15.2 Contracts With Customers

ASC 606-10

50-4 An entity shall disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of comprehensive income (statement of activities) in accordance with other Topics:

Revenue recognized from contracts with customers, which the entity shall disclose separately from its other sources of revenue
Credit losses recorded (in accordance with Subtopic 326-20 on financial instruments measured at amortized cost) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from credit losses from other contracts.

The first disclosure requirement seems obvious, but it may not always be straightforward. That is, an entity must disclose its revenue from contracts with customers unless the revenue is presented separately in the statement of comprehensive income (or statement of activities, in the case of a nonprofit entity). As a result, the entity must determine which of its contracts or revenue streams are being accounted for in accordance with ASC 606 rather than in accordance with guidance on other revenue transactions, such as those related to financial instruments (interest income), leases (lease income), or insurance contracts. For example, an entity may be a lessor and derive revenue from its leasing operations in addition to various services it provides in contracts with customers. As further discussed in Chapter 3, some contracts with customers (or portions of contracts with customers) are outside the scope of ASC 606. In those circumstances, unless the lessor’s two sources of revenue are separately presented in the income statement, the lessor must disclose the breakdown of those two revenue sources: (1) revenue from contracts with customers (i.e., those contracts or portions of a contract that are being accounted for in accordance with ASC 606) and (2) lease income accounted for in accordance with ASC 842.

To take another example, an entity that derived revenue from financial instruments, leases, and contracts with customers (ASC 606 contracts) may present or disclose its revenues as follows:

Similarly, an entity is required to disclose any impairment losses related to its contracts with customers (e.g., bad debt expense on customer receivables and impairment of contract assets) separately from other impairments, such as losses recorded on other financial instruments (e.g., investments) or lease receivables.

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

As explained in Section 14.7.6, SEC Regulation S-X, Rule 5-03(b), requires various line items to be presented on the face of the income statement. In addition, ASC 606 includes requirements related to the disaggregation of revenue, which are discussed in Section 15.2.2. While ASC 606 permits the disaggregated information to be presented or disclosed, the requirements of Rule 5-03(b) cannot be satisfied solely by meeting the ASC 606 requirements. Therefore, public entities need to consider both sets of requirements when preparing their financial statements (i.e., they must comply with the SEC’s presentation requirements regardless of how disaggregated revenue amounts are disclosed in the footnotes).

15.2.2 Disaggregation of Revenue

The table below summarizes the disclosure requirements discussed in this section, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Disaggregation of revenue	Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors.	Yes9	Yes
Disaggregation of revenue	Sufficient information to understand the relationship between disaggregated revenue and each disclosed segment’s revenue information.	Yes	Yes

To meet the revenue standard’s disclosure objective, an entity is required to disaggregate revenue into categories. Revenue from contracts with customers presented in the statement of comprehensive income typically comprises sales of various types of goods and services and involves customers from different markets or geographic regions. As discussed in paragraph BC336 of ASU 2014-09, “because the most useful disaggregation of revenue depends on various entity-specific or industry-specific factors, the Boards decided that Topic 606 should not prescribe any specific factor to be used as the basis for disaggregating revenue from contracts with customers.” Instead, the boards included implementation guidance that provides examples of categories that may be appropriate to disclose in an entity’s financial statements. One or more than one category may be presented depending on what is most meaningful to the business.

The revenue standard’s implementation guidance also suggests that an entity should consider various sources of information (e.g., investor information, internal reports) in determining the categories to use for disaggregation of revenue. To enable users of the financial statements to understand the relationship between an entity’s revenue and how the entity manages its business, entities are required to describe the relationship between disaggregated revenue and segment disclosures in accordance with ASC 280. These disclosures do not need to be in a particular format; as a result, some entities may describe the interaction between the two required disclosures in the revenue footnote, while others may include the disclosures in the segment footnote. In addition, since the guidance is not prescriptive, the disclosures may also be presented in a tabular format or narrative format.

Entities should examine whether (1) the information necessary to produce these disclosures is readily available and (2) there are proper controls in place for reviewing this information.

