June 19, 2014

FASB’s New Revenue Recognition Standard: Pre-Adoption Planning Required

Here’s an excerpt from this Morgan Lewis blog by Linda Griggs and Sean Donahue:

U.S. companies will need to comply with a new converged revenue recognition standard that the FASB and the International Accounting Standards Board (IASB) issued on May 28. The converged standard—which applies to fiscal years beginning after December 15, 2016—eliminates many existing industry and other accounting guidance related to revenue recognition for U.S. companies and provides the first comprehensive requirements in International Financial Reporting Standards.

The new standard may not affect all U.S. companies equally, but it will require all to evaluate their contracts to determine whether:

– the new standard will affect the timing and amount of revenue recognized;
– new contracting processes should be considered;
– internal control over financial reporting and IT systems need to be updated; and
– bonus and incentive plans and other compensation arrangements need to be revised.

The amount and timing of revenue may be affected for the following reasons:

1. The new revenue recognition standard requires companies to determine whether goods or services promised in a contract are separate performance obligations that must be accounted for separately if they are distinct, which means that (1) “[t]he customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer” and (2) “[t]he promise to transfer the good or service is separately identifiable from other promises in the contract.”

2. The amount of revenue that is recognized (i.e., the transaction price) must take into account various factors, including the following:
– Discounts, credits, price concessions, returns, and performance bonuses/penalties that may be considered to be variable consideration. Variable consideration may only be included in the transaction price to the extent that it is “probable” that the variable consideration will not be reversed.
– Any significant financing component in the contract that results from the timing of the customer’s payment differing by more than a year from the transfer date of the promised goods or services to the customer, in which case the transaction price should be adjusted for the time value of money.
– Any noncash consideration being paid by the customer.
– Any consideration payable to the customer, such as vouchers and coupons.

3. The timing of revenue recognition will be affected by the following:
– The allocation of revenue to different performance obligations
– The timing of when the entity’s customer obtains control of a good or service because—unless an entity transfers control of a good or service over time, requiring the recognition of revenue over time—the entity is considered to satisfy the performance obligation at a point in time.

A significant requirement in the new revenue recognition standard is the principles-based disclosure requirement, which is intended to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from such contracts. This will likely result in robust, qualitative, and quantitative information about contracts on a disaggregated basis for appropriate categories of customers, such as the categories that companies use in their investor presentations, about related revenues, the allocation of the transaction price to performance obligations and significant judgments, and changes in judgments made in applying the new standard to contracts.

Facebook Sued Over Director Compensation

Here’s news from this Reuters article (and here’s the complaint and Mike Melbinger’s analysis):

Mark Zuckerberg and other members of Facebook Inc’s board have been sued by a shareholder who claimed a policy letting them annually award directors more than $150 million of stock each if they choose is unreasonably generous. In a complaint filed on Friday night in Delaware Chancery Court, Ernesto Espinoza said the board was “essentially free to grant itself whatever amount of compensation it chooses” under the social media company’s 2012 equity incentive plan, which also covers employees, officers and consultants.

He said the plan annually caps total awards at 25 million shares and individual awards at 2.5 million, and in theory lets the board annually award directors $156 million in stock each, based on Friday’s closing price of $62.50. The lawsuit does not contend that such large sums will be awarded. Espinoza also said last year’s average $461,000 payout to non-employee directors was too high, being 43 percent larger than typical payouts at “peer” companies such as Inc and Walt Disney Co that on average generated twice as much revenue and three times more profit.

Facebook spokeswoman Genevieve Grdina said in an email: “The lawsuit is without merit and we will defend ourselves vigorously.” A spokeswoman for Robbins Arroyo, a law firm representing the plaintiff, had no immediate comment.

The lawsuit alleges breach of fiduciary duty, waste of corporate assets and unjust enrichment. It seeks to force directors to repay Facebook for alleged damages sustained by the Menlo Park, California-based company, and to impose “meaningful limits” subject to shareholder approval about how much stock the board can award itself.

Among the other defendants is Facebook Chief Operating Officer Sheryl Sandberg, a director whose compensation was $16.15 million in 2013, according to a regulatory filing. She is worth $999 million, Forbes magazine said on Monday. Zuckerberg made $653,165 last year, a regulatory filing shows, and Forbes said his net worth is $27.7 billion. Espinoza was also a plaintiff in a 2010 shareholder case in Delaware against Hewlett-Packard Co concerning its handling of the resignation of Chief Executive Mark Hurd over his relationship with a former contractor. The case is Espinoza v. Zuckerberg et al, Delaware Chancery Court, No. 9745.

SEC to Bring More Insider Trading Cases in Administrative Proceedings?

As noted in this Reuters article, the SEC is looking to bring more insider trading cases “as administrative proceedings in appropriate cases,” Andrew Ceresney, head of the SEC enforcement division, told the District of Columbia Bar on Wednesday. “We have in the past. It has been pretty rare. I think there will be more going forward.”

Meanwhile, here’s the NY Times article admitting that the paper got it wrong in reporting that golfer Phil Mickelson was being investigated for insider trading…

– Broc Romanek