On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued their final standard on revenue from contracts with customers. The standard, issued as ASU 2014-09 by the FASB and as IFRS 15 by the IASB, outlines guidance for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including most industry-specific guidance.
Under ASU 2014-09, adoption for most non-public companies is required for reporting periods beginning after December 15, 2017 or for interim reporting periods within annual reporting periods beginning after December 15, 2018. With the adoption dates right around the corner one of the key considerations is the impact on financial statement disclosures. While the effect will vary greatly between public and non-public companies these changes in disclosure requirements are expected to affect all entities and merit strong consideration prior to adoption.
As discussed within ASU 2014-09 itself and seen commonly within practice, current disclosures regarding revenue are often found to be limited in nature and lacking cohesion. Entities currently include descriptions of their accounting policies regarding revenue recognition, however, the level of detail varies greatly in practice. Information range from a general description of the revenue recognition process to more in-depth descriptions of the entity’s role in a transaction, rights of return, incentives offered, and other more detailed information. Even the most thorough descriptions, however, are often criticized as lacking in enough detail by the users of the financials to properly analyze the revenue streams. It was primarily this factor, further accentuated by a variance in practice on level of detail that prompted the disclosure changes in ASU 2014-09.
The guidance issued under ASU 2014-09 has sought to make revenue disclosures more descriptive regarding the nature, amounts, timing, and uncertainty of revenue and related cash flows that are recognized as well as more consistent between industries. The focus is through expanded disclosures in the areas of contracts with customers, the judgements associated in the revenue recognition process, and assets recognized from the costs to obtain or fulfill a customer contract.
Contracts with Customers
Under the new guidance the entity shall disclose revenue recognized from contracts with customers and any impairment losses recognized on receivables or contract assets. Both shall be disclosed separately from revenue or impairment losses recognized from its other revenue sources. Also disclosed are the following balances (if not otherwise presented or disclosed):
Disaggregation of revenue – Revenue recognized from contracts shall also be disaggregated when appropriate and disclosed in separate categories depicting the nature, amount, timing, uncertainty of revenue and cash flows. The number of categories will vary by entity but is based on consideration to the following areas:
The guidance further suggests that the type of service, geographical region, market or type of customer, type of contract, contract duration, timing of transfer of goods or services, and sales channels be consideration for determination of the categories. Disclosures must then be made on the disaggregated revenue in order to make the rationale for the different groups clear to the users of the financial statements.
Non-public company specific guidance – Many non-public companies may elect not to apply the quantitative disaggregation disclosure guidance noted above. In lieu of these disclosures the entity must disclose revenue disaggregated by timing of the transfer of goods or services and qualitative information about how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows. Generally speaking this election would allow for a simpler analysis of the disaggregation of revenue in addition to potentially reduced disaggregated categories and in some cases be as simple as a category for revenue earned as a point in time and a category for revenue recognized over time.
Judgements Utilized in Application of Guidance
Another area of emphasis under the updated guidance is the judgements utilized in the revenue recognition process. The entity is required to disclose any of the judgements made in applying the updated guidance under ASU 2014-09, in addition to any changes in judgements from the resulting adoption. Such disclosures should include following:
Methods, inputs, and assumptions utilized in the following determinations should also be disclosed for both revenue recognized over time and at a point in time:
Non-public company specific guidance – Most non-public companies may elect to not provide disclosure on all the above judgement specific areas. Upon election it is allowable for these entities to only disclose the methods utilized in the recognition of revenue for revenue recognized over time and the assessment on whether an estimate of variable consideration is constrained.
Assets Recognized from the Costs to Obtain or Fulfill a Contract
As discussed in the disclosure requirements surrounding contracts with customers there is an increased level of disclosure on certain revenue related balance sheet accounts. Certain costs incurred for the purposes of obtaining or fulfilling a contract may be appropriate to include as an asset on the balance sheet. Under the new guidance there are certain disclosure requirements for these assets:
In addition to the above items the closing balance of such assets must be disclosed along with any amortization or impairment losses recognized during the period.
Non-public company specific guidance – Most non-public companies may elect not to disclose the above information regarding assets recognized from the costs to obtain or fulfill a contract.
The ultimate impact of the disclosures changes under ASU 2014-09 will vary greatly depending on the various revenue streams of an entity as well as its designation as a public or non-public entity. While most non-public companies will be able to elect for more limited disclosure that will reduce the implementation burden there are still significant disclosure changes anticipated for these companies. Furthermore, many companies are not anticipated to have the information gathering systems in place or reporting capacity to facilitate the preparation of the necessary disclosures. It is with that in mind that early review of the disclosure requirements on a company by company basis is therefore strongly encouraged. This will help to ensure that not only the expected financial statement impact is clear but that the mechanisms are in place to enable such disclosures.