Readiness Discussion SEC Comment Letters, SAB 74 ... · a) For pre-adoption companies, SEC comments mainly focus on the extent of companies’ SAB 74 disclosures related to the evaluation

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IPO Statistics &

Readiness Discussion

ASC 606 (IFRS 15) Adoption Trends

SEC Comment Letters, SAB 74 Disclosures, Early Adopters

April 2018


SEC Comment LettersASC 606 (IFRS 15) Adoption and

Implementation

1


Connor Group has reviewed SEC comment letters issued to date as of March 31, 2018 regarding the adoption or implementation of ASC 606Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15).

This population of relevant SEC comment letters was determined and the filings were retrieved via searches within CompanyIQ™¹based on the following criteria:

• SEC Comment letters issued and closed as of March 31, 2018. Please note that SEC only publishes comment letters that havebeen fully addressed and closed.

• Comment letter language includes “Topic 606”, “ASC 606” or “ASU 2014-09”.

A total of 38 companies have been issued comment letters, 8 of which are early adopters of the new revenue standard. Those comment letterscontain 64 comments pertaining to either the adoption or implementation of the standard.

A summary of the findings is presented below:

a) For pre-adoption companies, SEC comments mainly focus on the extent of companies’ SAB 74 disclosures related to the evaluationand implementation status. Approximately 36% of the comments are to request expansion of such disclosures and all of them wereissued prior to November 2017. Only one comment to pre-adoption companies was noted concerning technical clarifications in theSAB 74 disclosure.

b) Over 50% of the comments were issued to early adopters. Those comments consist of both inquiries about rationale in reachingcertain technical conclusions and requests to expand disclosure for specific technical areas. Notable ones include: Disaggregated revenue: SEC comments, in some cases, require companies to demonstrate how they have considered (i)

the level of information reviewed by chief operating decision maker and (ii) business trends discussed in MD&A indetermining the appropriate disaggregation level to depict how the nature, amount, timing and uncertainty of revenue andcash flows are affected by economic factors.

Timing of payment and contract balances: SEC in multiple instances inquires about companies’ significant payment termsand how the timing of satisfaction of performance obligations relates to the timing of payment and the effect on the contractasset and liability balances

Significant judgements: SEC request companies to provide the basis of certain significant judgments related to contractcombination, identification of performance obligations, principal vs. agent, standalone selling price methodology, recognitionpattern and timing, and contract costs.

c) In a few instances, early adopters that received SEC comment letters indicate that they will expand disclosures related to commentedareas in future filings.

The study includes a full list of SEC comments issued and links to companies’ response letters. See pages 4-7.

2Executive Summary - SEC Comment Letters

¹ CompanyIQ™ is a product of (http://www.mylogiq.com/), a provider of SEC compliance and public company intelligence products. CompanyIQ™ identifies, extracts, and collatesinformation from relevant public sources to create an 360° company profile and access SEC disclosures and SEC comments linked with responses.

http://www.mylogiq.com/


Type 2: SEC inquiries to early adopters cover the following areas: How the companies have considered the disaggregated revenue

disclosure requirements in selecting the appropriate categories to use(e.g. Ford Motor, Alphabet)

Rationale of why residual method is appropriate in establishingstandalone selling price of software (e.g. Commvault Systems)

Basis of concluding certain commission costs are capitalizable, thebenefit period of capitalized commission, and the amortization patternof capitalized commission (e.g. Commvault Systems, Workday)

Disclose why the selected measure of progress is a faithful depiction oftransfer of control (e.g. General Dynamics, First Solar)

Disclose significant payment terms and how the timing of satisfaction ofperformance obligations relates to the timing of payment and the effecton the contract asset and liability balances (e.g. Ford Motor, RadiusHealth, First Solar, General Dynamics)

Rationale for concluding point-in-time recognition for customizedconstruction contracts (e.g. General Dynamics)

3SEC Comments by TypeType 3: Clarifications andminor corrections requested:11% (7/64 comments)

Type 1: Request pre-adoption companies to expand evaluation and implementation status: 36% (23/64 comments)Type 2: Technical comments

for early adopters: 53% (34/64 comments)

Type 1: A typical example comment is as follows,

Please revise to provide qualitative financial statement disclosures of thepotential impact that this standard will have on your financial statementswhen adopted. In this regard, include a description of the effects of theaccounting policies that you expect to apply, if determined, and a comparisonto your current revenue recognition policies. Describe the status of yourprocess to implement the new standard and the significant implementationmatters yet to be addressed. In addition, to the extent that you determine thequantitative impact that adoption of Topic 606 is expected to have on yourfinancial statements, please also disclose such amounts. Please refer to ASC250-10-S99-6 and SAB Topic 11.M.


Comment Letter Examples 4

Company Name Response Date Link to response letter and Question #1. First Data Corp April 17, 2017 Question 5

2. NASDAQ, Inc April 13, 2017 Question 1

Example of Type 1 - Request to expand evaluation and implementation status

Other companies received similar Type 1 comments: Mastec, Inc. Legget & Platt, Inc. Monster Beverage Corp IAC/InterActive Corp ONEOK Partners LP Vermillion, Inc. ONEOK, Inc.

MKS Instruments, Inc. Guaranty Bancshares, Inc. United Therapeutics Corp Community Health Systems, Inc. Integer Holdings Corporation Ctrip.com International, Ltd Roku, Inc.

Snap, Inc. Black Knight, Inc. SenesTech, Inc. Altice USA, Inc. RYB Education, Inc. AGM Group Holdings, Inc. Co-Diagnostics, Inc.

https://www.sec.gov/Archives/edgar/data/883980/000162828017003668/filename1.htm



Comment Letter Examples (Cont’d) 5

Company Name Response DateLink to response

letter and Question #

Key issues

1. General Dynamics Corp

September 7, 2017 Question 1 - 6 Origination and fulfillment costs Distinct goods and services Disclosure of significant financing

component Selected measure of progress Contract combination

October 19, 2017 Question 1

2. First Solar, Inc. August 17, 2017 Question 7 - 10

Disclosure of significant payment terms and impacts of timing of satisfaction of performance obligations and payment terms on contract balances

Selected measure of progress

3. Workday, Inc. August 8, 2017 Question 1 - 2 Origination costs (e.g. commission) and related benefit period

4. CBOE Global Markets, Inc. September 1, 2017 Question 1 - 2

Consideration payable to customers Disclosure of remaining

performance obligations

Full list of Type 2 – Comments to early adopters








Company Name Response DateLink to response

letter and Question #

Key issues

5. Ford Motor CompanySeptember 29, 2017 Question 1 - 5

Lease vs revenue scope determination

Disclosure of disaggregated revenue and significant payment termsDecember 1, 2017 Question 1

