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The Importance of Textual Analysis

Tuesday, January 8, 2019
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Wednesday, January 2, 2019
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Friday, December 28, 2018
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Thursday, December 27, 2018
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Monday, December 17, 2018
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Wednesday, December 12, 2018
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Sunday, December 2, 2018
SEC Comment Letters: The Amazon Example

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Tuesday, October 30, 2018
10-K/Q Section Text Change Detection

Sunday, October 28, 2018
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Recasting Revenue: Another Example
Wednesday, January 31, 2018

So defense contractor Northrop Grumman filed its 2017 Form 10-K earlier this week, and Calcbench was rooting around in the financial disclosures to see whether we could find any cool stuff.

Sure enough, at the bottom of its Summary of Significant Accounting Policies, we found what Northrop had to say about the new accounting standard for revenue recognition — including a forecast of what Northrop’s 2017 revenues would have looked like, had the company already adopted the new standard.

First, a few caveats. The new standard (ASC 606, Contracts With Customers) requires companies to define business transactions as a series of performance obligations they provide to a customer. The company can then only recognize revenue as it fulfills each obligation.

For many companies, that new approach won’t mean much. For some (looking at you, software sector), it will mean a lot, to the point that companies might have to report a material change in the timing or nature of their revenue patterns.

So what did Northrop Grumman have to say?

First, the company adopted the new standard as of Jan. 1, 2018. So its most recent Form 10-K, for the fiscal year ending Dec. 31, 2017, still includes financials on the income statement reported according to the old standard. Mixed results on that front: total revenue up 8.8 percent to $16.04 billion, but net earnings down 8 percent $2.02 billion.

About the new revenue standard, Northrop said in its Summary of Significant Accounting Policies that it does not expect the new standard to have a material effect on revenue numbers. That said, the company will be adopting ASC 606 using the “full retrospective method,” where it recasts previous years’ revenue numbers according to the new standard. And Northrop did find a few changes:

Under the full retrospective method, we principally recognized the cumulative effect of adoption as an increase in unbilled accounts receivable, a reduction in inventoried costs, an increase in advance payments and amounts in excess of costs incurred and a net increase in retained earnings as of January 1, 2016.

But wait, it gets better! Northop even included a table of the revised revenue numbers. Take a look:

Financial analysts will see more and more of these disclosures in coming weeks, and then throughout 2018 as all companies eventually implement ASC 606. Northrop is one example; we’ll post about other interesting ones as they come to light.

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