14.7 Other Presentation Matters

14.7.1 Unit of Account for Presentation

Under ASC 606, a contract asset can arise when the amount of revenue recognized by an entity exceeds the amount that has already been paid by the customer together with any unpaid amounts recognized as receivables. Conversely, a contract liability can arise when the amount of revenue recognized by an entity is less than the amount that has already been paid by the customer together with any unpaid amounts recognized as receivables.

When there are multiple performance obligations in a contract (or in multiple contracts accounted for as a single combined contract in accordance with ASC 606-10-25-9), it is possible that revenue recognized is in excess of amounts paid or receivable for some performance obligations but less than amounts paid or receivable for other performance obligations. In such circumstances, the appropriate unit of account for presenting contract assets and contract liabilities is the contract. Accordingly, it is not appropriate to present both contract assets and contract liabilities for a single contract; instead, a single net figure should be presented.

ASC 606-10-45-1 states that “[w]hen either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.”

This also applies to circumstances in which multiple contracts are combined and are accounted for as a single contract in accordance with the requirements for combination in ASC 606-10-25-9.

Paragraph BC317 of ASU 2014-09 explains that the “Boards decided that the remaining rights and performance obligations in a contract should be accounted for and presented on a net basis, as either a contract asset or a contract liability. . . . The Boards decided that those interdependencies are best reflected by accounting and presenting on a net basis the remaining rights and obligations in the statement of financial position” (emphasis added).

See also Section 14.7.2.1 for discussion of offsetting contract assets and contract liabilities against other assets and liabilities.

Unit of account considerations for presentation purposes are addressed in Implementation Q&As 61 through 63 (compiled from previously issued TRG Agenda Papers 7 and 11). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

Connecting the Dots

As a corollary to the discussion in Section 6.3.5.5.1 that variability due to changes in the foreign currency exchange is not variable consideration, questions have been raised about the accounting for receivables, contract assets, and contract liabilities in contracts that include consideration denominated in a foreign currency. Specifically, stakeholders have asked how an entity should apply the guidance in ASC 830 on foreign currency matters to the recognized assets and liabilities in a customer contract with the expectation that more contract assets may arise in contracts under ASC 606.

ASC 606 requires an entity to recognize (1) a contract asset if the entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due or (2) a contract liability if the entity receives (or has an unconditional right to receive) consideration before it transfers goods or services to the customer.

Contract liabilities are nonmonetary liabilities because they require an entity to perform a service in the future. Contract assets are monetary assets because they will ultimately be settled for a fixed amount of cash.

A separate issue arises if a single contract with a customer contains a performance obligation that is in a contract asset position and another performance obligation that is in a contract liability position. ASC 606 requires an entity to present contract assets and contract liabilities on a net basis in the balance sheet. Therefore, questions have arisen about whether the guidance in ASC 830 should be applied to the gross contract asset and liability balances separately or only to the net contract asset or liability for a single contract. We believe that the guidance in ASC 830 should be applied on a gross basis. For a complete discussion of this issue, see Section 4.8 of Deloitte’s Roadmap Foreign Currency Matters.

14.7.2 Balance Sheet Offsetting

14.7.2.1 Offsetting Contract Assets and Contract Liabilities Against Other Assets and Liabilities

ASC 606 uses the terms “contract asset” and “contract liability” (defined in ASC 606-10-20) in the context of revenue arising from contracts with customers and provides guidance on the presentation of contract assets and contract liabilities in the statement of financial position (see ASC 606-10-45-1 through 45-5). Entities may also recognize other types of assets or liabilities as a result of revenue or other transactions related to customers. Examples might include costs of obtaining a contract capitalized in accordance with ASC 340-40-25-1, financial assets or liabilities as defined in ASC 825-10-20 (e.g., receivables), and provisions as defined in ASC 460.

In practice, it will not be possible for entities to offset contract assets and contract liabilities against other assets and liabilities given that the contract assets and contract liabilities do not represent determinable amounts owed by each party. ASC 210-20 prohibits offsetting of assets and liabilities unless required or permitted by another Codification subtopic, and neither ASC 606-10 nor any other Codification subtopic includes such a requirement or permission with respect to contract assets and contract liabilities.