6. Commvault Systems, Inc.

October 27, 2017 Question 1 – 4Attachment

Amortization period and pattern of capitalized commission

Transfer of control when software is sold via distributors

Residual method in establishing SSP of software

December 4, 2017 Question 1

7. Radius Health, Inc. January 23, 2018 Question 3 Disclosure of significant payment terms

8. Alphabet Inc.

August 15, 2017 Question 1 - 5 Principal vs agent in advertising arrangements

Disclosure of disaggregated revenue

October 16, 2017 Question 1 - 2

Full list of Type 2 – Comments to early adopters











Company Name Response Date Link to response letter and Question #1. BioLargo, Inc. March 30, 2017 Question 17

2. Veritone, Inc. March 15, 2017 Question 3

3. BeautyKind Holdings, Inc. April 1, 2016 Question 12

4. QMC Systems, Inc. March 7, 2016 Question 4*

5. Sanchez Energy Corporation December 22, 2017 Question 3

6. Dogness (International) Corporation October 10, 2017 Question 2

7. Huami Corporation December 8, 2017 Question 24

Full list of Type 3 – Clarifications and minor corrections requested

* Response letter to this SEC letter is not available on SEC.gov as of the date of this study.




https://www.sec.gov/Archives/edgar/data/1642223/000000000016067458/filename1.pdf





ASC 606 (IFRS 15) Early Adopters

(All Industries and Market Size)

8


List of Early Adopters 9

Below list includes companies that have adopted ASC 606 (IFRS 15) as of their most recent SEC filing date. This list is identified through key word search within SEC.gov and CompanyIQ™ and therefore might

not represent the complete population of early adopters.

# Company Name Adoption Date Adoption Method Industry Link to most recent filing

1 Alphabet, Inc. January 1, 2017 Modified Technology 10-K2 AquaBounty Technologies, Inc January 1, 2017 No historical revenue Life science 10-K3 Aradigm Corporation January 1, 2017 Modified Life science 10-Q4 Bsquare Corporation January 1, 2017 Modified Technology 10-K

5 Catabasis Pharmaceuticals, Inc. January 1, 2017 No historical revenue Life science 10-Q

6 CBOE Holdings, Inc. January 1, 2017 Full Finance, Insurance & Real Estate 10-K7 Commvault Systems, Inc April 1, 2017 Full Technology 10-Q8 Digipath, Inc. October 1, 2017 Modified Life science 10-Q9 DocuSign, Inc. February 1, 2017 Full Technology S-1

10 Dropbox, Inc. January 1, 2017 Full Technology S-111 Ecoark Holdings, Inc April 1, 2017 Modified Consumer products 10-Q

12 Ener-Core, Inc January 1, 2017 No historical revenue Industrial products, chemicals, and manufacturing 10-Q

13 EnerNoc, Inc. January 1, 2017 Modified Technology 10-Q14 Extreme Networks, Inc July 1, 2017 Full Technology 10-Q15 First Solar, Inc. January 1, 2017 Full Technology 10-K

https://www.sec.gov/Archives/edgar/data/1652044/000165204418000007/goog10-kq42017.htm

https://www.sec.gov/Archives/edgar/data/1603978/000160397818000025/aqb10-k20171231.htm

https://www.sec.gov/Archives/edgar/data/1013238/000119312517333059/d443933d10q.htm

https://www.sec.gov/Archives/edgar/data/1054721/000156459018002910/bsqr-10k_20171231.htm

https://www.sec.gov/Archives/edgar/data/1454789/000110465917067354/a17-20619_110q.htm

https://www.sec.gov/Archives/edgar/data/1374310/000155837018000953/cboe-20171231x10k.htm

https://www.sec.gov/Archives/edgar/data/1169561/000116956118000006/a2017123110q.htm

https://www.sec.gov/Archives/edgar/data/1502966/000149315218001810/form10-q.htm

https://www.sec.gov/Archives/edgar/data/1261333/000119312518129809/d506878ds1a.htm


https://www.sec.gov/Archives/edgar/data/1437491/000121390018001513/f10q1217_ecoarkholdings.htm

https://www.sec.gov/Archives/edgar/data/1495536/000121390017012364/f10q0917_enercoreinc.htm

https://www.sec.gov/Archives/edgar/data/1244937/000124493717000101/q22017enoc.htm

https://www.sec.gov/Archives/edgar/data/1078271/000156459018001677/extr-10q_20171231.htm

https://www.sec.gov/Archives/edgar/data/1274494/000127449418000011/fslr10-k12x31x2017.htm


List of Early Adopters (Cont’d) 10


16 Ford Motor Company January 1, 2017 Modified Industrial products, chemicals, and manufacturing 10-K

17 General Dynamics Corporation January 1, 2017 Full Industrial products, chemicals,

and manufacturing 10-K

18 Histogenics Corporation January 1, 2017 No historical revenue Life science 10-K19 Lipocine, Inc. January 1, 2017 No historical revenue Life science 10-K20 Microsoft Corporation July 1, 2017 Full Technology 10-Q21 Mirati Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-K22 Nutanix, Inc. August 1, 2017 Full Technology 10-Q23 Pivotal Software, Inc. February 4, 2017 Full Technology S-124 Pluristem Therapeutics, Inc. July 1, 2017 Modified Life science 10-Q25 Power Integrations, Inc. January 1, 2017 Full Technology 10-K26 Pure Cycle Corporation September 1, 2017 Modified Transportation and utilities 10-Q

27 R1 RCM Inc. January 1, 2017 Modified Wholesale/retailer trade, services and others 10-K

28 Radius Health, Inc. April 1, 2017 No historical revenue Life science 10-K

29 Raytheon Company January 1, 2017 Full Industrial products, chemicals, and manufacturing 10-K

30 Sage Therapeutics, Inc. January 1, 2017 No historical revenue Life science 10-K31 Smartsheet, Inc. February 1, 2017 Full Technology S-132 Solid Biosciences, Llc January 1, 2017 No historical revenue Life science S-1

https://www.sec.gov/Archives/edgar/data/37996/000003799618000015/f1231201710-k.htm

https://www.sec.gov/Archives/edgar/data/40533/000004053318000008/gd-2017123110k.htm

https://www.sec.gov/Archives/edgar/data/1372299/000156459018005711/hsgx-10k_20171231.htm

https://www.sec.gov/Archives/edgar/data/1535955/000114420418013981/tv486805_10k.htm

https://www.sec.gov/Archives/edgar/data/789019/000156459018001129/msft-10q_20171231.htm

https://www.sec.gov/Archives/edgar/data/1576263/000162828018002942/mrtx-20171231x10k.htm

https://www.sec.gov/Archives/edgar/data/1618732/000161873218000027/ntnx-01312018x10qxq2x18.htm

https://www.sec.gov/Archives/edgar/data/1574135/000104746918002922/a2235357zs-1a.htm

https://www.sec.gov/Archives/edgar/data/1158780/000117891318000390/zk1821111.htm

https://www.sec.gov/Archives/edgar/data/833640/000083364018000067/powi-2017123110k.htm

https://www.sec.gov/Archives/edgar/data/276720/000165495418000232/pcyo_10q.htm

https://www.sec.gov/Archives/edgar/data/1472595/000147259518000023/a201710k.htm

https://www.sec.gov/Archives/edgar/data/1428522/000162828018002666/rdus1231201710-k.htm

https://www.sec.gov/Archives/edgar/data/1047122/000104712218000022/rtn-12312017x10k.htm

https://www.sec.gov/Archives/edgar/data/1597553/000156459018002772/sage-10k_20171231.htm

https://www.sec.gov/Archives/edgar/data/1366561/000162828018004916/smartsheets-1a2.htm



