Monthly Archives: February 2017

Disclosures from two giants (Intel and Caterpillar) in this week’s 10-K regarding revenue recognition

Disclosures from two giants (Intel and Caterpillar) in this week’s 10-K regarding revenue recognition

INTEL CORP: 10-K Filed February 17, 2017:
We recognize net product revenue when the earnings process is complete, as evidenced by an agreement, delivery has occurred, pricing is deemed fixed, and collection is considered probable. We record pricing allowances, including discounts based on contractual arrangements with customers, when we recognize revenue as a reduction to both accounts receivable and net revenue. Because of frequent sales price reductions and rapid technology obsolescence in our industry, we defer product revenue and related costs of sales from component sales made to distributors under agreements allowing price protection or right of return until the distributors sell the merchandise. The right of return granted generally consists of a stock rotation program in which distributors are able to exchange certain products based on the number of qualified purchases made by the distributor. Under the price protection program, we give distributors credits for the difference between the original price paid and the current price that we offer. We include shipping charges billed to customers in net revenue, and include the related shipping costs in cost of sales.

Revenue Recognition – Contracts with Customers. This standard was issued to achieve a consistent application of revenue recognition within the U.S., resulting in a single revenue model to be applied by reporting companies under U.S. GAAP. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.   Effective in the first quarter of 2018. We plan to adopt the standard retrospectively with the cumulative effect of initially applying it recognized at the date of initial application (“modified retrospective” approach).   Our assessment has identified a change in revenue recognition timing on our component sales made to distributors. We expect to recognize revenue when we deliver to the distributor rather than deferring recognition until the distributor sells the components.
On the date of initial application, we will remove the deferred net revenue on component sales made to distributors through a cumulative adjustment to retained earnings. We expect the revenue deferral, historically recognized in the following period, to be offset by the acceleration of revenue recognition as control of the product transfers to our customer.
Our assessment has also identified a change in expense recognition timing related to payments we make to our customers for distinct services they perform as part of cooperative advertising programs. We expect to recognize the expense for cooperative advertising in the period the marketing activities occur. We currently recognize the expense in the period the customer is entitled to participate in the program, which coincides with the period of sale.
On the date of initial adoption, we will capitalize the expense of cooperative advertising not performed through a cumulative adjustment to retained earnings. We expect the recognition of capitalized advertising to offset the deceleration in expense recognition until the marketing services are performed.
We will continue our assessment, operate parallel systems and processes, as well as finalize our evaluation of any changes to our accounting policies and disclosures. This excludes our planned divestiture of Intel Security Group (ISecG).

Caterpillar Inc. 10-K Filed February 15, 2017:

Sales of Machinery, Energy & Transportation are recognized and earned when all the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectibility is reasonably assured; and (d) delivery has occurred. Persuasive evidence of an arrangement and a fixed or determinable price exist once we receive an order or contract from a customer or independently owned and operated dealer. We assess collectibility at the time of the sale and if collectibility is not reasonably assured, the sale is deferred and not recognized until collectibility is probable or payment is received. Typically, where product is produced and sold in the same country, title and risk of ownership transfer when the product is shipped. Products that are exported from a country for sale typically pass title and risk of ownership at the border of the destination country.

Revenue recognition – In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance to provide a single, comprehensive revenue recognition model for all contracts with customers. Under the new guidance, an entity will recognize revenue to depict the transfer of promised goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. A five step model has been introduced for an entity to apply when recognizing revenue. The new guidance also includes enhanced disclosure requirements, and is effective January 1, 2018, with early adoption permitted for January 1, 2017. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Consolidated Statement of Changes in Stockholders’ Equity. We plan to adopt the new guidance effective January 1, 2018.

We have made substantial progress in our evaluation of the impact of the new standard. Under the new guidance, we anticipate sales of certain turbine machinery units will change to a point-in-time recognition model. Under current guidance, we account for these sales under an over-time model following the percentage-of-completion method as the product is manufactured. In addition, under the new guidance we will begin to recognize an asset for the value of expected replacement part returns. At this time we have not identified any impacts to our financial statements that we believe will be material in the year of adoption. We are still evaluating the impact to certain revenue streams within our Energy & Transportation and Resource Industries segments and expect that evaluation to be completed during the first half of 2017. Based on the current estimated impact to our financial statements, we plan to adopt the new guidance under the modified retrospective approach.

The Virtual Shareholder Meeting: A Growing Way to Avoid Protestors?

The upcoming March 22nd annual shareholder meeting of the Hewlett Packer Enterprise (HPE) Company during President Trump’s first 100 days in office will be interesting in one fascinating way. It will be completely virtual.

As protests of all kinds rock American society, we may be on the cutting edge of a trend that will become standard operating procedure in the near future. According to HPE, an all virtual meeting enables shareholder participation. But is that their only objective?

This is the second year that HPE held an all virtual annual meeting. Only 70 companies out of the existing 8,000 held virtual meetings last year. Of those 70, only the following eight joined HPE as a S&P 500 company:

1) Alaska Air
2) CA Technologies
4) Harman International
5) Illumina
6) Laboratory Corp of America
7) Mosaic
8) PayPal

Companies have always had shareholder meetings. Some of these meetings are more popular than others. But they were always held in hotels or fancy corporate offices. This will be the first all virtual meeting with no physical meeting location since President Trump took office. To be clear, companies have always given shareholders the opportunity to listen in online or phone in but that has always been in connection to a meeting happening in a physical location.

Could this be a growing trend? A result of the corporate backlash from the masses aided by our country’s CEO? In our view, it makes most sense to hold shareholder meetings online. It provides safety to the attendees and host. But how will protesters, who are used to having a physical location to disrupt, react? Will they call in on the internet and submit a protest video stream? Danger: Could activist hackers take over a meeting and spread fake corporate news? IR officers may have a new role!