The Securities and Exchange Commission (SEC) recently released Staff Accounting Bulletin (SAB) 116, which became effective last week. The primary purpose of this release is to modify existing interpretive guidance to bring it into conformity with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. Here’s what you need to know.
SAB Topic 8: Retail Companies
Topic 8 will no longer be applicable when your company adopts ASC 606. Under ASC 605, this SAB (1) prohibited presentation of leased/licensed departments within the statement of comprehensive income and (2) presented SEC staff’s views on the disclosure of finance charges on credit sales. Step 2 of the new five-step revenue recognition process requires companies to identify the separate performance obligations within a contract, which includes those potentially subject to lease/licensing agreements. The Principal versus Agent Considerations section (ASC 606-10-55-36 through 55-40) provides guidance on when a company should (gross recognition) and should not (net recognition) recognize revenue related to a performance obligation. Furthermore, ASC 606 specifically requires disclosure of, among other things, significant payment terms, including significant financing components.
SAB Topic 11: Miscellaneous Disclosure
If your company earns revenue from operating-differential subsidies, this one’s for you. Under ASC 605, SEC staff’s view was that such revenue should be separately presented on the income statement as either (1) a revenue caption or (2) a credit in the costs and expenses section. Under ASC 606, there will no longer be an option 2, as all revenues from operating-differential subsidiaries should be presented as separate captions within revenue.
SAB Topic 13: Revenue Recognition
Topic 13 was the SEC staff’s take on ASC 605. When your company adopts ASC 606, this guidance will become completely irrelevant. On a side note, should your company participate in any bill-and-hold arrangements, it will no longer behoove you to follow the guidance in Securities Exchange Act Release No. 23507 and Accounting and Auditing Enforcement Release No. 108, In the Matter of Stewart Parness (“AAER 108”). ASC 606-10-55-81 through 55-84 provides implementation guidance specific to bill-and-hold transactions, making the former SEC release unnecessary.
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