List of Early Adopters (Cont’d) 11


33 Spotify Technology S.A. January 1, 2017 Full Entertainment, media and communication F-1

34 Strongbridge Bipharma April 1, 2017 No historical revenue Life science 10-K

35 Sunlands Online Education Group January 1, 2017 Full Wholesale, retail, services and

other F-1

36 Tauriga Science, Inc. October 1, 2017 Modified Life science 10-Q37 Tesaro, Inc. January 1, 2017 Full Life science 10-K

38 Ultragenyx Pharmaceutical, Inc. January 1, 2017 Full Life science 10-K

39 UnitedHealth Group January 1, 2017 Modified Finance, Insurance & Real Estate 10-K

40 Vanguard Natural Resources, Inc August 1, 2017 Modified Oil, mining and other energy

related 10-Q

41 Varian Medical Systems, Inc. September 30, 2017 Full Life science 10-Q42 Workday, Inc. February 1, 2017 Full Technology 10-K43 Zafgen, Inc January 1, 2017 No historical revenue Life science 10-K44 Zscaler, Inc. August 1, 2017 Full Technology S-1

https://www.sec.gov/Archives/edgar/data/1639920/000119312518092759/d494294df1a.htm

https://www.sec.gov/Archives/edgar/data/1634432/000155837018001865/sbbp-20171231x10k.htm

https://www.sec.gov/Archives/edgar/data/1723935/000119312518082489/d494072df1a.htm

https://www.sec.gov/Archives/edgar/data/1142790/000149315218001877/form10-q.htm

https://www.sec.gov/Archives/edgar/data/1491576/000155837018001248/tsro-20171231x10k.htm

https://www.sec.gov/Archives/edgar/data/1515673/000156459018002535/rare-10k_20171231.htm

https://www.sec.gov/Archives/edgar/data/731766/000073176618000005/unh2017123110-k.htm

https://www.sec.gov/Archives/edgar/data/1384072/000138407217000152/vnr2017q310-q.htm

https://www.sec.gov/Archives/edgar/data/203527/000162828018001216/var10qq12018.htm#s006DE4E3DA1B5F6C8C9E74234D917A78

https://www.sec.gov/Archives/edgar/data/1327811/000132781118000009/wday-01312018x10k.htm

https://www.sec.gov/Archives/edgar/data/1374690/000119312518077456/d537290d10k.htm

https://www.sec.gov/Archives/edgar/data/1713683/000119312518048303/d400527ds1.htm


SAB 74 Disclosure Trend ASC 606 (IFRS 15)

Methods, Dates, and Anticipated Impact(Selected Industries and $10B+ Market Size)

12


This disclosure study is intended to provide an overview of current disclosures made by large US-listed companies regarding theupcoming or recent adoption of ASC 606 Revenue from Contracts with Customers (or its IFRS equivalent, IFRS 15). This is our sixthSAB 74 disclosure study on the topic. The last study was completed in January 2018.

This study was conducted in April 2017 based on disclosures in SEC filings of 418 companies (390 companies filing using US GAAP,and 28 using IFRS). This population was determined and the filings were retrieved via searches within CompanyIQ™based on the following criteria:

• Companies with market capitalization over $10 billion at the later of (a) companies’ most recent fiscal year end or (b)December 31, 2017

• A Form 10-Q, 10-K, 20-F or 6-K was filed from November 10, 2017 to March 1, 2018.

• Disclosure language includes “revenue from contracts with customers” or “new revenue standard”.

• All industries except finance, insurance, real estate, oil and gas, and mining

Following the same sampling methodology above, the populations for our six disclosure studies have been increasing from 257companies in November 2016 study to 418 companies within this study.

A summary of the findings is presented below:

Overall, 91% of the companies sampled have elected an adoption method and 84% have indicated, on a high-level, whetherthe adoption will have a material impact or not. These percentages improved by approximately 10% since our last study.

a) We continue to see some companies switching from full to modified retrospective method at the last minute. Amongthe companies that have disclosed their adoption method, over 80% have elected the modified retrospective.

b) Within the $10 billion+ market capitalization companies sampled, we did not note any new early adopters other thanwhat has been identified in our previous studies, i.e. Alphabet, Diageo, General Dynamics, Ford Motors, Microsoft,Raytheon and Workday. Analog Devices changed its early adoption plan to standard adoption.

c) Almost 80% of the companies sampled do not anticipate a material impact. Most companies are yet to disclosequantitative impact on the financial statement level.

The study has included a summary of impacted areas disclosed by early adopters in technology and life science industries as well asdisclosure examples from notable early adopters.

13Executive Summary - SAB 74 Disclosures


14Sampled Companies by Industry

9384

78

50

39 38 36

0

20

40

60

80

100

a b c d e f g

19%

12%

9% 9% 9%

22%20%

From left to right:a. Transportation and utilitiesb. Technologyc. Industrial products, chemicals and manufacturingd. Life sciences (biotechnology, pharmaceuticals, medical devices)e. Wholesale, retail, services and otherf. Consumer productsg. Entertainment, media and communications


15Anticipated Adoption Method

4% 5%

91%

11%

29%

60%

14%

34%

52%

17%

49%

34%

18%

65%

17%17%

74%

9%

0%

20%

40%

60%

80%

100%

Full Retrospective Modified Retrospective Still AssessingNov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study Mar'18 Study (Current)

73/418 companies Notable companies:- Raytheon (adopted)- General Dynamics (adopted)- Workday (adopted)- Microsoft (adopted)- Apple- Salesforce- VMware- Comcast- American Airline- Intuitive Surgical

308/418 companies Notable companies:- Alphabet (adopted)- Ford (adopted)- Diageo (adopted)- PepsiCo- Procter & Gamble- Twitter- Facebook- IBM- Merck- AT&T

Full Retrospective = recast all comparative periods presented in the post-adoption financial statements; Modified Retrospective = cumulative-effectadjustment to retained earnings in the period of adoption for prior periods’ effects

We continue to see companies changing the adoption method previously elected from full retrospective to modified retrospective. In addition to Netflix,International Paper, and Sherwin-Williams that were noted in our previous studies, Express Script, Omnicom Group and Yum! Brands have also changedtheir adoption method this quarter.