The above issue is addressed in Implementation Q&A 63 (compiled from previously issued TRG Agenda Papers 7 and 11). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

14.7.2.2 Offsetting Refund Liabilities Against Accounts Receivable

For an entity to offset refund liabilities against accounts receivable, all of the following criteria in ASC 210-20-45-1 must be met:

Each of two parties owes the other determinable amounts.
The reporting party has the right to set off the amount owed with the amount owed by the other party.
The reporting party intends to set off.
The right of setoff is enforceable at law.

If an entity has a legally enforceable contract and amounts have been billed (i.e., there is an unconditional right to payment for amounts billed), but because of a termination right a contract has not been identified under step 1 of ASC 606, the entity will generally recognize a refund liability (or similar liability) and accounts receivable.

If the contract is legally enforceable and the recognition of accounts receivable is appropriate, presenting the amounts net would generally be inappropriate. ASC 210-20 provides guidance on evaluating whether an asset and a liability may be netted. For example, ASC 210-20-45-1 outlines the criteria used to determine whether a right of setoff exists, including the requirement that the reporting party have both the legal right and the intent to set off. If the reporting entity does not expect the customer to terminate, it effectively believes that the customer will pay in the normal course and that the entity will provide goods or services. In such a case, the criteria related to the right of setoff would not be met and the entity should not net the amounts.

However, when the criteria related to the right of offset are met, a reporting entity is not required to net the amounts. An entity’s decision to offset when the criteria in ASC 210-20-45-1 are met is an accounting policy election that should be applied consistently to all similar types of transactions.

The example below illustrates how to determine whether it is permissible to offset a refund liability against accounts receivable.

Example 14-6

Company P manufactures widgets and sells them to various retailers, which ultimately sell the widgets to end customers. Company P has concluded that the retailers are its customers and that control of the widgets is transferred to the retailers upon delivery to them. Upon receipt of the widgets, retailers have 90 days to return any unsold widgets to P. If a retailer exercises its right to return a widget, P provides a credit against the retailer’s accounts receivable balance. That is, P does not pay cash to settle the refund liability; rather, it offsets the refund liability against any currently outstanding accounts receivable.1 In accordance with ASC 606-10-32-10, P estimates a refund liability for widgets that it expects retailers to return.

Company P must evaluate the criteria in ASC 210-20 to determine whether it is permitted to offset the refund liability against accounts receivable in P’s balance sheet.

In practice, P may not have the legal right to offset the refund liability against amounts receivable from a retailer. Further, the estimated refund liability may not represent a determinable amount because P estimated the refund liability by using a portfolio of information.

The notion that an entity should apply ASC 210-20 to determine whether offsetting is appropriate is consistent with the considerations related to offsetting contract assets and contract liabilities against other assets and liabilities (see Section 14.7.2.1 for a discussion of that issue).

14.7.3 Income Statement Classification of Interest

Many companies offer financing arrangements to customers who purchase their products. Some of these companies may also offer financing of products sold by other vendors. Often, the financing is offered through a wholly owned subsidiary of the parent company. In other situations, the parent itself may also offer this financing.

For purposes of the consolidated financial statements, the interest income generated from certain financing arrangements may be classified as revenue in the income statement. Paragraph BC29 of ASU 2014-09 states that the FASB and IASB “decided not to amend the existing definitions of revenue in each of their conceptual frameworks.” The legacy guidance in paragraph 79 of FASB Concepts Statement 6 indicates that cash inflows, such as interest, that are the result of an entity’s ongoing major or central operations represent revenue. When the major activity of a subsidiary is the financing of products, the interest income generated from this financing would represent its major revenue-generating activity. Therefore, this interest income would continue to be classified as revenue for consolidated financial statement purposes. However, the interest income (i.e., the financing component) should be presented separately from the revenue from the sale (i.e., revenue from contracts with customers) in accordance with the requirements of ASC 606-10-32-20.

