commission revenue from hotel reservations when the reservation becomes non-cancellable. On the other hand, the promise to transfer the clinical data to Kaken is a material promise because “it was a bargained for element of the arrangement that is an obligation for the Company and transfers a ‘good’ in the form of clinical data for the benefit of the customer.”. To determine this amount, it considered its three-year agreement to sell the product to Hunan until Hunan can build its own factory and get approval: Misonix will recognize gross profit on the anticipated needs for generators and disposables as the sole source of product for Hunan and acknowledges this as an implicit price concession (in accordance with ASC 606-10-55-99 to 101) during the duration of the time period until Hunan is able to manufacture and sell its products in the territory. We apply the value relationship, expressed as a percentage, to the observable selling price of the license bundle to determine the SSP [standalone selling price] for the underlying software license and software maintenance. However, if you look at the three-year trend, the number of letters remained consistent. NextGen Healthcare realized that the disclosure made it sound like the company occasionally failed to estimate sales returns, which would be in violation of the standard. This is a matter of significant judgment and is evaluated both quantitatively and qualitatively. We provide examples of the process for two proposed actions and responses. … Although status is also achieved by travel with us, the business practices and uses of the program are evidence that we provide status as a marketing incentive to attract customers and incent future travel. We provide five examples of comment letters relating to a filer's 10K, and one each for a 10Q and Proxy Statement. … 0000006091 00000 n Scoping Letter to SHPO. Companies are asked to submit a letter in response to comments or an amendment to the filing under review, or with a phone call to tell the SEC when it can expect either, noted Nester, who added: “We use 10 days to ‘start’ the process.” In a June 2019 thread, the SEC asked Misonix Inc. to justify exempting a guaranteed minimum royalty payment from the sales-based and usage-based royalty exception. In some cases, Nuvasive will have written contracts with pricing and terms prior to the surgery, but other times it will not: In cases where a written agreement has not been previously executed between the Company and the hospital, the scheduling of the surgery coupled with the actual consumption of the Company’s products in a surgery is determined to be an implied contract based on customary business practices. Please tell us how you determined whether your development obligations represent a material promise under the agreement. trailer For segments operated by other airline partners on tickets sold by JetBlue, the Company has determined that it is acting as an agent on behalf of the other airlines as they are responsible for their portion of the contract. The first step in revenue recognition is determining if the arrangement in question represents a valid contract with a customer. Like sales- and usage-based royalties and principal vs. agent considerations, licensing is another topic that is only discussed in the implementation guidance subtopic yet received a lot of comments. The issue was complicated because the guaranteed minimum royalty payment wasn’t actually guaranteed—Misonix was treating it as variable consideration and only recorded a portion of the payment as revenue at the time of license transfer (additional information about this issue is under “Variable Consideration at Misonix Inc.” in number four above). Please tell us how you determined that a current report on Form 8-K is not considered necessary in this situation. As is customary when new guidance like this is issued, the Staff of the Division of Corporation Finance is incorporating such guidance into its disclosure review program, as revealed by this recent SEC Staff comment letter exchange with News Corporation made public last week. KB Home’s response is a good example of the thought process behind when to recognize revenue. Corp Fin posts sample comment letter for offerings in context of extreme volatility. Please tell us how this policy complies with ASC 606-10-32-5 through 606-10- 32-7. Another frequently mentioned topic in comment letters was identifying distinct goods or services in a contract. It also asked why the most likely or expected value method was appropriate for the situation and how the decision to constrain or not constrain revenue was appropriate. 192 0 obj <> endobj After excluding sales transactions that consist of multiple performance obligations, we analyze the distribution of these standalone transactions. 0000002089 00000 n The comment letters also show the topics that the SEC is currently most concerned about, and the trends can be very informative. 0000000016 00000 n Confidential Treatment While confidential treatment for SEC comment letters will be unavailable, the SEC … In an October 2019 response to the SEC’s request, Axon Enterprise, Inc. explained the methods it used to determine standalone selling prices: On at least an annual basis, we analyze standalone sales of our products and services by reviewing the sales activity of those products and services during the year that has just been completed. However, P.A.M.’s response still provides a good explanation for its decision: Since the benefit from the freight transportation service performed by the Company on behalf of its customers is simultaneously received and consumed by customers as the service is performed, the Company determined that the conditions described in ASC 606-10-25-27(a) and 606-10-55-5 are true. In this regard, you disclose here that you have established pricing practices for software licenses bundled with maintenance, which are separately observable in renewal transactions. In monitoring SEC comment letters, we came across this SEC comment letter made public last week. For the delivery of the land parcels, KB Home explained: The determination of when a land buyer accepts delivery of and takes control of the applicable land parcel(s) is objectively determinable at a point in time. The Company establishes the selling price of merchandise inventory in product revenue transactions. P.A.M. does recognize revenue over time as the SEC suspected it should. The sales-based or usage-based royalties exception is discussed only in three short paragraphs in the implementation section of ASC 606. %PDF-1.4 %���� Without the license, Mylan cannot sell the product post FDA approval, and therefore would not be able to derive economic value in the future. Initiating Consultation with SHPO and THPO. The graph below shows the comment letter topics related to Accounting Standards Codification (ASC) 606 through December 2019. It serves a reminder to registrants about their loss contingency disclosures, particularly those involving a “reasonably possible” loss per ASC 450. For example, Corp Fin Deputy Director Shelly Parratt notes that “…it seems that many [firms] are reluctant to address these comment themes until we provide specific comments requesting enhanced disclosure…” 11 Although Parratt’s comments … Misonix first summarized guidance from Financial Accounting Standards Board (FASB) Transition Resource Group (TRG) Memo 58 to justify not using the sales-based and usage-based royalty exception: FASB TRG members generally agreed that a minimum guaranteed amount of sales- or usage-based royalties in a license of functional IP should be recognized as revenue at the point in time that the entity transfers control of the license to the customer, like other revenue for this type of IP license. However, software maintenance renewals are sold on a standalone basis to perpetual license customers. Comments addressing this issue are similar to the example below. SEC comment letters often contain multiple comments each with several sub-questions. The SEC asked how Adobe determined that its services should be considered one performance obligation: Please provide us with a comprehensive analysis of how you determined that the Creative Cloud and Document Cloud on-premise software and the related cloud functionality are highly integrated and interrelated and are therefore accounted for as a single performance obligation. Specifically, the SEC asked companies how certain items (such as advertising or commission revenue, outcome-based pay, contract guarantees, fuel surcharges, or volume discounts) were treated with respect to the variable consideration guidance. Please describe your cancellation provisions and explain why they impact the timing of revenue recognition. The outcome of our analysis determines the standalone selling prices we establish for the subsequent calendar year, which generally equates to the list prices of our goods and services from the calendar year that has just been completed. 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