There are still 9% of the companies sampled that are yet to determine an adoption method, most of which have an off-calendar year-end date. Over 80% ofthe companies that disclosed an adoption method have elected to use the modified retrospective method.

When comparing adoption method election among industries, it is noted that technology industry has the highest percentage electing the full method (26%),with life sciences industry having the lowest at 6%. On the other hand, 88% of life sciences companies and 63% of consumer product companies elected touse the modified method, which represent the highest and lowest percentages among all industry groups.

For early adopters, 4 out of 7 companies elected the full retrospective method.

37/418 companies


16Anticipated Adoption Date

2%

35%

63%

2%

85%

13%

2%

93%

5%2%

96%

2%2%

97%

1%2%

98%

0%0%

20%

40%

60%

80%

100%

120%

Early Adoption Standard Adoption Not SpecifiedNov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec '17 Study Mar'18 (Current)

7/418 companies:- Alphabet (adopted)- General Dynamics (adopted)- Ford (adopted)- Raytheon (adopted)- Workday (adopted)- Microsoft (adopted)- Diageo (adopted)

411/418 companies

7 companies that issued SEC filings during our current study date range have elected to early adopt the new standard (3 from technologyindustry, 3 from industrial products, chemicals, and manufacturing industry, and 1 from consumer products industry). 6 out of those 7companies disclosed an immaterial impact.

1 company (Analog Device) has switched from its initial plan of early adoption to standard adoption.

Among the 411 companies within the “standard adoption” group,

80% (330 companies, comprising of 81% of US GAAP companies sampled and 50% of IFRS companies sampled) have disclosed boththe high-level adoption impact and an adoption method. This percentage has increased by 15~20% per quarter for the past 3 quarters.

6% (25 companies, comprising of 5% of US GAAP companies sampled and 18% of IFRS companies sampled) have not determined thehigh-level adoption impact nor an adoption method.


17Anticipated Adoption Impact

4%9%

87%

8%

42%50%

6%

43%51%

5%

54%

41%

5%

69%

26%

5%

79%

16%

0%

20%

40%

60%

80%

100%

Material Not Material Still AssessingNov'16 Study Mar'17 Study May'17 Study Aug'17 Study Dec'17 Study Mar'18 (Current study)

19/418 companies Notable companies:- Boeing- T-Mobile- American Airlines- Hilton Worldwide Holdings- Electronic Arts

330/418 companies Notable companies:- IBM- Procter & Gamble- Amgen- Best Buy- Johnson & Johnson

We have seen continued progress in companies’ disclosures about high-level adoption impacts. 10% more companies sampled have disclosed their high-level adoption impacts.

Among the companies that have disclosed a material impact, approximately 60% are from technology industry. None are from life sciences or consumerproducts industries.

61% of the IFRS companies sampled and 85% of the US GAAP companies sampled have discussed their preliminary conclusion as to whether theyanticipate a significant adoption impact.

For companies that have disclosed the high-level adoption impacts, 97% have also disclosed the adoption method. For the “still assessing” group, 49% (34 companies) have elected the modified retrospective method and 14% (10 companies) have elected the full

retrospective method. These percentages are consistent with those observed in our last study. Although the high-level adoption impact is yet to bedetermined, many companies within this group have included discussion about potential impacted areas.

Most companies sampled are yet to disclose quantitative adoption impact on the financial statements. Please refer to “Adoption Impacts – Technology” and “Adoption Impacts – Life Science ” for common impacts disclosed for those two industries.

69/418 companies


Industry Perspective Technology

18


Top 15 Technology Companies 19

Adoption Impact

Adop

tion

Met

hod

FullRetrospective

Apple Oracle Microsoft (Adopted)

ModifiedRetrospective Broadcom

Alphabet (Adopted) Facebook IBM Accenture Cisco Systems Texas Instruments Taiwan Semiconductor

Manufacturing Co Visa Mastercard SAP

Intel

NotSpecified

NotSpecified Immaterial Material

Top 15 technology companies were selected based on market capitalization at the later of (a) companies’ most recent fiscal year end or(b) December 31, 2017 (Source: MyLogIQ)

4 more companies have moved into the dot-shaded zone (right top corner) since our last study. Only 1 out of 15 companies is yet todisclose the high-level adoption impact.


20Adoption Impacts – Technology IndustryWe have reviewed specific impact areas disclosed by technology companies and summarized the most commonadoption impacts:

Elimination of VSOE and introduction of functional IP:The requirement to have vendor specific objective evidence (VSOE) for undelivered elements is eliminated. As a result,revenue from most software licenses will be recognized at a point in time compared to the legacy practice of recognizing theentire sales price ratably over time by those companies that did not or could not establish VSOE.

License renewal:Recognition of certain term software license early renewals is delayed until the commencement of the renewal term, ratherthan occur upon execution of the renewal agreement.

Over-time recognition of custom products:Custom products under non-cancellable purchases orders which are manufactured to customers’ specifications and cannot bere-sold to another customer are recognized in revenue over the production period, rather than upon delivery as under thelegacy guidance.

Sell-in vs. sell through:Revenue from sales to distributors in many instances is recognized upon product delivery to the distributors (sell-in), instead ofupon the reported resale of the product by the distributors to their customers (sell-through).

Additional software copies:Customers’ options to purchase additional copies of software that was already licensed were not accounted for asdeliverables. Under ASC 606, such options may be deemed to provide a material right to the customers and constituteseparate performance obligations.


21Adoption Impacts –Technology Industry (Cont’d)We have reviewed specific impact areas disclosed by technology companies and summarized the most commonadoption impacts:

Timing of royalty recognition:Under legacy guidance, sales- or usage-based royalties were often recognized as revenues in the period in which suchroyalties were reported by licensees, which could be after the conclusion of the quarter in which the licensees’ sales or usageoccurred. Under the new guidance, companies are required to estimate and recognize royalties in the period when theassociated sales or usage occurs.

Gross vs. net:Gross vs. net conclusions are changed in certain instances, e.g. payment processing, online booking platform, etc. as the keydriver of this assessment has shifted to whether the entity controls the underlying goods or services under ASC 606.

Warranty:Standard warranty that is not separately paid for by customers might constitute a performance obligation under ASC 606 whenthe entity provides for necessary repairs as well as preventative maintenance services for such products.

Consideration payable to customers:Customer incentive arrangements, e.g. volume-related and other pricing rebates or cost reimbursements for marketing andother activities, were sometimes recorded based on the maximum potential liability under the legacy guidance. Under the newguidance, companies estimate the amount of all customer incentives.

Overage fees:Under the legacy guidance, in some instances overage fees were recognized when they were generated. Under ASC 606,estimation of overage fees might be required.


