Is the Price Right? WD-40’s Revenue Recognition Choices Based on Financial Disclosures From the WD-40 Company

Abstract

Accounting Standards Codification 606, Revenue from Contracts with Customers, provides greater standardization of revenue recognition practices across industries and companies, thereby promoting comparability for the users of financial statements. This case provides students an opportunity to learn about revenue recognition procedures by employing a detailed analysis of transaction prices using data from financial disclosures from the WD-40 Company. Students will be asked to review Form 10-K excerpts to learn about the company’s business models and accounting practices, review a Securities and Exchange Commission comment letter, and analyze the implications of the company’s response.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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Resources

Appendix A: Independent Accountant Audit Report

To the Board of Directors and Shareholders of WD-40 Company

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of WD-40 Company and its subsidiaries (the “Company”) as of August 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, including the related notes, of WD-40 Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”).

We also have audited the Company’s internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Rebates - Cooperative Marketing Program Accruals

As described in Notes 2 and 10 to the consolidated financial statements, sales are recorded net of allowances for damaged goods and other sales returns, sales incentives, trade promotions and cash discounts. In determining the transaction price, management evaluates whether the price is subject to refund or adjustment related to variable consideration to determine the net consideration to which the Company expects to be entitled. The Company records estimates of variable consideration, which primarily includes rebates (cooperative marketing programs and volume-based discounts), coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its consolidated statements of operations. These estimates are based on the most likely outcome method considering all reasonably available information, including current and past trade promotion spending patterns, status of trade promotion activities, the interpretation of historical spending trends by customer and category, customer agreements and/or currently known factors that arise in the normal course of business. Management reviews its assumptions and adjusts these estimates accordingly on a quarterly basis. As of August 31, 2019, the Company had a [USD] $7.5 million balance in rebate liabilities, which are included in accrued liabilities on the Company’s consolidated balance sheet, and recorded approximately [USD] $18.2 million in rebates as a reduction to sales during fiscal year 2019.

The principal considerations for our determination that performing procedures relating to the cooperative marketing program accruals is a critical audit matter are (i) there was significant judgment by management to estimate the cooperative marketing program accruals, which in turn led to a high degree of auditor judgment in performing procedures to evaluate the status of trade promotion activities within the cooperative marketing program accruals, and (ii) there was a high level of audit effort and subjectivity in performing procedures to evaluate the current and past trade promotion spending patterns and the status of trade promotion activities used to determine the cooperative marketing program accruals.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the estimation of cooperative marketing program accruals, which included controls over the current and past trade promotion spending patterns and the status of trade promotion activities used in management’s estimate. These procedures also included, among others, (i) testing management’s process to estimate the cooperative marketing program accruals, including evaluating the appropriateness of the most likely outcome method, testing the completeness, accuracy and relevance of underlying data used, including the current and past trade promotion spending patterns, and evaluating the reasonableness of the status of trade promotion activities assumption considering the overall business environment, and (ii) evaluating the completeness of offers made to customers for potential promotional activities, which may require accrual as of period end.

Income Taxes – Uncertain Tax Position – Toll Tax

As described in Note 13 to the consolidated financial statements, on December 20, 2017, the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (Tax Act), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018. In November 2018, subsequent to the filing of the Company’s federal income tax return, the U.S. Treasury released proposed regulations that were subsequently finalized in June 2019. These regulations specifically address, and are inconsistent with, the Company’s position regarding the availability of the dividends received deduction for deemed foreign dividends recorded in fiscal 2018 associated with the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings. During July 2019, management completed its assessment of these final regulations. Due to the uncertainty created by these regulations, the Company recorded a reserve for an uncertain tax position in the fourth quarter of its fiscal year 2019 in the amount of [USD] $8.7 million, inclusive of accrued interest of approximately [USD] $0.4 million. As described in Note 13, this uncertain tax position represents the estimated tax liability that would be imposed if these final regulations are enforced.

The principal considerations for our determination that performing procedures relating to the uncertain tax position related to the toll tax is a critical audit matter are (i) there was significant judgment by management when determining the uncertain tax position, which in turn led to a high level of audit effort and judgment to evaluate management’s assessment, (ii) there was a high degree of auditor subjectivity relative to the interpretation and application of the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the identification, recognition, and measurement of the uncertain tax position. These procedures also included, among others, (i) testing the information used in the calculation of the liability for the uncertain tax position, including the filed federal tax return, (ii) testing the calculation of the liability for the uncertain tax position, and (iii) evaluating management’s assessment of the technical merits and estimate of the tax position expected to be sustained. Professionals with specialized skill and knowledge were used to assist in the evaluation of the recognition and measurement of the Company’s uncertain tax position, including evaluating the reasonableness of management’s assessment of whether the tax position is more-likely-than-not of being sustained and the amount of potential benefit to be realized, the application of relevant tax laws and regulations, and estimated interest and penalties.

