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Remarks before the 2018 AICPA Conference on Current SEC and PCAOB Developments

Sarah N. Esquivel
Associate Chief Accountant, Office of the Chief Accountant

Washington D.C.

Dec. 10, 2018

The Securities and Exchange Commission (“SEC” or “Commission”) disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.


Good morning.  I would like to share some observations related to consultations OCA has received on the new revenue standard (Topic 606),[1] including observations on the identification of performance obligations and evaluating the existence of a significant financing component.

Identification of Performance Obligations

I’d like to begin by sharing a few observations regarding identification of performance obligations, and like my good friend and colleague, Sheri York[2], will focus on the determination of whether the promises to transfer goods or services are separately identifiable (that is, distinct within the context of the contract).[3]

I would like to express my appreciation to all of the preparers, industry groups, auditors, and others that have consulted with OCA regarding implementation of the new revenue standard.  One such consultation from a large international conglomerate included a variety of questions, with one issue focused on a new business line that sells off-the-shelf software and related services where the first service was included with the purchase of the software.  Consider, as an example, the sale of software that allows the customer to prepare patent applications, and includes a free, one-time service of electronically submitting an application with the appropriate government agency, but the software also allows the customer to print out patent applications to submit by mail.

The registrant concluded that the software and the service were capable of being distinct but were not distinct in the context of the contract[4] since the registrant believed the promises were highly interdependent or highly interrelated[5] based on the combined utility of the promises in the contract.  The registrant believed that its customers were seeking a combined solution—in my example, to submit completed patent applications—and therefore believed the nature of its promise was a single solution that could not be satisfied without delivery of the service to the customer.  Last year at this conference, my colleague made remarks that “in evaluating whether two or more promised goods or services each significantly affect the other (and, therefore, are highly interdependent or highly interrelated), registrants should not merely evaluate whether one item, by its nature, depends on the other.  Rather, those goods or services should significantly affect each other.”[6]  I believe that those points are relevant to this consultation.

In this fact pattern, the service was a convenience to the customer, but it was not required, similar to my example where the customer could choose to submit patent applications by mail or use the included electronic submission service, as a convenience.  In addition, the choice of whether or not to use the service did not significantly impact the utility of the software, and thus the identified promises did not significantly affect each other, and therefore were not highly interdependent or highly interrelated.[7]  As a result, OCA objected to the registrant’s conclusion that the promises in the contract comprised a single performance obligation. 

Existence of a Significant Financing Component

Next, I would like to discuss a consultation we received on evaluating the existence of a significant financing component.  In this consultation, the registrant was a retailer looking to expand a non-core existing line of business.  To achieve this, the registrant entered into an arrangement with a third party to operate the non-core existing line of business, so that the registrant could maintain focus on its core operations.  The registrant determined that the arrangement contained a symbolic license of intellectual property (IP), requiring revenue to be recognized over time,[8] as the arrangement provided the third party with the right to access the registrant’s trademarks and brand.  As part of the consideration exchanged in the transaction, the registrant received a large up-front payment.  As a result of the timing difference between the up-front payment and the transfer of the symbolic IP license over time, the registrant considered whether there was a significant financing component in the contract.[9]

The registrant’s analysis focused on consideration of the guidance in Topic 606 that indicates a contract would not have a significant financing component if the difference between the promised consideration and the cash selling price[10] arises for reasons other than the provision of finance, and the difference between those amounts is proportional to the reason for the difference.[11]  In this consultation, the registrant asserted that it did not contemplate a financing arrangement with the third party when including a large up-front payment in the contract.[12]  Instead, the large up-front payment was to provide the registrant protection from the possibility that the third party could fail to adequately complete some or all of its obligations under the contract.[13]  The registrant concluded that the difference between the promised consideration and the cash selling price arose for reasons other than financing and that the difference between the up-front payment and what the customer would have paid, had the payments been made over the term of the arrangement, was proportional to the reason identified for the difference. In reaching this conclusion, the registrant considered the following:

  • A large up-front payment was critical in this arrangement to incentivize the third party to maximize value, and therefore profits to both parties, due in part to the registrant’s negative experience with other third parties where there was no up-front payment;
  • By the third party having sufficient “skin in the game” through the large up-front payment, it would mitigate some of the risk associated with third-party use of the registrant’s brand;
  • As evidenced by its strong operating results, the registrant believed that it would be able to obtain financing at favorable rates in the market place, if needed, and thus did not need the cash from the large up-front payment to finance its operations; and
  • Consideration was not given to structuring the transaction without a large up-front payment.

For these reasons, the registrant concluded that the contract did not have a significant financing component as the up-front payment was for reasons other than to provide a significant financing benefit.[14] Like other Topic 606 revenue consultations that OCA has evaluated, this was a facts and circumstances evaluation, and in this fact pattern, the staff did not object to the registrant’s conclusion that the contract did not have a significant financing component based on the nature of the transaction and purpose of the up-front payment.  


Thank you. That concludes my remarks.


[1] FASB Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (May 2014) , as amended, which is codified in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

[2] Sheri York, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments (December 10, 2018), available at

[3] ASC 606-10-25-19(b).

[4] ASC 606-10-25-19.

[5] ASC 606-10-25-21(c).

[6] Joseph R. Epstein, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments (December 5, 2016), available at

[7] ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, paragraph BC32 (April 2016), available at

[8] ASC 606-10-55-58 through 55-60.

[9] ASC 606-10-32-15 through 32-20.

[10] ASC 606-10-32-16 states that the cash selling price is “the price that a customer would have paid for the promised goods and services if the customer had paid cash for those goods or services when (or as) they transfer to the customer.”

[11] ASC 606-10-32-17.

[12] ASU 2014-09, paragraph BC 231.

[13] ASC 606-10-32-17c.

[14] ASC 606-10-32-15 to 17.

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