22Adoption Impacts –Technology Industry (Cont’d)We have reviewed specific impact areas disclosed by technology companies and summarized the most commonadoption impacts:

Sales commission:Many companies currently expense their sales commissions. Upon adoption of ASC 606, companies are required to capitalizeincremental costs to obtain the contracts and amortize them over an expected period of benefit, if this period exceeds oneyear.

Removal of contingent revenue rule:Removal of the current limitation on contingent revenue for multiple element arrangements, such as when fees depend ondelivery of additional items or meeting other specified performance conditions, in some instances results in revenue beingrecognized earlier under ASC 606.


23Technology Early Adopter Example –modified adoption, first 10-K after adoption

Adoption of ASC Topic 606, "Revenue from Contracts with Customers"On January 1, 2017, we adopted Topic 606 using the modified retrospective method applied to those contracts which werenot completed as of January 1, 2017. Results for reporting periods beginning after January 1, 2017 are presented under Topic606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting underTopic 605.We recorded a net reduction to opening retained earnings of $15 million as of January 1, 2017 due to the cumulativeimpact of adopting Topic 606, with the impact primarily related to our non-advertising revenues. The impact to revenuesas a result of applying Topic 606 was an increase of $34 million for the twelve months ended December 31, 2017.Revenue RecognitionRevenues are recognized when control of the promised goods or services is transferred to our customers, in an amount thatreflects the consideration we expect to be entitled to in exchange for those goods or services.The following table presents our revenues disaggregated by revenue source (in millions, unaudited). Sales and usage-basedtaxes are excluded from revenues:


24

(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.(2) Revenues include hedging gains (losses) of $1.4 billion, $539 million, and $(169) million for the years ended December 31, 2015, 2016, and 2017, respectively, which do

not represent revenues recognized from contracts with customers.

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers (in millions,unaudited):

(1) Regions represent Europe, the Middle East, and Africa (EMEA); Asia-Pacific (APAC); and Canada and Latin America (Other Americas).(2) Revenues include hedging gains (losses) for the years ended December 31, 2015, 2016, and 2017.

Technology Early Adopter Example –modified adoption, first 10-K after adoption (cont’d)


25

Advertising RevenuesWe generate revenues primarily by delivering advertising on Google properties and Google Network Members’ properties.…...Most of our customers pay us on a cost-per-click basis (CPC), which means that an advertiser pays us only when a user clicks onan ad on Google properties or Google Network Members' properties or views certain YouTube ad formats like TrueView. For thesecustomers, we recognize revenue each time a user clicks on the ad or when a user views the ad for a specified period of time.We also offer advertising on other bases such as cost-per-impression (CPM), which means an advertiser pays us based on thenumber of times their ads are displayed on Google properties or Google Network Members’ properties. For these customers, werecognize revenue each time an ad is displayed.Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. Weestimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized.We believe that there will not be significant changes to our estimates of variable consideration.For ads placed on Google Network Members’ properties, we evaluate whether we are the principal (i.e., report revenues on a grossbasis) or agent (i.e., report revenues on a net basis). Generally, we report advertising revenues for ads placed on Google NetworkMembers’ properties on a gross basis, that is, the amounts billed to our customers are recorded as revenues, and amounts paid topublishers are recorded as cost of revenues. Where we are the principal because we control the advertising inventory beforeit is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventorybefore it is transferred to our customers, and is further supported by us being primarily responsible to our customers andhaving a level of discretion in establishing pricing.



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Other Revenues……As it relates to Google other revenues, the most significant judgment is determining whether we are the principal or agent for appsales and in-app purchases through the Google Play store. We report revenues from these transactions on a net basisbecause our performance obligation is to facilitate a transaction between app developers and end users, for which weearn a commission. Consequently, the portion of the gross amount billed to end users that is remitted to app developers is notreflected as revenues.Arrangements with Multiple Performance ObligationsOur contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to eachperformance obligation based on its relative standalone selling price. We generally determine standalone selling prices basedon the prices charged to customers or using expected cost plus margin.Deferred RevenuesWe record deferred revenues when cash payments are received or due in advance of our performance, including amounts whichare refundable. The increase in the deferred revenue balance for the twelve months ended December 31, 2017 is primarilydriven by cash payments received or due in advance of satisfying our performance obligations, offset by $985 million ofrevenues recognized that were included in the deferred revenue balance as of December 31, 2016.Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicingand when payment is due is not significant. For certain products or services and customer types, we require payment before theproducts or services are delivered to the customer.



27

Practical Expedients and ExemptionsWe generally expense sales commissions when incurred because the amortization period would have been one year orless. These costs are recorded within sales and marketing expenses.We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length ofone year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice forservices performed. [Emphasis added]



28

Recently Adopted Accounting Pronouncements

…… We early adopted the requirements of the new standard as of February 1, 2017, utilizing the full retrospective methodof transition. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, trade and otherreceivables, and deferred commissions as detailed below. We applied the new standard using a practical expedient where theconsideration allocated to the remaining performance obligations or an explanation of when we expect to recognize thatamount as revenue for all reporting periods presented before the date of the initial application is not disclosed.

The impact of adopting the new standard on our fiscal 2017 and fiscal 2016 revenues is not material. The primary impactof adopting the new standard relates to the deferral of incremental commission costs of obtaining subscription contracts.Under Topic 605, we deferred only direct and incremental commission costs to obtain a contract and amortized thosecosts over the term of the related subscription contract, which was generally three years or longer. Under the newstandard, we defer all incremental commission costs to obtain the contract. We amortize these costs on a straight-linebasis over a period of benefit that we have determined to be five years or the related contractual renewal period,depending on whether the contract is an initial or renewal contract, respectively.

Technology Early Adopter Example –full adoption, first 10-K after adoption


29

Summary of Significant Accounting Policies

Revenue RecognitionWe derive our revenues primarily from subscription services and professional services. Revenues are recognized when control ofthese services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchangefor those services.……

Subscription Services RevenuesSubscription services revenues primarily consist of fees that provide customers access to one or more of our cloud applications forfinance, human resources, and analytics, with routine customer support. Revenue is generally recognized over time on a ratablebasis over the contract term beginning on the date that our service is made available to the customer. Our subscription contracts aregenerally three years or longer in length, billed annually in advance, and non-cancelable.

Professional Services RevenuesProfessional services revenues primarily consist of fees for deployment and optimization services, as well as training. The majorityof our consulting contracts are billed on a time and materials basis and revenue is recognized over time as the services areperformed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion performed.

Contracts with Multiple Performance ObligationsSome of our contracts with customers contain multiple performance obligations. For these contracts, we account forindividual performance obligations separately if they are distinct. The transaction price is allocated to the separateperformance obligations on a relative standalone selling price basis. We determine the standalone selling prices based onour overall pricing objectives, taking into consideration market conditions and other factors, including the value of ourcontracts, the cloud applications sold, customer demographics, geographic locations, and the number and types of userswithin our contracts.

