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Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments

Kevin Cherrstrom
Professional Accounting Fellow, Office of the Chief Accountant

Washington D.C.

Dec. 7, 2020

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.


Good afternoon, and thank you for having me. I plan to share some observations with you regarding consultations the OCA staff has received relating to the identification of performance obligations under Topic 606[1] and presentation of certain payments in the statement of cash flows.

Identification of Performance Obligations

First, I would like to discuss a fact pattern whereby a registrant concluded that its software license, along with updates to the software license, represent a single performance obligation. The assessment of whether a software license is distinct from related services can have a significant effect on the financial statements. Revenue from software and services that are one combined performance obligation would be recognized over time, while revenue from a software license that is distinct would be recognized when control of the software license transfers to the customer.

The registrant developed a new data analytics software platform that it provides to its customers under a one-year license. The software’s core functionality allows its customers to aggregate data from multiple sources and analyze that data on a real-time basis. To achieve that result, the software must be updated periodically in response to both a customer’s internal changes, such as new data sources or hardware added to the customer’s IT environment, and to external changes, such as updates to third-party software that impact the ability of the registrant’s software to obtain real-time data from those third-party systems. As part of the registrant’s promises to its customer, it monitors the software for required updates and provides updates to the licensed software as needed, on an on-going basis, throughout the contract term.

The registrant performed a detailed assessment to determine the nature of each of its updates in order to identify those specific updates that are critical to maintaining the utility of the software. The frequency of the critical software updates varies depending on each customer’s unique IT environment, ranging from critical updates provided on a daily basis for customers with more dynamic IT systems, to critical updates every few months for customers with static IT environments. Regardless of the frequency of each customer’s critical updates, if they were not provided to the customer, the software would not be able to access and analyze the customer’s data. The registrant concluded that the software license and updates are highly interdependent or interrelated, such that they significantly affect one another, and there is a significant two-way dependency between the software and the related updates.

In this fact pattern, the staff did not object to the registrant’s conclusion that the software license and related updates should be combined into a single performance obligation.

Cash Flows Presentation - Consideration Received From a Vendor

Next, I would like to discuss another area where we have received consultations: presentation of certain payments in the statement of cash flows.

Consider a fact pattern presented to OCA staff where a registrant evaluated whether it would be acceptable to report cash outflows to a vendor net of cash inflows arising from payments from the vendor. The registrant’s relationship with the vendor arises from the purchase of fixed assets, and thus the entity classifies the cash outflows paid to the vendor within Investing Activities in the statement of cash flows. The registrant concluded that the cash received should be presented on a net basis, offsetting the cash outflows, within Investing Activities.

The registrant noted that although GAAP states that generally information about the gross amounts of cash receipts and cash payments is more relevant than information about the net amounts of cash receipts and payments,[2] certain aspects of the cash inflows and outflows were similar to the scenarios in the authoritative guidance where net reporting is acceptable.[3] Specifically, the registrant asserted that the amounts are large and the turnover is quick because the entity had contracts to purchase additional goods from the vendor in the near future for amounts in excess of the cash inflows. The registrant further asserted that the criteria stipulating that maturities be short was not relevant to the evaluation as the contractual cash outflows and inflows did not have stated maturities.

The staff objected to the registrant’s conclusion to present the cash receipts from the vendor net of the cash payments made to the vendor.

Thank you.

[1] Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

[2] See FASB ASC 230-10-45-7.

[3] See FASB ASC 230-10-45-26 and 230-10-45-8 through 230-10-45-9.

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