Connecting the Dots

In December 2021, the FASB updated the definition of revenue in FASB Concepts Statement 8, Chapter 4 (the “FASB Concepts Statement”). Under the revised definition, revenues are “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.” Notably, the FASB eliminated the phrase “ongoing major or central operations.” However, the updated definition of revenue in the FASB Concepts Statement did not amend the ASC master glossary’s definition of revenue or the definition of a customer within the scope of ASC 606. In addition, the FASB Concepts Statement does not represent authoritative guidance. Further, paragraph E84 of the FASB Concepts Statement states, in part, that “[o]ther activities . . . are those activities that permit others to use the entity’s resources, which, for example, result in interest.” Therefore, we do not expect that the updated definition of revenue in the FASB Concepts Statement would result in a change in practice regarding the determination of (1) which transactions should be accounted for and presented as revenue under ASC 606 and (2) whether interest income can be classified as revenue (presented separately from revenue from contracts with customers). See Section 3.2.8 for more information.

Conversely, if interest income is generated as a result of an activity that does not derive from an entity’s ongoing major or central operations (i.e., an activity that is peripheral or incidental to an entity’s central activities, as described by paragraph 75 of FASB Concepts Statement 6), such income is unlikely to be classified as revenue.

SEC registrants’ analysis of whether the activity generating the interest income is a result of the ongoing major or central operations should include questions such as the following:

Does management discuss the financing operation in the MD&A or Business sections of the Form 10-K?
Does management provide focus on the financing operation in other external communications (e.g., analyst calls, press releases)?
Is the financing operation a separate reportable segment?

SEC registrants should also consider the guidance in SEC Regulation S-X, Rule 5-03, regarding separate disclosure of revenue from services and revenue from products when presenting this interest income in the statement of comprehensive income.

The examples below demonstrate the concepts explained above.

Example 14-7

Company A sells machinery. The company has a subsidiary, B, whose sole operations are to provide financing to customers who purchase the machinery from A. In this situation, the interest income generated by B from its product financing is part of the consolidated entity’s major ongoing operations and should therefore be classified as revenue in A’s consolidated statement of comprehensive income, separately from revenue from contracts with customers.

Example 14-8

Company X sells vehicles. The company does not have a financing subsidiary, has not previously provided financing to its customers, and does not have any intent to provide financing in the future. However, as a result of a large order placed by Customer Y, X has agreed to provide financing to Y. In this situation, because X has no history of providing financing to customers, and because financing arrangements are not part of X’s ongoing operations, the interest income generated from Y should not be classified as revenue in X’s consolidated financial statements.

14.7.4 Income Statement Classification of Amortized Contract Costs

Generally, the amortization of any incremental costs of obtaining a contract that are capitalized under ASC 340-40 should be classified in the income statement as selling, general, and administrative (SG&A) expense.

Under ASC 340-40, an entity is required to recognize the incremental costs of obtaining a contract (i.e., those costs that would not have been incurred if the contract had not been obtained) as an asset if the entity expects to recover them.2 When capitalized, the costs are “amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.” However, ASC 340-40 does not include guidance on the presentation of amortized contract costs in the income statement.

In addition, the Codification does not contain guidance on the types of expenses that represent SG&A expense or cost of sales. SEC Regulation S-X, Rule 5-03(b), provides limited guidance by indicating the various line items that should appear on the face of the income statement (if applicable). Rule 5-03(b) indicates that the cost of any tangible goods sold and the cost of any services sold are “[c]osts and expenses applicable to sales and revenues.” Further, Rule 5-03(b) requires a separate line item for SG&A expenses.

Despite the limited authoritative guidance, we believe that SG&A expense in the income statement would be the preferred classification of the amortization of incremental costs of obtaining a contract that are capitalized under ASC 340-40. This is because such costs represent costs of acquiring a contract (e.g., selling costs), as opposed to costs of fulfilling a contract that generally would be included in cost of goods sold (or a similar line item).

14.7.5 Income Statement Presentation of Reimbursements for Out-of-Pocket Expenses

ASC 606 does not explicitly address out-of-pocket reimbursements. However, ASC 606-10-32-2 defines the transaction price as “the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes).” Therefore, generally all consideration provided to the entity from the customer should be included in the transaction price and allocated to the promised goods or services identified in the contract. This includes reimbursements for out-of-pocket expenses incurred in connection with fulfilling the entity’s performance obligation(s) to the customer. However, the transaction price should not include reimbursements related to goods or services transferred to the customer if the entity is merely acting as an agent in purchasing such goods or services on behalf of the customer.

The example below illustrates how to present reimbursements received from a customer for out-of-pocket expenses.

