SEC Commentary to Early Adopters

This article explains what types of behavior with regards to implementing the new revenue recognition standard are receiving comments from the SEC.

Mar 12, 2019

Accounting Standards Codification (ASC) Topic 606 is now effective for public companies, but are you applying it correctly?

That’s a question that many accounting leaders across the country have asked (or are currently asking) as they attempt to implement the new revenue recognition standard. If you’re feeling some uncertainty, you’re not alone.

As your accounting team works to establish changes, it is important to remember that the Securities and Exchange Commission (SEC) has the final say on how the new standard should be applied. As of March 31, 2018, 38 companies had received comment letters1 regarding ASC 6062 (containing an overall total of 64 comments on the topic). Eight of these companies were early adopters of the new standard. Looking at these comments can help you determine if your company is correctly complying with the ASC 606 implementation and disclosure requirements.

This article will describe the main themes of the SEC’s commentary to give you a better idea of what to expect as you implement ASC 606. All the information referenced in this article comes from a study of SEC comments on ASC Topic 606 disclosures conducted by Connor Group. You can find the original study at the following link: ASC 606 Adoption Trends.

SEC Comments by Type

The SEC’s 64 comments about companies’ disclosures under ASC 606 can be classified into three main types: (1) requests for pre-adoption companies to expand on their evaluation and implementation status, (2) technical comments for early adopters, and (3) requests for clarifications and minor corrections. The chart below illustrates the percent distribution of each comment type:

23 of the 64 comments (36%) were of Type 1; 34 of the 64 comments (53%) were of Type 2; 7 of the 64 comments (11%) were of Type 3.

The remainder of this article will discuss these three main types of comments and provide examples of specific letters that discuss ASC 606 implementation issues.

Type 1: Requests for pre-adoption companies to expand evaluation and implementation status

The SEC’s most common comments were requests for filers to expand their evaluations of the impact of ASC 606 and their current implementation status. These were given in response to SAB 74 disclosures by companies that had not yet adopted ASC 606. (See our RevenueHub article on SAB 74 disclosures for more information on this disclosure requirement.) Although there were 23 different SEC type 1 comments issued, the substance of these comments was generally similar. A typical comment was as follows:

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. 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.

Many companies responded to the SEC by providing an update on their progress toward implementation and a detailed description of what would be disclosed in the subsequent financial reports. Some companies, like FirstData Corp. and NASDAQ, Inc., gave very detailed responses and full explanations to the SEC, but other responses were more brief and general.

For example, FirstData’s response to the SEC included a detailed explanation of its three-phase approach to adopt and implement the new revenue standard. Within the correspondence, the company explained the activities within each phase, described its progress in completing the activities, and then expressed that more information would be provided in subsequent disclosures closer to adoption. FirstData then provided the text of its planned disclosure for the next quarterly report. (The full text of FirstData’s correspondence regarding ASC 606 can be found by looking at Question 5 in its comment letter.)

Comparatively, NASDAQ’s correspondence included a detailed response to the SEC explaining how the company interpreted ASC 606 with respect to its operations, but did not walk through multiple phases of implementation like FirstData. Rather, NASDAQ only provided its planned disclosure for the next financial release. NASDAQ intended its next release to include information on whether the adoption of ASC 606 would materially impact its different lines of business or not. (The full text of NASDAQ, Inc.’s correspondence can be found here.)

There are many other examples of similar correspondences between the SEC and filing companies:

Type 2: Technical comments for early adopters

The SEC issued 34 comments to early adopters of the new revenue standard, including General Dynamics (GD), First Solar (FSLR), Workday (WDAY), CBOE Global Markets (CBOE), Ford Motor Company (F), Commvault Systems (CVLT), Radius Health (RDUS), and Alphabet (GOOGL). The SEC’s inquiries regarding ASC 606 varied by company. The Connor Group study cited at the beginning of this article suggests the following areas of concern addressed by the SEC:

