Are you sure you know when the new revenue guidance is effective?
February 7, 2017 [Updated August 11, 2017]
The determining factor in identifying when the new revenue recognition guidance issued by the Financial Accounting Standards Board (FASB) in May 2014, which is included in Topic 606, Revenue from Contracts with Customers, of the FASB’s Accounting Standards Codification (ASC), is effective is whether the entity is considered a public entity. A public entity for purposes of ASC 606’s effective date provisions includes all of the following: (a) public business entities (PBEs), (b) not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market and (c) employee benefit plans that file or furnish financial statements to the Securities and Exchange Commission (SEC). For additional information about ASC 606, including its effective date and early adoption provisions, refer to our white paper, Revenue recognition: A whole new world. The effective dates for public entities and all other entities (e.g., private companies) are as follows:
- Public entities: In annual reporting periods beginning after December 15, 2017, and the interim periods within those years
- However, as discussed in our article, Some PBEs may use private company effective dates for ASC 606 and 842, the SEC Observer at the Emerging Issues Task Force meeting on July 20, 2017, announced that the SEC staff would not object to entities that are PBEs solely because their financial statements or financial information is included in a filing with the SEC pursuant to SEC rules and regulations (numerous examples of which are provided later in this article) adopting the new guidance in accordance with the effective date applicable to private companies.
- All other entities: In annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019
It is important to carefully consider whether an entity is considered a public entity given that ASC 606 is first effective for public entities, and it is important to do so now given that the effective date for these entities is fast approaching. Of the categories of entities that are considered public entities for purposes of ASC 606’s effective date, the category for which many questions arise in practice is PBEs. We provide answers to many of these questions in our summary, Q&A on the new public business entity definition. As discussed in more detail in our summary, the following types of entities are considered PBEs:
- An entity that files or furnishes financial statements to the following regulatory agencies in the circumstances noted:
- The SEC, either because it is required to do so by the SEC or because it does so voluntarily
- A regulatory agency other than the SEC, because it is required to do so by the Securities Exchange Act of 1934 (as amended) or any rules or regulations promulgated under that act
- A foreign or domestic regulatory agency, because it is required to do so by that agency, for purposes of selling or issuing securities that do not have contractual restrictions on their transfer
- An entity that would not otherwise be considered a PBE for purposes of its standalone financial statements because those financial statements or its financial information is included in a filing with the SEC pursuant to any SEC rules or regulations, such as the following: (a) Regulation S-X, Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, (b) Regulation S-X, Rule 3-05, Financial Statements of Businesses Acquired or to Be Acquired, or (c) Regulation S-X, Rule 4-08(g), Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons
- For example, a consolidated subsidiary of a public company is a PBE for purposes of its standalone financial statements when those financial statements are included in an SEC filing by its parent or by other registrants, regardless of whether the consolidated subsidiary is considered a PBE on a standalone basis.
- If the consolidated subsidiary’s standalone financial statements are not included in an SEC filing (either its own or another registrant’s filing), it is not a PBE for purposes of those financial statements.
- An entity that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter (OTC) market (which includes an interdealer or trading system for securities that are not listed on an exchange, such as the OTC Pink Markets and OTC Bulletin Board)
- A business entity that meets both of the following criteria: (a) it has securities that are not subject to contractual restrictions on transfer and (b) it is required by law, contract or regulation to prepare financial statements (including footnotes) in accordance with U.S. generally accepted accounting principles (GAAP) and make them publicly available on a periodic basis (e.g., monthly, quarterly, annually)
- Banks with over $500 million in assets are required to file annual audited U.S. GAAP financial statements with the Federal Deposit Insurance Corporation and to make those financial statements available to the public upon request. Accordingly, if such a bank has one or more securities not subject to contractual restrictions on transfer, that bank would be considered a public business entity.
- Contractual restrictions on transfer of a security means sale of the securities is subject to management pre-approval. These restrictions limit the ability of the holder to transfer the security.
For additional examples of entities that are or are not considered PBEs (e.g., a private company that controls a public subsidiary), refer to our summary, Q&A on the new public business entity definition.
The determination of whether an entity is considered a PBE can be difficult. If your situation is not addressed in our summary, please contact your RSM representative.