Example 14-9

Company X enters into an agreement to identify and acquire specified goods on behalf of Customer P from a third party for which X will earn a commission calculated as a percentage of the agreed purchase price. Company X has determined that it is acting as an agent in this arrangement, in accordance with ASC 606-10-55-36 through 55-40. In addition, as part of the agreement, P will reimburse X for reasonable out-of-pocket expenses (e.g., hotels, meals, transportation). Consequently, X must determine how to present the out-of-pocket expenses and reimbursements.

Company X should first determine the nature of the out-of-pocket expenses reimbursed by P. If such costs are incurred for X to fulfill its agency service and are not incurred on behalf of P, X’s out-of-pocket costs and related reimbursements should generally be presented gross. Alternatively, if in the course of providing its agency services to P, X were to incur and be reimbursed for costs on behalf of P that provide a good or service to P, such costs should generally be presented net.

Assume that X determines that its reimbursable out-of-pocket expenses (e.g., hotels, meals, transportation) are expenses that (1) X incurs in fulfilling its agency service, (2) are not incurred on behalf of P, and (3) do not provide a good or service to P. On the basis of this determination, X will include any amounts collected (or expected to be collected) as reimbursements in the transaction price for the agency service delivered to P. As a result, such reimbursements will be presented gross in X’s income statement.

14.7.6 Interaction Between ASC 606 and SEC Regulation S-X, Rule 5-03(b)

SEC Regulation S-X, Rule 5-03(b)

§210.5-03 Statements of comprehensive income. . . .

(b) If income is derived from more than one of the subcaptions described under § 210.5-03.1, each class which is not more than 10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under § 210.5-03.2 shall be combined in the same manner.

1. Net sales and gross revenues. State separately:

(a) Net sales of tangible products (gross sales less discounts, returns and allowances), (b) operating revenues of public utilities or others; (c) income from rentals; (d) revenues from services; and (e) other revenues. Amounts earned from transactions with related parties shall be disclosed as required under § 210.4-08(k). A public utility company using a uniform system of accounts or a form for annual report prescribed by federal or state authorities, or a similar system or report, shall follow the general segregation of operating revenues and operating expenses reported under § 210.5-03.2 prescribed by such system or report. If the total of sales and revenues reported under this caption includes excise taxes in an amount equal to 1 percent or more of such total, the amount of such excise taxes shall be shown on the face of the statement parenthetically or otherwise.

SEC Regulation S-X, Rule 5-03(b), indicates the various line items that should appear on the face of the income statement. Specifically, a registrant should separately present any amounts that represent 10 percent of the sum of income derived from net sales of tangible products, operating revenues of public utilities or others, income from rentals, revenues from services, and other revenues. Aside from minor revisions, no updates have been made to Rule 5-03(b) since the issuance of ASU 2014-09. Further, there is limited guidance on interpreting the requirements of Rule 5-03(b) — for example, the terms “income from rentals,” “revenues from services,” “products,” and “services” are not specifically defined. Despite the long-standing need for registrants to use judgment when applying Rule 5-03(b), stakeholders have raised concerns about the interplay between Rule 5-03(b) and new accounting standards, including the revenue standard.

The interaction between ASC 606 and Rule 5-03(b) was discussed at the March 2018 CAQ SEC Regulations Committee joint meeting with the SEC staff. As indicated in the highlights of that meeting, the SEC staff noted that it is encouraging registrants to submit real-life examples of potential inconsistencies in income statement classification that may arise between ASC 606 and Rule 5-03(b). For additional information, see Deloitte’s May 22, 2018, journal entry.

Entities may need to apply judgment when aligning their revenue streams with the presentation requirements of Rule 5-03(b) and consider how they are disaggregating revenue in the footnotes (see Section 15.2.2). The SEC staff has asked registrants questions related to inconsistencies between disaggregation of revenue in the footnotes to the financial statements (or the discussion of disaggregation of revenue outside of the financial statements) and the presentation of revenue from products and services on the face of the income statement. For additional information and examples of SEC comments issued to registrants on this topic, see Section 2.18.4 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights. For considerations related to the disaggregation of revenue in accordance with the disclosure requirements of ASC 606, see Section 15.2.2 of this Roadmap.

Footnotes

Company P would pay cash to settle the refund liability only if the customer did not have an outstanding accounts receivable balance.

ASC 340-40-25-4 provides a practical expedient under which “an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.”

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.