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Revenue Recognition: SAB 74 DisclosuresThe U.S. Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin No. 74, (SAB 74) Disclosure of theImpact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant WhenAdopted in a Future Period, imposes financial statement disclosure requirements in advance of a company’sadoption of a new accounting standard. The next several years will see a flurry of major accounting changesprimarily related to three recently issued standards: Accounting Standards Codification (ASC) 606, Revenue fromContracts with Customers; ASC 842, Leases; and ASC 326, Financial Instruments—Credit Losses. In severalspeeches, SEC officials have made it clear they are looking for increasing levels of detail from SAB 74 disclosures asthe effective dates approach. For public entities 1, the revenue rules are effective for calendar-year 2018 financialstatements. Let’s take a closer look at the SEC’s expectations for SAB 74 disclosures related to adoption of the newrevenue recognition standard, Accounting Standards Update (ASU) 2014-09.In multiple public speeches, senior SEC officials noted they are looking for disclosures beyond the plain language ofSAB 74. Statements that the effect of the new standard is immaterial should reflect consideration of the full scopeof the new standard, which covers recognition, measurement, presentation and disclosure for revenuetransactions. The SEC staff expects to see the following in the upcoming SAB 74 disclosures (whether in the Form10-K or quarterly reports on Form 10-Q): Quantitative disclosures of directional effects of adoption, if known, and the anticipated date and methodof adoption (in the case of revenue recognition, full versus modified retrospective) (see Ford, Appendix A) Qualitative information on the status of management’s implementation efforts (see AT&T, Appendix B) Any additional information—whether quantitative or qualitative—that may be necessary to enableinvestors to understand the company’s progress on implementation (see Analog Devices, Appendix C) Enumeration of open items not yet addressed as part of a company’s implementation plan (see Microsoft,Appendix D 2Q17) Quantitative estimates of the effects on specific product categories or revenue streams if reasonablydeterminable, even if the overall revenue effects are not yet calculable (see Microsoft, Appendix E 1Q17)From a preliminary look at recent Form 10-K and Form 10-Q filings, a number of companies have enhanced theirtransition disclosures, although others still have more work to do. Some recent SEC filings include these SAB 74details:1 The expectation of more, less or similar performance obligations and whether revenue would berecognized earlier, later or remain the same (see Fluor, Appendix F) The possibility of earlier revenue recognition for contingent amounts of variable consideration (seeMorgan Stanley, Appendix G) The need to recognize revenue later for certain contracts that were previously recognized over time usingthe percentage-of-completion model (see Howard Hughes Corp., Appendix H)The new revenue standard defines a public entity as any one of these:A public business entityA not-for-profit entity that has issued, or is a conduit bond obligor for, securities traded, listed or quotedon an exchange or over-the-counter market An employee benefit plan that files or furnishes financial statements to the SEC

Revenue Recognition: SAB 74 DisclosuresThe SEC recognizes that SAB 74 disclosures are preliminary and subsequent changes in disclosed estimates will notbe assumed to reflect a control deficiency relating to prior disclosures. A company’s disclosures should evolveover time and be consistent with information provided to its audit committee and investors. As managementcompletes portions of its implementation plan and develops an assessment of the anticipated effect, effectiveinternal controls should be designed and implemented to timely identify disclosure content and ensure thatappropriately informative disclosure is made. The SEC announced it will pay close attention to both the accountingpolicy footnote addressing the effect of adoption of the new generally accepted accounting principles and acompany’s quarterly disclosures of any material changes to internal controls over financial reporting, given themagnitude of the implementation process.SEC officials emphasized that audit committees should be discussing the outside auditor’s views aboutmanagement’s implementation efforts. Wesley Bricker, SEC chief accountant, pointedly observed in his AmericanInstitute of CPAs keynote address: “Particularly for companies where implementation is lagging, preparers, theiraudit committees and auditors should discuss the reasons why [implementation is lagging] and provideinformative disclosures to investors about the status so that investors can assess the implications of theinformation. Successful implementation requires companies to allocate sufficient resources and develop orengage appropriate financial reporting competencies.”BKD continues to monitor the revenue recognition standard process. Visit BKD's Hot Topic page to learn more.ContributorAnne CoughlanDirector317.383.4000acoughlan@bkd.com2

Revenue Recognition: SAB 74 DisclosuresAppendix A – Ford Motor Company 2016 10-KWe will adopt the new revenue guidance effective January 1, 2017, by recognizing the cumulative effect of initiallyapplying the new standard as an increase to the opening balance of retained earnings. We expect this adjustmentto be less than 100 million, with an immaterial impact to our net income on an ongoing basis. Adoption of thenew standard will also result in changes in classification between Revenues, Cost of sales, Non-Financial Servicesinterest income and other income/(loss), net, and Financial Services other income/(loss), net.Appendix B – AT&T 2015 10-KUpon initial evaluation, we believe the key changes in the standard that impact our revenue recognition relate tothe allocation of contract revenues between various services and equipment, and the timing in which thoserevenues are recognized. We are still in the process of determining the impact on the timing of revenuerecognition and the allocation of revenue to products and segments.ASU 2014-09 also specifies that all incremental costs of obtaining and direct costs of fulfilling our contracts withcustomers should be deferred and recognized over the contract period or expected customer life. In the thirdquarter of 2015, we changed our accounting policy for the costs of fulfilling contracts with customers to defer allrecoverable costs while not changing our approach to acquisition costs. We believe, as a result of our accountingpolicy change for fulfillment costs, that the requirement to defer such costs in the new standard will not result in asignificant change to our results. The requirement to defer contract acquisition costs however, will result in therecognition of a deferred charge on our balance sheets, but as the industry continues to undergo changes in howdevices and services are sold to customers with impacts on the resulting commissions paid to our internal andexternal salesforces, we cannot currently estimate impact of this change.While we continue to evaluate the impact of the new standard and available adoption methods, we believe thestandard will require us to implement new revenue accounting systems and processes, which will significantlychange our internal controls over revenue recognition.Appendix C – Analog Devices 1Q17 10-QWe have developed a project plan for the implementation of the guidance including a review of all revenuestreams to identify any differences in the timing, measurement or presentation of revenue recognition. While theCompany is still in the process of completing its evaluation of the standard, it currently believes the mostsignificant impact will be related to the timing of recognition of sales to distributors. The Company currentlydefers revenue and the related cost of sales on shipments to distributors until the distributors resell the productsto their customers. Upon adoption of ASU 2014-09, the Company will no longer be permitted to defer revenueuntil sale by the distributor to the end customer, but rather, will be required to estimate the effects of returns andallowances provided to distributors and record revenue at the time of sale to the distributor. The Company iscontinuing to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on itsconsolidated financial statements and related disclosures. The Company is considering early adoption of the newstandard using the full retrospective method in the fiscal year ending November 3, 2018. The method of adoptionand the Company's ability to early adopt the standard is dependent on system readiness and the completion ofanalysis necessary to meet the requirements under ASU 2014-09.3