New revenue recognition standard ASU No. 2014-09, Revenue Recognition from Contracts with Customers (Topic 606), goes into effect with respect to fiscal years beginning after December 15, 2017, for most public companies that report using US generally accepted accounting principles. This means that calendar-year companies affected by this new standard will start applying it in their reports on Form 10-Q for the quarter ended March 31, 2018.
Companies transitioning to this new revenue recognition standard may use one of two methods:
- Applying it retrospectively to each prior period presented, subject to the election of certain practical expedients (full retrospective method), or
- Applying it retrospectively with the cumulative effect of initially applying the new revenue recognition standard recognized at the date of adoption (modified retrospective method).1
Companies electing the full retrospective method have to retroactively apply the new revenue recognition standard to all prior periods presented. For example, when a calendar-year company electing this option files its Form 10-Q for the first quarter of 2018, it will need to apply the new standard to both first quarter 2018 and first quarter 2017 financial periods. For such a company, this will cause an issue if it files a registration statement on Form S-3 with the US Securities and Exchange Commission (SEC) between the filing date of its first quarter 2018 Form 10-Q and the filing date of its subsequent 2018 Form 10-K.
Item 11(b)(ii) of Form S-3 requires that a prospectus include restated financial statements if there has been a change in accounting that requires a material retroactive restatement of financial statements. As a result, if a company electing to use the full retrospective method files a registration statement on Form S-3 during the period between filing its first Form 10-Q applying the new standard and its first Form 10-K applying the new standard (generally for the year ended December 31, 2018, for a calendar-year company), the prospectus would have to revise the audited financial statements contained in the company’s most recently filed Form 10-K (generally for the year ended December 31, 2017, for a calendar-year company), which would mean revising its 2017, 2016 and 2015 financial statements.
On the other hand, if a calendar-year company using the full retrospective method does not file a Form S-3 between the filing of its first quarter 2018 Form 10-Q and the filing of its 2018 Form 10-K, it generally would not need to revise its 2017 and 2016 financial statements until it files its 2018 Form 10-K and would not need to revise its 2015 financial statements at all since they would not appear in its 2018 Form 10-K.
If a company plans to use the full retrospective method and anticipates a need to file a registration statement on Form S-3 during 2018 (for example, to replace a shelf registration statement that is expiring), it may want to consider filing its registration statement early, before it files a Form 10-Q applying the new revenue recognition standard. If a company needs to file a registration statement on Form S-3 between the date on which it files its Form 10-Q first applying the new standard and the date it files its Form 10-K for that fiscal year and considers it impracticable to prepare retrospectively revised financial statements for its prospectus, the company may want to consult with the staff of the SEC’s Division of Corporation Finance.
This issue raised by Item 11(b)(ii) only applies to the filing of a Form S-3 between a company’s first Form 10-Q applying the new standard and the Form 10-K for that fiscal year. If a company already has an effective shelf registration statement on Form S-3 in place, it may conduct a “takedown” securities offering from this shelf without revising prior financial statements as long as its management determines that the application of the new standard does not constitute a “fundamental change” under Item 512(a) of Regulation S-K.2
Companies considering use of the full retrospective method should discuss the implications of that method generally, and particularly on the use of Form S-3 registration statements, with their independent public accountants and their audit committees.
This Legal Update only addresses the implications of the new revenue recognition standard on Form S-3 registration statements. Companies with SEC registration statements on forms other than Form S-3 should consider whether they also are impacted by the timing of filing in relation to compliance with this new accounting standard.3
1 Section 11100 of the SEC’s Division of Corporation, Finance Financial Reporting Manual (FRM), available at https://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf.
2 Section 13110.2 of the FRM.
3 For example, see the discussion of Form S-8 in Securities Act Forms Compliance and Disclosure Interpretation Question 126.40.