Authored by Tom Sheahan and Erik Schuchardt
After navigating the five elements of the revenue recognition process, ASC 606 requires robust disclosures for the users of the financial statements. The new accounting standard requires a contractor to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows. Contractors will need to provide qualitative and quantitative information regarding its contracts with customers, the estimates and judgments the contractor used to measure its revenue, and the nature of any assets recognized related to the costs of obtaining the contracts.
The extent of the disclosures required will vary depending on whether the contractor is a public or private company. Private companies may elect to exclude quantitative information from the required disclosures. These disclosures are required to be presented for each reporting period and include information related to contracts with customers such as the disaggregation of revenue, contract balances, performance obligations, transaction price and significant judgments used in applying the new standard.
Disaggregation of revenue
Disclosures of revenue should be disaggregated according to the nature, amount, timing and uncertainty of revenue and cash flows. Public companies are required to provide qualitative and quantitative disclosures, whereas nonpublic companies are only required to disclose qualitative information about how economic factors affect the nature, timing and uncertainty of revenues and cash flows. ASC 606 provides the following examples of potential categories:
- Type of good or service (e.g., general contractor, design services, maintenance services)
- Geographical region (e.g., country or region)
- Market or type of customer (e.g., government, institutional, industrial, infrastructure, commercial, residential, multifamily)
- Type of contract (e.g., fixed-price, guaranteed maximum price, time and materials)
- Contract duration (e.g., short-term and long-term contracts)
- Timing of transfer of goods or services (e.g., at a point in time or over time)
The majority of disclosures related to contract balances are quantitative and as a result a nonpublic company may elect not to disclose this information; however, qualitative information related to contract balances would be required. A construction contractor 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 (required for both public and nonpublic companies)
- 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 (e.g., changes in transaction price)
- How the timing of satisfaction of its performance obligations relates to the typical timing of payment, and the effect that those factors have on the contract asset and the contract liability balances utilizing qualitative information
- Information related to significant changes in contract balances that occurred during the reporting period such as changes due to business combinations, cumulative catch-up adjustments, changes in estimate, contract modifications, impairment of a contract asset, a change in the time frame for a right to consideration to become unconditional, or a change in the time frame for a performance obligation to be satisfied
A construction contractor is required to disclose all of the following information about its performance obligations:
- When a performance obligation is typically satisfied (e.g., 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 (e.g., when payment is typically 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 as defined in the standard)
- The nature of the goods or services that the contractor has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (e.g., an agent).
- Obligations for returns, refunds, and other similar obligations
- Types of warranties and related obligations
Transaction price allocated to remaining performance obligations
A construction contractor is required to 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 satisfied) as of the end of the reporting period
- An explanation of when the contractor expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the contractor 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
A construction contractor that is not a public company may elect not to provide the disclosures about remaining performance obligations. As a practical expedient, all entities may elect not to provide disclosures about remaining performance obligations that have an original expected duration of less than one year and it follows relevant guidance for recognizing revenue over time. A contractor that applies this practical expedient must explain whether or not any variable consideration subject to the constraint is excluded from the information about the transaction price.
Significant judgments used in applying the guidance
A construction contractor shall disclose the judgments and estimates (and any related changes) in applying the guidance in ASC 606 that significantly impact the determination of the amount and timing of revenue from contracts with customers. In particular, a contractor shall explain the judgments used in determining the following:
- 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 contractor shall disclose information relevant to its decision as to when the customer obtains control
- With respect to 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
A construction contractor that is not a public company may elect to not provide any or all of the following disclosures:
- Paragraph 606-10-50-18(b), which states that a contractor 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 a contractor 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 a contractor shall disclose the methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price. However, if a contractor elects not to provide the disclosures in paragraph 606-10-50-20, the contractor shall provide the disclosure in paragraph 606-10-50-20(b), which states that a contractor shall disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained.
The disclosure requirements under ASC 606 are more extensive than those required under current guidance. The new standard does not provide any examples or illustrations of suggested disclosure formats. This enables contractors to develop acceptable or best practice approaches to the required disclosures.
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