Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments

Joseph R. Epstein, Professional Accounting Fellow, Office of the Chief Accountant

Washington D.C.

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.


Good morning. I would like to share some observations from consultations OCA has received related to the new revenue standard (“Topic 606”),[1] including observations on the accounting for pre-production arrangements and the identification of performance obligations.

Accounting for Pre-Production Arrangements

First, pre-production arrangements and similar arrangements often vary industry-by-industry and even contract-by-contract. However, such arrangements typically consist of 1) an entity having to undertake various activities before beginning production of a good, such as engineering, design, or manufacturing molds, tools, or dies to use in the production process, and 2) the counterparty agreeing to provide cash consideration in contemplation of those activities as an upfront payment, as the pre-production activities occur, or in the future as part of the cost per unit when, or if, the goods are produced and sold.

As a registrant adopts Topic 606, it may question whether it should make any changes to its historical accounting for pre-production arrangements. While the assessment will be based on a registrant’s facts and circumstances, I believe this analysis would generally fall into one of a few scenarios.

For example, historically, some registrants considered pre-production to be a service deliverable under Topic 605.[2] As these registrants transition to Topic 606, I believe they should begin by evaluating whether pre-production is a performance obligation under Topic 606, including consideration of the relevant TRG discussions.[3] This may result in situations where a registrant concluded it had a service deliverable related to pre-production activities under Topic 605, but not a performance obligation related to pre-production activities under Topic 606.

For example, OCA received a pre-filing consultation from a registrant regarding a pre-production arrangement for the design of a specialized good that the registrant anticipated manufacturing and selling to the counterparty. OCA did not object to the registrant’s conclusion that the design activities did not transfer control of a good or service to the counterparty, and therefore were not a performance obligation under Topic 606,[4] because the periodic information provided to the counterparty related to the design activities over the course of the arrangement was not detailed enough to enable the counterparty to avoid having to re-perform the design work, for example, if the design efforts were not successful or if the counterparty selected another manufacturer for the specialized good.

The registrant determined that the pre-production design activities should be accounted for as research and development expenses[5] and that payments received should be accounted for as an advance payment for the future sale of the specialized good to the counterparty.[6] OCA did not object to this accounting based on the specific facts and circumstances.

OCA also did not object to the registrant applying its conclusion consistent with the transition guidance in Topic 606.[7] In this circumstance, I believe it was appropriate to follow the transition guidance in Topic 606, instead of the voluntary change in accounting principle guidance in Topic 250,[8] because the registrant began its analysis under the revenue guidance, consistent with its historical policy under Topic 605, and then applied reasonable judgment in reaching its conclusion under Topic 606.

Other registrants have historically considered pre-production as a non-revenue arrangement, which could include, but is not limited to, accounting for pre-production activities as research and development or fulfillment activities with the consideration received from the counterparty accounted for as either an advanced payment for the goods to be sold in the future or as a contra-expense under a cost reimbursement model (which I’ll collectively refer to as examples of a “non-revenue model”).

As these registrants transition to Topic 606, OCA has noted it would not object to these registrants continuing to apply their historical, non-revenue models to pre-production arrangements. For registrants that historically applied a non-revenue model and are considering applying either a revenue model under Topic 606 or making changes to their historical non-revenue model, including, for example, any changes to the historical timing or presentation of payments received from the counterparty in the income statement, I would encourage consultation with OCA.

Identification of Performance Obligations

Next, I’d like to discuss the identification of performance obligations; specifically, whether the registrant’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. The objective of this assessment is to determine whether the nature of the promise, within the context of the contract, is to transfer each of the goods or services individually or, instead, to transfer a combined item to which the promised goods or services are inputs.[9]

For example, OCA received a pre-filing consultation from a registrant that was providing its customer with licenses to a portfolio of patents that existed at inception of the arrangement, and licenses to any new patents that were obtained by the registrant and added to the portfolio during the term of the arrangement. The registrant concluded that the existing patents and the when-and-if-available additions were inputs into a combined output, with the output being ongoing access to an evolving portfolio of patents that the entity managed. However, based on the nature of the patents, the existing patents and the promise to provide any when-and-if-available additions to the portfolio had utility on a stand-alone basis, did not significantly affect each other, and therefore were not highly interdependent or highly interrelated. Consequently, OCA objected to the registrant’s conclusion that the promises could be combined as a single performance obligation since the promises in the contract were separately identifiable.

I’d also like to take this opportunity to remind registrants 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.[10]


Thank you. That concludes my prepared remarks.

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

[2] ASC Topic 605, Revenue Recognition.

[3] For example, see FASB/IASB Joint Transition Resource Group for Revenue Recognition (“TRG”) Agenda Ref. No. 46, Pre-Production Activities (November 9, 2015), available at

[4] Id.

[5] ASC Topic 730, Research and Development.

[6] ASC 606-10-55-51.

[7] ASC 606-10-65-1.

[8] Paragraphs 10-45-1 through 10-45-13 of ASC Topic 250, Accounting Changes and Error Corrections.

[9] ASC 606-10-25-21.

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

Last Reviewed or Updated: Jan. 11, 2018