Prepare now for new revenue recognition disclosure requirements

November 17, 2017|Chris Roble

Updated guidance on revenue recognition standards will affect all companies issuing financial statements in accordance with U.S. GAAP, and you’ll need to begin planning for the implementation of these changes.

In planning for implementing the Financial Accounting Standards Board’s (FASB) new revenue recognition standard, FASB ASC 606, Revenue from Contracts with Customers, expect these new disclosures may be one of the most significant challenges for issuers of U.S. generally accepted accounting principles (GAAP) financial statements.

How have the disclosures changed?

In the past, financial statements have disclosed a varying degree of information related to revenue recognition. The new revenue standard has very extensive disclosure requirements. Under today’s GAAP, basic revenue disclosures have been presented in one or several paragraphs, whereas the disclosures under the new standard may provide for multiple pages of content in the financial statements.

As indicated throughout the FASB’s deliberations of the new revenue recognition standard, the current U.S. GAAP disclosures will be enhanced to generally include significant new depth and extensiveness to add clarity, transparency and consistency.

The general disclosure requirements outlined in ASC 606 require entities to disclose information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

In general, the three high-level areas of new disclosures include information about:

  1. An entity’s contracts with customers
  2. Any significant judgments in applying the new revenue recognition model, and
  3. Any assets recognized from costs to obtain contracts with customers

For each disclosure area, both qualitative and quantitative characteristics may be required.

Disclosure walkthrough

Under the new revenue standard, there are eight core areas of required disclosures you must report either on the face of or in the footnotes to the financial statements. Nonpublic entities have been granted relief from certain disclosure requirements where the cost of providing the information is considered to outweigh the benefits of the disclosure.

A description of the disclosure requirements by area under the new revenue recognition standard is as follows.

1. Contracts with customers

In general, all amounts of revenue arising from contracts with customers (unless on the face of the financial statements) will be disclosed. Additionally, disclosures will be provided for any impairment losses recognized on any related receivables or contract assets.

2. Disaggregation of revenue

An entity will be required to present disaggregated revenue into certain meaningful categories. Required disclosures for all entities will include revenue amounts recognized under different timing scenarios, for example related to goods or services transferred at a point in time or over time. Certain amounts of qualitative information on the impact of economic factors will also be required.

Additional disclosures related to public entities and optional disclosures for nonpublic entities include disaggregated revenue by type of goods and services:

  • Major product lines
  • Customer geographic region
  • Market or type of customer, such as government or nongovernment
  • Type of contract, such as fixed price and time and materials
  • Contract duration, such as short- and long-term contracts
  • Sales channels, such as goods sold to consumers and goods sold through intermediaries

3. Contract balances

An entity will be required to present contract-based receivables, contract assets and contract liabilities associated with customer contracts for each period presented in the financial statements. Required disclosures for all entities will include the opening and closing balances of contract assets, liabilities and receivables from contracts with customers.

Additional disclosures related to public entities and optional disclosures for nonpublic entities includes:

  • Revenues recognized in the current period that were previously recorded in contract liabilities (formerly known as deferred revenue in some cases)
  • Explanatory information related to the timing of payments on performance obligations
  • Certain other significant changes in contract balances

4. Performance obligations

Disclosures that an entity provides will include descriptive information about its performance obligations. Disclosures related to when an entity typically satisfies its performance obligations (for example upon customer shipment, upon delivery, as services are rendered, or upon completion of service), will also include a discussion of significant customer payment terms.

5. Transaction price allocated to remaining performance obligations

Specific information relative to performance obligations that are unsatisfied at the reporting date will be reported along with general information on time bands or when the revenue is expected to be recognized. Entities are not required to disclose information on performance obligations in a contract that has an original term expected to be less than one year.

6. Determining the timing of satisfaction of performance obligations

Under the revenue recognition model, entities will record revenue either when or as a performance obligation is satisfied, or at a point in time or over time to state it slightly differently. For performance obligations satisfied at a point in time, entities will disclose the judgments made as to when a customer obtains control of a promised good or service. For performance obligations satisfied over time, entities will disclose the methods used (for example, an output or input method) and also an explanation of why the method is a faithful depiction of the transfer process of goods or services.

7. Determining the transaction price and the amounts allocated to performance obligations

In a revenue transaction, determining the transaction price may be a relatively straight-forward process based on evidence supporting the contract arrangement with the customer, such as a contract or invoice. There are a number of additional types of considerations addressed in the new revenue standard, which include variable consideration, such as customer incentives, noncash components and noncash consideration. The entity’s process for determining its transaction price and types of consideration will be disclosed. For arrangements with multiple performance obligations, the disclosures will also present information surrounding the price allocation to performance obligations based on the standalone selling price methodology.

8. Significant judgments related to application of ASC 606

An entity will disclose any significant assumptions used in applying the new revenue recognition model, either for determining estimates in the timing of completing performance obligations, and or in determining the transaction price.

For U.S. nonpublic entities, the implementation date of the new revenue standard is 2019 for calendar year-end financial statement issuers. U.S. public companies are required to adopt one year earlier in 2018. With the extent of the changes in the new revenue standard, it will be vital for you to plan and to execute the implementation process.

Contact us for assistance in planning for the implementation of this new standard and its impact on your business.

Chris Roble, CPA, is a shareholder who has nearly 15 years of audit and financial reporting experience. He specializes in the planning, supervision and review of external audit engagements primarily serving the trucking, logistics and manufacturing industries.