A wide assortment of new disclosures is expected to be one of the biggest challenges for financial statement preparers as they implement the new revenue recognition guidance issued last month by FASB and the International Accounting Standards Board (IASB).
Public companies today voluntarily provide investors with many disclosures about revenue in their news releases and earnings calls. Monthly reports prepared by private companies often give a lot of detail about revenue that is not required by accounting standards.
But FASB member Marc Siegel said that, remarkably, GAAP in the past has prescribed few disclosures related to revenue recognition.
“So this will standardize a set of disclosures for companies to provide, including an objective for how to disaggregate or break out the revenue in the footnotes,” he said.
During a recent webcast, Deloitte LLP Partner Kristin Bauer, CPA, provided an overview of the disclosures that the new standard requires.
Companies are required to disclose revenue and impairment losses from contracts with customers separately from other sources of revenue or impairment, she said. Qualitative and quantitative disclosures are required, including:
- Disaggregation of revenue. Companies are required to disclose disaggregated revenue to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, Bauer said. The guidance also requires companies to disclose the relationship between the disaggregated amounts they are disclosing and revenue information that is disclosed for each reportable segment in accordance with segment reporting standards, she said.
- Contract balances. Companies will be required to disclose both the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, Bauer said. Revenue recognized in the reporting period that was included in the contract liability balance also is required to be disclosed. Disclosure also is required for revenue recognized in the reporting period for performance obligations satisfied or partly satisfied during previous periods, she said.
- Performance obligations. Companies are required to describe when they typically satisfy performance obligations, the significant payment terms, the nature of the goods or services the company is transferring, obligations for returns and refunds, and types of warranties and related obligations.
- Remaining performance obligations. Disclosures will require companies to provide information about the amount of the transaction price allocated to remaining performance obligations, and when the company expects to recognize the remaining contract revenue, Bauer said.
- Significant judgments and estimates. For many companies, the standard will require new judgments such as whether revenue is recognized at a point in time or over time. Estimates with regard to transaction price and allocation to separate performance obligations also are required. The standard requires these judgments and estimates to be disclosed.
- Policy decisions. Companies will be required to disclose policy decisions such as whether the company used practical expedients to avoid capitalizing the incremental costs of obtaining a contract or to ignore the effects of a significant financing component because the time from the transfer of goods or services to payment is less than one year.
A minor difference between the substantially converged FASB and IASB standards involves disclosures on an interim basis. Both boards will require the disaggregated revenue to be disclosed on an interim and annual basis. FASB also will require contract balance and remaining performance obligation disclosures on an interim and annual basis, but the IASB will require those disclosures on an annual basis only.
The rest of the disclosures will be required annually by both boards.
“The FASB did vote to have a requirement that certain disclosures be required for interim,” FASB Chairman Russell Golden explained, “and that’s because in the U.S. capital markets there is oftentimes more interim financial reporting than in other capital markets around the world.”
Experts say companies will need to study these disclosure requirements to make sure they are capturing the information the standard demands. While companies will need to adjust to these requirements, board members say they will provide useful information about an extremely important metric.
“You’ll get a much more multidimensional picture about revenue recognition at a company in the footnotes than you have in the past,” Siegel said.
Ken Tysiac (
) is a JofA senior editor.