• Form S-3s Filed After Adoption of New Revenue Recognition Standard Will Require Retrospective Revision of Financial Statements
  • November 7, 2016
  • Law Firm: Greenberg Traurig LLP - New York Office
  • In a recent meeting with the Center for Audit Quality SEC Regulations Committee (the CAQ Committee), the SEC staff addressed the impact of new revenue recognition standard, Accounting Standards Codification Topic 606 (ASC 606) on registration statements on Form S-3 filed after the adoption of the new standard. According to Item 11(b)(ii) of Form S-3, at the time the Form S-3 becomes effective, registrants must retrospectively revise audited financial statements that are incorporated by reference into the Form S-3 to reflect a subsequent change in accounting principle in order to reflect the impact of the new principle on such prior comparable period. The staff has historically viewed discontinued operations and changes in segment presentation as changes that would require such retrospective revision. At the meeting with the CAQ Committee, the staff indicated that the adoption of ASC 606 would be a change that would require full retrospective revision of financial statements incorporated by reference into a Form S-3.

    As a result, unless a registrant can show that the retrospective application of ASC 606 to all prior year periods is "impracticable" (as further discussed in ASC 250-10-45-9), a registrant must retrospectively revise prior year financial statements prior to going effective on a Form S-3 (or any other registration statement) filed after its first Form 10-Q incorporating the new standard. The staff indicated that they are available to consult with registrants that find retrospective revision of prior year comparable periods to be impracticable. The staff did not, however, offer any additional guidance on what circumstances might be deemed "impracticable," and therefore the guidance set forth in ASC 250-10-45-9 remains the guidepost for this determination.

    Because the updating requirements of Item 11(b)(ii) of Form S-3 do not apply to "takedown offerings" from an existing effective Form S-3 shelf registration statement, the consideration of whether to retrospectively revise financial statements in connection with such offerings hinges on whether the adoption of ASC 606 constitutes a "fundamental change," thereby triggering the registrant’s undertaking to update its prospectus for such change.