/s/ PricewaterhouseCoopers LLP

San Diego, California

October 22, 2019

We have served as the Company’s auditor since at least 1972. We have not been able to determine the specific year we began serving as auditor of the Company.

Appendix B: SEC Comment Letter

The contents of the letter from the SEC to WD-40 are as follows:

A logo of Securities and Exchange Commission

Division of Corporation of Finance

United States

Securities and Exchange Commission

Washington, D.C. 20549

March 12, 2020

Jay Rembolt

Chief Financial Officer

WD 40 CO

9715 Businesspark Avenue

San Diego, CA. 92131

Re: WD 40 CO

Form 10-K for the year ended December 31, 2019

Filed on October 22, 2019

File No. 000-06936

Dear Mr. Rembolt:

We have reviewed your filing and have the following comments. In some of our comments, we may ask you to provide us with information so we may better understand your disclosure.

Please respond to these comments within ten business days by providing the requested information or advise us as soon as possible when you will respond. If you do not believe our comments apply to your facts and circumstances, please tell us why in your response.

After reviewing your response to these comments, we may have additional comments.

Form 10-K for the year ended August 31, 2019

Note 10. Revenue Recognition, page F-20

1. You indicate that you estimate your transaction price using the most likely method. Please tell us why it is appropriate to apply this method rather than the expected value method given the characteristics of your contracts and the nature of your promotional activities. See ASC 606-10-32-8.

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action, or absence of action by the staff.

You may contact Ameen Hamady at 202-551-3891, or in his absence, Terence O Brien at 202-551-3355 at if you have any questions.

Jay Rembolt

WD 40 CO

March 12, 2020

Page 2

Sincerely,

Division of Corporation Finance

Office of Life Sciences

A letter from the SEC to WD-40.

Appendix C: WD-40 Response to Comment Letter

The contents of the letter from WD-40 to the SEC are as follows:

11/30/2020

SEC Comment Letter March 2020

CORRESP 1 filename1.htm

March 31, 2020

Securities and Exchange Commission

Division of Corporate Finance

Office of Life Sciences

100 F Street, NE

Washington, D.C. 20549

Attention: Ameen Hamady

Terence O Brien

Re: WD-40 Company

Form 10-K for the year ended December 31, 2019

Filed October 22, 2019

File No. 000-06936

Dear Ameen Hamady:

This letter is provided in response to the comment of the staff of the Division of Corporation Finance of the Securities and Exchange Commission contained in your letter dated March 12, 2020, which was received by the Company on March 20, 2020. For reference purposes, the staff’s comment has been reproduced below in italics followed by our responses.

Form 10-K for the year ended August 31, 2019

Note 10. Revenue Recognition page F-20

1. You indicate that you estimate your transaction price using the most likely method. Please tell us why it is appropriate to apply this method rather than the expected value method given the characteristics of your contracts and the nature of your promotional activities. See ASC 606-10-32-8.

Response

We respectfully acknowledge the staff’s comment and have reviewed the guidance in ASC 606-10-32-8. Based upon our further review of this guidance and analysis of industry practice and disclosures, we have gained additional perspective with respect to our interpretation of the definitions for the methods specified in ASC 606-10-32-8. As a result of this additional perspective, we have now concluded that the estimation process that we follow for our promotional activities in order to determine our transaction price uses the expected value method.

The Company further advises the staff that it will revise its disclosure as follows in future periodic reports filed with the Commission, starting with its Quarterly Report on Form 10-Q for the quarterly period ended February 29, 2020, by updating the following paragraph in the Revenue Recognition Footnote:

Variable Consideration - Sales Incentives

In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment related to variable consideration to determine the net consideration to which the Company expects to be entitled. The Company records estimates of variable consideration, which primarily includes rebates (cooperative marketing programs and volume-based discounts), coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its consolidated statements of operations. These estimates are based on the most likely outcome expected value method considering all reasonably available information, including current and past trade promotion spending patterns, status of trade promotion activities, the interpretation of

https://sec.repor/Document/0000105132-20-000016/0000105132-20-000016txt

11/30/2020

SEC Comment Letter March 2020

historical spending trends by customer and category, customer agreements and/or currently known factors that arise in the normal course of business. The Company reviews its assumptions and adjusts these estimates accordingly on a quarterly basis.

A letter from WD-40 to the SEC.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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