Technology Early Adopter Example –full adoption, first 10-K after adoption (Cont’d)


30

Trade and Other ReceivablesTrade and other receivables are primarily comprised of trade receivables that are recorded at the invoice amount, net of anallowance for doubtful accounts, which is not material. Other receivables represent unbilled receivables related to subscription andprofessional services contracts.

Deferred CommissionsSales commissions earned by our sales force are considered incremental and recoverable costs of obtaining a contractwith a customer. Sales commissions for initial contracts are deferred and then amortized on a straight-line basis over aperiod of benefit that we have determined to be five years. We determined the period of benefit by taking intoconsideration our customer contracts, our technology and other factors. Sales commissions for renewal contracts aredeferred and then amortized on a straight-line basis over the related contractual renewal period. Amortization expense isincluded in Sales and marketing expenses in the accompanying condensed consolidated statements of operations.

Unearned RevenueUnearned revenue primarily consists of customer billings in advance of revenues being recognized from our subscriptioncontracts. We generally invoice our customers annually in advance for our subscription services. Our typical paymentterms provide that customers pay a portion of the total arrangement fee within 30 days of the contract date. Unearnedrevenue that is anticipated to be recognized during the succeeding twelve-month period is recorded as current unearnedrevenue and the remaining portion is recorded as noncurrent.



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We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption ofASU No. 2014-09 and ASU No. 2016-18. Select condensed consolidated balance sheet line items, which reflect theadoption of the new ASU’s are as follows (in thousands):



32

Select unaudited condensed consolidated statement of operations line items, which reflect the adoption of the new ASUsare as follows (in thousands except per share data):



33

Select audited consolidated statement of cash flows line items, which reflect the adoption of the new ASUs are as follows (in thousands):

a. Adjusted to reflect the adoption of ASU No. 2014-09, Revenue from Contracts with Customers.b. Adjusted to reflect the adoption of ASU No. 2016-18, Statement of Cash Flows, Restricted Cash.



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Unearned Revenue and Performance Obligations$1.0 billion and $738 million of subscription services revenue was recognized during fiscal 2018 and 2017, respectively,that was included in the unearned revenue balances at the beginning of the respective periods. Professional servicesrevenue recognized in the same periods from unearned revenue balances at the beginning of the respective periods wasnot material.Transaction Price Allocated to the Remaining Performance ObligationsAs of January 31, 2018, approximately $5.2 billion of revenue is expected to be recognized from remaining performanceobligations for subscription contracts. We expect to recognize revenue on approximately two thirds of these remainingperformance obligations over the next 24 months, with the balance recognized thereafter. Revenue from remainingperformance obligations for professional services contracts as of January 31, 2018 was not material.Disaggregation of RevenueWe sell our subscription contracts and related services in two primary geographical markets: to customers located in theUnited States, and to customers located outside of the United States. Revenue by geography is generally based on theaddress of the customer as specified in our master subscription agreement. The following table sets forth revenue bygeographic area (in thousands):

[Emphasis added]



Industry Perspective Life Sciences

35


Top 15 Life Sciences Companies 36

Adoption Impact

Adop

tion

Met

hod Full

Retrospective

ModifiedRetrospective

Abbott Laboratories AbbVie Allergan Amgen Celgene Eli Lily Gilead Sciences Johnson & Johnson 3M Merck Pfizer Medtronic Biogen GlaxoSmithKline Bristol Myers Squibb

NotSpecified

NotSpecified Immaterial Material

Top 15 life science companies were selected based on market capitalization at the later of (a) companies’ most recent fiscal year end or(b) December 31, 2017 (Source: MyLogIQ)

All top 15 life science companies have disclosed both adoption method and high-level adoption impact.


37Adoption Impacts – Life Science IndustryWe have reviewed specific impact areas disclosed by life sciences companies and summarized the most common adoptionimpacts:

Product sales:Overall, life science companies generally disclosed that they do not believe the adoption of ASC 606 will have a significant impact onrevenue generated from product sales.

Over-time recognition for contract manufacturing and private label arrangement:Certain contract manufacturing arrangements and private label arrangements may require revenue recognition over-time in situations inwhich companies produce products that have no alternative use and have an enforceable right to payment for performance completed todate, inclusive of a reasonable profit margin. Currently, such revenues are recognized at a point in time.

Early access program:Sales of products under early access programs, i.e. products that have been through regulatory approvals but with pricing that is not fixedor determinable due to ongoing pricing discussions regarding the reimbursement rate, are deferred under the current guidance. UnderASC 606, revenues based on companies’ estimation under variable consideration guidance will be recognized.

Milestone payments:Under the legacy standard, milestone payments were recognized when earned in many instances. Under the new standard, milestonepayments are included in the initial transaction price when it is probable that a significant reversal of cumulative revenue recognized willnot occur. Accordingly, it is possible to start recognizing milestone payments before the milestones are achieved.

Licensing revenue:Some entities report significant changes to license revenue. Additional performance obligations may result, e.g. from multiple independentR&D programs, or when new territories or targets can be added to the license scope. Revenue is often accelerated if a collaboration wasstill accounted for under EITF 00-21. Some licenses are combined with a different set of services and as a result recognized over adifferent period (R&D period vs. the entire contract term). Some entities previously deferred license revenues due to refund potentialunder cost-sharing provisions; the ASC 606 constraint threshold may allow to accelerate some of these amounts.

Timing of royalty recognition:Sales-based royalties will be estimated (if necessary) and recognized in the period in which the associated sales or usage occurs ratherthan in the period in which such royalties are reported by licensees.


38

Summary of Significant Accounting Policies

Revenue Recognition

Effective January 1, 2017, the Company adopted Accounting Standards Codification, or ASC, Topic 606, Revenue fromContracts with Customers, using the full retrospective transition method. Under this method, the Company has revised itsconsolidated financial statements for the years ended December 31, 2015 and 2016, and applicable interim periods within thoseyears, as if Topic 606 had been effective for those periods. This standard applies to all contracts with customers, except forcontracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financialinstruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in anamount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determinerevenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the followingfive steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine thetransaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when(or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probablethat the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. Atcontract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods orservices promised within each contract and determines those that are performance obligations, and assesses whether eachpromised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocatedto the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion ofaccounting for net product revenue and license, collaboration and other revenues, see Note 13, “Revenue Recognition”.

Life Sciences Early Adopter Example –full adoption, first 10-K after adoption


39

New Accounting Pronouncements - Recently Adopted

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09,which amends the guidance for accounting for revenue from contracts with customers. This ASU supersedes the revenuerecognition requirements in ASC Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts withCustomers. In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of theguidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifyingperformance obligations, and licensing, and they include other improvements and practical expedients. The Company adoptedthis new standard on January 1, 2017 using the full retrospective transition method, and has elected to use the followingpractical expedients that are permitted under the rules of the adoption, which have been applied consistently to allcontracts within all reporting periods presented:

• For completed contracts that had variable consideration, the Company has used the transaction price at the datethe contract was completed rather than estimating variable consideration amounts in the comparative reportingperiods. Therefore, the Company did not need to estimate its discounts, returns, chargebacks, rebates, co-payassistance and other allowances on product sales made in the comparative reporting periods.