  • How the companies have considered the disaggregated revenue disclosure requirements in selecting the appropriate categories to use (e.g. Ford Motor, Alphabet)”
  • Rationale of why the residual method is appropriate in establishing standalone selling prices of software (e.g. Commvault Systems)”
  • Basis of concluding certain commission costs are capitalizable, the benefit period of capitalized commission, and the amortization pattern of capitalized commission (e.g. Commvault Systems, Workday)”
  • Disclose why the selected measure of progress is a faithful depiction of transfer of control (e.g. General Dynamics, First Solar)”
  • Disclose significant payment terms and how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contract asset and liability balances (e.g. Ford Motor, Radius Health, First Solar, General Dynamics)”
  • Rationale for concluding point-in-time recognition for customized construction contracts (e.g. General Dynamics) (page 3)

The original text of the SEC’s correspondence with early adopters can be accessed by clicking on the links in the table below. Note that none of the comments were groundless as ASC 606 requires a few additional items not previously disclosed under ASC 605. Many companies tried to minimize some of the requirements because this new standard requires specific information companies have never disclosed before. However, the SEC pushed back on the attempted bypass, requesting that the disclosures fully adhere to the level of detail required under ASC 606.

Company Name Response Date Link to Response Letter and Question #(s)
1. General Dynamics Corp Sept 7, 2017 Question 1 – 6
Oct 19, 2017 Question 1
2. First Solar, Inc. Aug 17, 2017 Question 7 – 10
3. Workday, Inc. Aug 8, 2017 Question 1 – 2
4. CBOE Global Markets, Inc. Sept 1, 2017 Question 1 – 2
5. Ford Motor Company Sept 29, 2017 Question 1-5
Dec 1, 2017 Question 1
6. Commvault Systems, Inc. Oct 27, 2017 Question 1-4 Attachment
Dec 4, 2017 Question 1
7. Radius Health, Inc. Jan 23, 2018 Question 3
8. Alphabet, Inc. Aug 15, 2017 Question 1-5
Oct 16, 2017 Question 1-2

Type 3: Minor corrections requested

The SEC issued 7 comments requesting minor corrections to disclosures concerning ASC Topic 606. These were mainly typographical errors. The following table contains a list of the companies with which the SEC corresponded as well as links to the response letters:

Copmany Name Response Date Link to Response Letter and Question #
1. BioLargo, Inc. Mar 30, 2017 Question 17
2. Veritone, Inc. Mar 15, 2017 Question 3
3. BeautyKind Holdings, Inc. Apr 1, 2016 Question 12
4. QMC Systems, Inc. Mar 7, 2016 Question 4
5. Sanchez Energy Corporation Dec 22, 2017 Question 3
6. Dogness (International) Corporation Oct 10, 2017 Question 2
7. Huami Corporation Dec 8, 2017 Question 24

BioLargo, Inc., Veritone, Inc. and Dogness Corporation recorded incorrect effective dates for Accounting Standards Update (ASU) 2014-09. Filers should verify that they are using the correct dates for optional (early) and mandatory adoption. (See our article on Transition Dates and Methods for more information.) BeautyKind and QMC both made incorrect references to sections within the Accounting Standards Codification (ASC) (referencing ASC 606 when they should have referenced ASC 605).

Sanchez corporation was asked to clarify a conclusion regarding deferred gains from the sale of equity method investments. The SEC requested additional explanation regarding how Sanchez reached this conclusion. Companies should be prepared to support any and all conclusions reached under ASC 606. The SEC requested that Huami Corporation clearly state its intent to early adopt ASU 2014-09, as its disclosures were signaling early adoption but Huami never explicitly stated this intention.


As more companies implement the new revenue standard and disclose its impact in their filings, we can expect to see additional commentary from the SEC regarding proper ASC 606 practices. Many companies are still trying to determine if they’re applying ASC 606 correctly, and questions will continue to arise. The SEC comments discussed in this article, especially the type 2 comments to early adopters, are just the beginning of a long implementation process. As you compose your disclosures, it may be helpful to refer to the SEC’s past comments to avoid problems that other companies have already experienced.

  1. The SEC only publishes comment letters that have been fully addressed and closed.
  2. The number of relevant SEC comment letters was determined via searches within MYLOGICID CompanyIQ, looking specifically for SEC comments that were issued and closed as of March 31, 2018 and included the language “Topic 606,” “ASC 606,” or “ASU 2014-09.”