AXT INC Revenue Disclosure

Revenue Recognition

We manufacture and sell high-performance compound semiconductor substrates including indium phosphide and semi-conducting and semi-insulating gallium arsenide and germanium wafers, and our three consolidated subsidiaries sell certain raw materials including 99.99% pure gallium (4N Ga), high purity gallium (7N Ga), pyrolytic boron nitride (pBN) crucibles and boron oxide (B2O3). After we ship our products, there are no remaining obligations or customer acceptance requirements that would preclude revenue recognition. Our products are typically sold pursuant to a purchase order placed by our customers, and our terms and conditions of sale do not require customer acceptance. We recognize revenue upon shipment and transfer of title of products to our customers, which is either upon shipment from our dock, receipt at the customer’s dock, or removal from consignment inventory at the customer’s location, provided that we have received a valid purchase order, the price is fixed or determinable, title and risk of ownership have transferred, collection of resulting receivables is probable, and product returns are reasonably estimable. Revenue is net of any taxes assessed by any governmental authority. 

 

We do not provide training, installation or commissioning services. We assess the probability of collection based on a number of factors including past history with the customer and credit worthiness.  We provide for future returns based on historical experience, current economic trends and changes in customer demand at the time revenue is recognized.

In May 2014, the Financial Accounting Standards Board ("FASB") issued new guidance related to revenue recognition, which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue as control of goods or services transfers to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. In August 2015, the FASB issued an amendment to defer the effective date of the guidance. The effective date of the guidance will be the first quarter of our fiscal year 2018. The new standard creates a single source of revenue guidance under U.S. GAAP, eliminating industry-specific guidance.

The underlying principle of the standard is to recognize revenue when a customer obtains control of promised goods or services at an amount that reflects the consideration that is expected to be received in exchange for those goods or services. An entity should apply a five-step approach for recognizing revenue as follows (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The standard also requires increased disclosures including the nature, amount, timing, and uncertainty of revenues and cash flows related to contracts with customers. The standard allows two methods of adoption: (1) retrospectively to each prior period presented (“full retrospective method”), or (2) retrospectively with the cumulative effect recognized in retained earnings as of the date of adoption ("modified retrospective method").

 

We have evaluated and disclosed whether or not we expect the recent accounting pronouncements will have a material impact on our consolidated financial statements. With regard to Accounting Standards Update 2014-09 Revenue from Contracts with Customers, we have established a crossfunctional team to assess the potential impact of the new standard and is reviewing current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to revenue contracts and identifying appropriate changes to the business processes, systems and controls to support revenue recognition and disclosure requirements under the new standard. We have completed our evaluation of the potential impact on business processes, systems, controls and consolidated financial statements of the new revenue standard and have concluded there will be no significant changes to our statement of operations. We have adopted this standard on January 1, 2018 using the modified retrospective method.