• For all reporting periods presented before January 1, 2017, the Company has not disclosed the amount of thetransaction price allocated to the remaining performance obligations or an explanation of when the Companyexpects to recognize that amount as revenue.

Life Sciences Early Adopter Example –full adoption, first 10-K after adoption (Cont’d)


40

Impact of Adoption

The Company, as a result of adopting Topic 606 on January 1, 2017, has revised its comparative financial statements forthe prior years as if Topic 606 had been effective for those periods. As a result, the following financial statement lineitems for the years ended December 31, 2015 and 2016 were affected.



41Life Sciences Early Adopter Example –full adoption, first 10-K after adoption (Cont’d)


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The most significant change above relates to the Company’s license, collaboration and other revenues and the impact of thepotential payment to Zai Lab (Shanghai) Co., Ltd., or Zai Lab, upon exercise of the option to co-market niraparib in China, HongKong and Macao, or the China Territories. Under Topic 605, even though the Company believed the probability was remote thatthis option would be exercised, the Company had concluded that the contract price was not fixed or determinable under therevenue recognition criteria and accordingly no revenue had been previously recognized. Therefore, the upfront, non-refundablelicense fee of$15.0 million received by the Company in the fourth quarter of 2016 was deferred and recorded as a customer depositas of December 31, 2016. Upon its adoption of Topic 606, the Company determined the probability was remote that it wouldexercise the option and accordingly, the potential future payments to Zai Lab had no impact on the transaction price. Further, theCompany evaluated this option to co-market niraparib under Topic 606 and concluded that this option was not a repurchase rightand accordingly recognized revenue in 2016 for the transaction price received as and when the performance obligations under thisagreement were satisfied by the Company. In February 2018, the Company and Zai Lab entered into an amendment to theCollaboration, Development and License agreement between the parties, eliminating the Company’s co-marketing right. Thisamendment had no impact on the Company’s accounting conclusions under Topic 606. For further discussion of the adoption ofthis standard, see Note 13, “Revenue Recognition” and Note 14, “License and Collaboration Agreements”.



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13. Revenue RecognitionProduct Revenue, NetThe Company sells its products principally to a limited number of specialty distributors and specialty pharmacy providers in the U.S.and the EU, or collectively, its Customers. These Customers subsequently resell the Company’s products to health care providersand patients. In addition to distribution agreements with Customers, the Company enters into arrangements with health careproviders and payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts withrespect to the purchase of the Company’s products.Revenues from product sales are recognized when the Customer obtains control of the Company’s product, whichoccurs at a point in time, typically upon delivery to the Customer. When the Company performs shipping and handlingactivities after the transfer of control to the Customer (e.g., when control transfers prior to delivery), they are consideredas fulfillment activities, and accordingly, the costs are accrued for when the related revenue is recognized. Taxescollected from Customers relating to product sales and remitted to governmental authorities are excluded from revenues.The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortizationperiod of the asset that the Company would have recognized is one year or less.Reserves for Variable ConsiderationRevenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variableconsideration for which reserves are established and which result from discounts, returns, chargebacks, rebates, co-payassistance and other allowances that are offered within contracts between the Company and its Customers, health careproviders, payors and other indirect customers relating to the Company’s sales of its products. These reserves arebased on the amounts earned or to be claimed on the related sales and are classified as reductions of accountsreceivable (if the amount is payable to the Customer) or a current liability (if the amount is payable to a party other than aCustomer). Where appropriate, these estimates take into consideration a range of possible outcomes that areprobability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutoryrequirements, specific known market events and trends, industry data and forecasted customer buying and paymentpatterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which



44

it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transactionprice may be constrained, and is included in the net sales price only to the extent that it is probable that a significantreversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts ofconsideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from theCompany’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings inthe period such variances become known.Trade Discounts and Allowances: The Company generally provides Customers with discounts that include incentive fees that areexplicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product revenue isrecognized. In addition, the Company receives sales order management, data and distribution services from certain Customers.To the extent the services received are distinct from the Company’s sale of products to the Customer, these payments areclassified in selling, general and administrative expenses in the consolidated statements of operations and comprehensive loss ofthe Company.Product Returns: Consistent with industry practice, the Company generally offers Customers a limited right of return based on theproduct’s expiration date for product that has been purchased from the Company, which lapses upon shipment to a patient. TheCompany estimates the amount of its product sales that may be returned by its Customers and records this estimate as a reductionof revenue in the period the related product revenue is recognized. The Company currently estimates product return liabilitiesusing available industry data and its own historical sales information, including its visibility into the inventory remaining in thedistribution channel.Provider Chargebacks and Discounts: Chargebacks for fees and discounts to providers represent the estimated obligationsresulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices chargedto Customers who directly purchase the product from the Company. Customers charge the Company for the difference betweenwhat they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established inthe same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable.



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Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider by Customers, and theCompany generally issues credits for such amounts within a few weeks of the Customer’s notification to the Company of theresale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distributionchannel inventories at each reporting period end that the Company expects will be sold to qualified healthcare providers, andchargebacks that Customers have claimed but for which the Company has not yet issued a credit.Government Rebates: The Company is subject to discount obligations under state Medicaid programs and Medicare. TheCompany estimates its Medicaid and Medicare rebates based upon a range of possible outcomes that are probability-weighted forthe estimated payor mix. These reserves are recorded in the same period the related revenue is recognized, resulting in areduction of product revenue and the establishment of a current liability that is included in accrued expenses on the consolidatedbalance sheet. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whomthe Company will owe an additional liability under the Medicare Part D program. The Company’s liability for these rebates consistsof invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received,estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized asrevenue, but remains in the distribution channel inventories at the end of each reporting period.Payor Rebates: The Company contracts with various private payor organizations, primarily insurance companies and pharmacybenefit managers, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates andrecords such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and theestablishment of a current liability.Other Incentives: Other incentives that the Company offers include voluntary patient assistance programs, such as co-payassistance programs, which are intended to provide financial assistance to qualified commercially insured patients with prescriptiondrug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims andthe cost per claim that the Company expects to receive associated with product that has been recognized as revenue, but remainsin the distribution channel inventories at the end of each reporting period.



