The Securities and Exchange Commission’s queries to Adobe Inc. on how it is implementing the new revenue accounting standard shows the regulator’s efforts to push companies into revealing more about how they are complying with the new rules.
The San Jose, Calif.-based software company is the latest U.S. firm to grapple with the new accounting guidelines, which came into effect at the start of last year for most public companies and aim to unify how companies from different industries account for revenue from sales and services. Adobe was one of the later adopters of the new standard because its fiscal year ended on Nov. 30. Adobe implemented the rule on Dec. 1 for the first quarter of the 2019 fiscal year.
The SEC, in letters sent this spring as part of a routine review, has questioned Adobe on why in its first-quarter earnings filings it combined the reporting of revenue from its software licensing and cloud services into a single performance obligation, instead of accounting them separately.
Adobe, in its response, said its Creative Cloud and Document Cloud program’s cloud-based features, functionalities and software licenses constitute a single performance obligation that should be recognized over a customer’s subscription period.
After some back-and-forth, the SEC agreed with Adobe’s logic but asked the company to include additional disclosure in all future periodic filings that the software licenses and cloud services for those two Cloud programs are entwined.
The correspondence illuminates the level of detail and effort that executives have to expend to comply with the new accounting standard, said Matthew Kaplan, a securities attorney at law firm Debevoise & Plimpton.
The involvement of the company’s auditors in fielding the SEC’s questions shows how all parties involved with preparing financial statements continue to grapple with the new revenue rules. Adobe’s thorough and nuanced responses can serve as guidance to other companies in similar situations, Mr. Kaplan said.
The SEC judged the matter resolved without further action, according to a letter the regulator sent to the company June 4. The documents were made public Tuesday.
About 50 companies have exchanged letters with the SEC over the separation of performance obligations in the new standard since 2017, seven of which were software companies such as Microsoft Corp. and Autodesk Inc., according to consulting firm Audit Analytics.
"It doesn’t seem SEC has required anyone to change their accounting, but instead required them to disclose the changes more comprehensively," said Derryck Coleman, an analyst at Audit Analytics.
Both the SEC and Adobe declined to comment.
Adobe, founded in 1982, made its largest purchase to-date last year with the $4.75 billion acquisition of marketing-software manager Marketo. The company posted better-than-expected second-quarter earnings last month with revenue of $2.74 billion, a 25% increase from a year earlier.
Write to Mark Maurer at [email protected]
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