Authored by: Philip Santarelli
Historically, revenue disclosures in financial statements have been quite minimal. Most entities briefly described that revenue was measured based on these basic concepts: delivery of the goods or services has occurred and the price has been established. There is not much useful information in these disclosures. Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, seeks to change that by requiring robust disclosure for the users of the financial statements.
The objective of the standard is to: “…disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows…”1 Entities will accomplish this by providing qualitative and quantitative information regarding the entity's contracts with customers, the estimates and judgments the entity used to measure its revenue, and the nature of any assets recognized related to the costs of obtaining the contracts.
While ASC 606 is a principle-based standard, stating that an entity shall consider what level of detail is necessary for users to obtain the understanding described in the objective, it does provide many requirements, which will be discussed further below. The standard also provides some relief in that entities may comply with the disclosure requirements through disclosures required by other ASC topics, when the requirements overlap.
The disclosures are required to be presented for each reporting period for which a statement of comprehensive income is presented.
The following briefly describes the requirements within the broad disclosure topics:
Contracts with customers
- Revenue from contracts with customers shall be disclosed separately from other sources of revenue, such as interest income.
- Entities shall disclose any impairment losses related to receivables from revenue contracts (bad debts) or other contract assets related to contracts with customers (capitalized contract acquisition costs, assets recognized in connection with variable consideration, other contract costs such as unbilled work in process, etc.)
Disaggregation of revenue
- Revenue should be disaggregated in a manner that provides users with information on the “…how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.”2
- Information as to how the disaggregated revenue disclosure relates to the revenue information provided in the segment disclosures, if ASC 280 is applicable.
- The extent of the disaggregation disclosure will depend on the relevant facts and circumstances of an entity’s relationship with its customers. When determining the extent of the disclosure to provide an entity should:
- Consider information that is presented outside of the financial statements, such as in investor presentations.
- Review information to evaluate operating segment performance.
- Assess other similar information
- ASC 606 provides the following examples of potential categories:
- Type of good or service (e.g., major product lines)
- Geographical region (e.g., country or region)
- Market or type of customer (e.g., government and nongovernment customers)
- Type of contract (e.g., fixed-price and time-and-materials contracts)
- Contract duration (e.g., short-term and long-term contracts)
- Timing of transfer of goods or services (e.g., revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
- Sales channels (e.g., goods sold directly to consumers and goods sold through intermediaries).3
The guidance provides an exception for entities other than public entities4 to elect not to provide the quantitative information noted above. However, entities making this election must provide at a minimum:
- Revenue disaggregated based on the timing of recognition, that is over time or at a point in time, and
- Qualitative information about “…how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors.”5
- An entity shall disclose the following information related to its contract balances:
- The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed
- Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
- Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).6
- Information as to how the timing of contract performance relates to the timing of payment
- Information as to any significant changes in contract balances that occurred during the reporting period. Including qualitative and quantitative information. Examples include:
- Changes due to business combinations
- Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification
- Impairment of a contract asset
- A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be reclassified to a receivable)
- A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability).
- Entities other than a public business entity7, may elect not to provide the above disclosures related to contract balances but if such an election is made, they must provide information as to the opening and closing balances of receivables, contract and assets and contract liabilities.
- An entity shall disclose all of the following information about its performance obligations:
- When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement
- The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 606-10-32-11 through 32-13)
- The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent)
- Obligations for returns, refunds, and other similar obligations
- Types of warranties and related obligations.8
Transaction price allocated to remaining performance obligations
- An entity shall disclose all of the following information about its remaining performance obligations:
- The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period
- An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the entity shall disclose in either of the following ways:
- On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
- By using qualitative information.
- As a practical expedient, all entities may elect not to provide the above information for performance obligations that has an original expected duration of less than one year and it follows relevant guidance for recognizing revenue over time.
- An entity shall explain whether it is applying the practical expedient and whether or not any variable consideration subject to the constraint is not included in the information about the transaction price.
- An entity other than a public business entity and related similar entities may elect not to provide the disclosures about remaining performance obligations.
Significant judgments in the application of the guidance
- An entity shall disclose the judgments and estimates (and any related changes) in applying the guidance in ASC 606 that significantly affect the timing and amount of revenue recognized with particular requirements:
- With respect to the timing of the satisfaction of performance obligations recognized over time:
- Methods used to recognize such revenue, input methods or output methods and the application of either
- Information as to how the method utilized faithfully represents the transfer of goods or services.
- With respect to performance obligations satisfied at a point in time, the entity shall disclose information relevant to its decision as to when the customer obtains control
- With respect to the timing of the satisfaction of performance obligations recognized over time:
- An entity shall disclose the judgments and estimates related to the transaction price and allocation of the transaction price to performance obligations, including:
- How the transaction price including variable consideration was determined, including issues related to the time value of money and the measurement of any non-cash consideration
- Whether the constraint on variable consideration was applied
- How standalone selling prices were determined and how discounts and variable consideration was applied to specific performance obligations.
- How obligations related to returns, refunds, etc. were determined
- Entities other than public business entities and similar entities may elect not to provide any or all of the following disclosures:
- Paragraph 606-10-50-18(b), which states that an entity shall disclose, for performance obligations satisfied over time, an explanation of why the methods used to recognize revenue provide a faithful depiction of the transfer of goods or services to a customer
- Paragraph 606-10-50-19, which states that an entity shall disclose, for performance obligations satisfied at a point in time, the significant judgments made in evaluating when a customer obtains control of promised goods or services
- Paragraph 606-10-50-20, which states that an entity shall disclose the methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price. However, if an entity elects not to provide the disclosures in paragraph 606-10-50-20, the entity shall provide the disclosure in paragraph 606-10-50-20(b), which states that an entity shall disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained.
Clearly the disclosure requirements are much more extensive than those required by current standards. Applying these disclosures will likely present a significant challenge to public business entities and not-for-profit organizations that are conduit debt obligors. Unfortunately the standard itself does not provide any examples of suggested disclosure formats. This will perhaps, enable entities in particular industries to develop acceptable or best practice approaches to the required disclosures, but this will of course take some time.
Since much of the information required to be disclosed will not come directly from an entity’s general ledger, it will be necessary for entities to develop processes to obtain the required information, with sufficient internal control to provide reasonable certainty as to the accuracy and completeness of the information in accordance with GAAP. It will also likely to require significant judgment to determine whether other required disclosures may in part satisfy the above requirements, and how the layout of the disclosures can facilitate the users of the financial statement getting information to meet the objective.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
1 ASC 606-10-50-1
2 ASC 606-10-50-5
3 ASC 606-10-55-91
4 Including not for profit conduit debt obligors and benefit plans that file with the SEC
5 ASC 606-10-50-5
6 ASC 606-10-50-8
7 Including not for profit conduit debt obligors and benefit plans that file with the SEC
8 ASC 606-10-50-12