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To date, the Company’s sources of product revenue have been U.S. sales of ZEJULA and VARUBI, and limited sales of ZEJULAand VARUBY in Europe. For the years ended December 31, 2015 and 2016, product revenues consisted solely of VARUBI in theU.S. Total net product revenue was $5.2 million and $120.7 million for the years ended December 31, 2016 and 2017, respectively.These totals included $5.2 million and $11.9 million from sales of VARUBI/VARUBY, respectively, and zero and $108.8 million fromsales of ZEJULA, respectively. The following table summarizes balances and activity in each of the product revenue allowance andreserve categories for the years ended December 31, 2015 (as revised), 2016 (as revised) and 2017 (in thousands):

The provision for returns related to sales for the year ended December 31, 2017 was primarily related to VARUBI IV, due to theCompany’s update to the VARUBI IV package insert in January 2018.



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14. License, Collaboration and Other RevenuesThe Company enters into out-licensing agreements that are within the scope of Topic 606, under which it licenses certain rights toits product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or moreof the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments formanufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensedproducts. Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on netsales of licensed products, which are classified as royalty revenues.In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, theCompany performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination ofwhether the promised goods or services are performance obligations including whether they are distinct in the context of thecontract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of thetransaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies eachperformance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that requirejudgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company useskey assumptions to determine the stand-alone selling price, which may include forecasted revenues, developmenttimelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.Licenses of Intellectual Property: If the license to the Company’s intellectual property is determined to be distinct fromthe other performance obligations identified in the arrangement, the Company recognizes revenues from non-refundable,up-front fees allocated to the license when the license is transferred to the licensee and the licensee is able to use andbenefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess thenature of the combined performance obligation to determine whether the combined performance obligation is satisfiedover time or at a point in time and, if over time, the appropriate method of measuring progress for purposes ofrecognizing revenue from non-refundable, up-front fees. The Company evaluates the measure of progress each reportingperiod and, if necessary, adjusts the measure of performance and related revenue recognition.



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Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Companyevaluates whether the milestones are considered probable of being reached and estimates the amount to be included inthe transaction price using the most likely amount method. If it is probable that a significant revenue reversal would notoccur, the associated milestone value is included in the transaction price. Milestone payments that are not within thecontrol of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieveduntil those approvals are received. The transaction price is then allocated to each performance obligation on a relativestand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligationsunder the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates theprobability of achievement of such development milestones and any related constraint, and if necessary, adjusts itsestimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, whichwould affect license, collaboration and other revenues and earnings in the period of adjustment.Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drugproduct for either clinical development or commercial supply at the licensee’s discretion are generally considered asoptions. The Company assesses if these options provide a material right to the licensee and if so, they are accounted foras separate performance obligations. If the Company is entitled to additional payments when the licensee exercises theseoptions, any additional payments are recorded in license, collaboration and other revenues when the licensee obtainscontrol of the goods, which is upon delivery.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level ofsales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizesrevenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of theroyalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royaltyrevenue resulting from any of its out-licensing arrangements.



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The Company receives payments from its licensees based on billing schedules established in each contract. Up-front paymentsand fees are recorded as deferred revenue upon receipt or when due, and may require deferral of revenue recognition to a futureperiod until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable whenthe Company’s right to consideration is unconditional. The Company does not assess whether a contract has a significantfinancing component if the expectation at contract inception is such that the period between payment by the licenseesand the transfer of the promised goods or services to the licensees will be one year or less.The following table presents changes in the Company’s contract assets and liabilities during the years ended December31, 2016 (as revised) and 2017 (in thousands):

During the years ended December 31, 2015, 2016 and 2017, the Company recognized the following revenues as a result ofchanges in the contract asset and the contract liability balances in the respective periods (in thousands):



50

14. License and Collaboration Agreements……Takeda Pharmaceutical Co., Ltd.On July 27, 2017, the Company entered into an exclusive license agreement, or the Takeda Agreement, with MillenniumPharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, or Takeda. Pursuant to the TakedaAgreement, the Company granted Takeda licenses under certain patent rights and know-how relating to niraparib to develop andcommercialize niraparib for the treatment of all tumor types in Japan, and all tumor types excluding prostate cancer in South Korea,Taiwan, Russia and Australia.In connection with the Takeda Agreement, the Company received a $100.0 million up-front payment and is eligible to receiveadditional payments of up to $140.0 million related to the achievement of certain clinical development and regulatory milestones aswell as up to $100.0 million related to the achievement of additional sales milestones. The Company will also be eligible to receivetiered royalties from Takeda based on percentages of net product sales ranging from the high teens to low thirties. Takeda isresponsible for conducting and funding all development and commercialization of niraparib in the licensed territories, includingresearch, development, regulatory and commercialization activities. Unless earlier terminated, the Takeda Agreement will continuein effect until the date on which the royalty term and all payment obligations with respect to all products in all countries haveexpired.The Company identified the following performance obligations at the inception of the Takeda Agreement: (1) exclusivelicense with rights to develop and commercialize niraparib to Takeda in the licensed territories for the associated tumortypes, and (2) initial supply to Takeda of certain materials for the manufacture of niraparib. In addition, the Company mayalso become responsible for manufacturing certain niraparib products for clinical and commercial supply and providingtechnical assistance related to the transfer of know-how, at Takeda’s option, for the manufacture of niraparib for whichthe Company will receive reimbursement that approximates stand-alone selling prices.



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The Company evaluated the Takeda Agreement under Topic 606. Based on that evaluation, the up-front, non-refundablefees and the reimbursement received for the initial supply of materials constituted the amount of the consideration to beincluded in the transaction price and have been allocated to the performance obligations identified based on theCompany’s best estimate of the relative stand-alone selling price. None of the clinical or regulatory milestones has beenincluded in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of theconstraint, the Company considered numerous factors, including that receipt of the milestones is outside the control ofthe Company and contingent upon success in future clinical trials and the licensee’s efforts. Any consideration related tosales-based milestones (including royalties) will be recognized when the related sales occur as these amounts have beendetermined to relate predominantly to the license granted to Takeda and therefore are recognized at the later of when theperformance obligation is satisfied or the related sales occur. The Company considered Takeda’s right to sublicense andmanufacture certain niraparib products, and the fact that the manufacturing services are not proprietary and can beprovided by other vendors, to conclude that the license has stand-alone functionality and is distinct. The Companybelieves that a change in the assumptions used to determine its stand-alone selling price for the license most likelywould not have a significant effect on the allocation of consideration received (or receivable) to the performanceobligations. The Company will re-evaluate the transaction price in each reporting period and as uncertain events areresolved or other changes in circumstances occur.During the year ended December 31, 2017, the Company allocated $100.0 million of the transaction price to the license andrecognized this amount as revenue concurrent with the transfer of the license. Revenue associated with the initial supply ofniraparib materials will be recognized when delivered to Takeda. Under the Takeda Agreement, for the year ended December 31,2017, the Company recognized $100.0 million within license, collaboration and other revenues in its consolidated statements ofoperations and comprehensive loss.……


[Emphasis added]

Documents

Readiness Discussion SEC Comment Letters, SAB 74 ... · a) For pre-adoption companies, SEC comments mainly focus on the extent of companies’ SAB 74 disclosures related to the evaluation