ASC 606-10

50-5 An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue.

55-89 Paragraph 606-10-50-5 requires an entity to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Consequently, the extent to which an entity’s revenue is disaggregated for the purposes of this disclosure depends on the facts and circumstances that pertain to the entity’s contracts with customers. Some entities may need to use more than one type of category to meet the objective in paragraph 606-10- 50-5 for disaggregating revenue. Other entities may meet the objective by using only one type of category to disaggregate revenue.

55-90 When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity’s revenue has been presented for other purposes, including all of the following:

Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations)
Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments
Other information that is similar to the types of information identified in (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.

55-91 Examples of categories that might be appropriate include, but are not limited to, all of the following:

Type of good or service (for example, major product lines)
Geographical region (for example, country or region)
Market or type of customer (for example, government and nongovernment customers)
Type of contract (for example, fixed-price and time-and-materials contracts)
Contract duration (for example, short-term and long-term contracts)
Timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
Sales channels (for example, goods sold directly to consumers and goods sold through intermediaries).

50-6 In addition, an entity shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue (in accordance with paragraph 606-10-50-5) and revenue information that is disclosed for each reportable segment, if the entity applies Topic 280 on segment reporting.

50-7 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission (SEC), may elect not to apply the quantitative disaggregation disclosure guidance in paragraphs 606-10-50-5 through 50-6 and 606-10-55-89 through 55-91. If an entity elects not to provide those disclosures, the entity shall disclose, at a minimum, revenue disaggregated according to the timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred to customers over time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows.

The following example in ASC 606 illustrates how an entity could present the disaggregation of its revenue in a tabular format to meet the quantitative disclosure requirements in ASC 606-10-50-6:

ASC 606-10

Example 41 — Disaggregation of Revenue — Quantitative Disclosure

55-296 An entity reports the following segments: consumer products, transportation, and energy, in accordance with Topic 280 on segment reporting. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines, and timing of revenue recognition (that is, goods transferred at a point in time or services transferred over time).

55-297 The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirement in paragraph 606-10-50-5, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line, and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation, and energy segments in accordance with paragraphs 606-10-50-6.

Connecting the Dots

For many years, segment reporting has been a perennial topic of focus for the SEC (and SEC comment letters) and, as such, a topic of focus for many companies. Focus areas related to segments include (1) the identification and aggregation of operating segments, (2) changes in reportable segments, (3) product and service revenue by segment, (4) operating segments and goodwill impairment, and (5) information about geographic areas. Because of the historical challenges related to segment disclosures and the revenue standard’s requirements related to disaggregation, it is critical for each organization to evaluate the appropriate level at which to present its disaggregated revenue balances. As stated in ASC 606-10-55-90, an entity can make this determination by using (1) “[d]isclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations),” (2) “[i]nformation regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments,” and (3) other similar information “that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.”

At the 2016 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff highlighted that the disclosure guidance in ASC 606 on disaggregation of revenue is similar to the segment reporting guidance, but it noted that ASC 606 does not provide an impracticability exception. Further, the SEC staff stated that its reviews of filings will include reviews of other materials, such as investor presentations and earnings releases, to determine whether the appropriate amount of disaggregation is disclosed.

In recent years, the SEC staff has issued comments to registrants on various themes related to the disaggregation of revenue under ASC 606. In those comments, the staff has:

Questioned differences between the categories of revenue disclosed in the financial statements and the manner in which sales are categorized in other places such as MD&A, earnings releases, earnings calls, investor presentations, income statements, materials reviewed by the CODM, and other materials used by the registrant to evaluate the registrant’s financial performance or make resource allocation decisions.
Requested clear disclosures about how the revenue categories identified fairly depict the effect of economic factors on the nature, amount, timing, and uncertainty of revenue and cash flows. Economic factors could be macroeconomic, industry-specific, or entity-specific. The SEC staff has asked registrants to specifically address how they considered the guidance in ASC 606-10-55-89 through 55-91.
Noted that fewer revenue categories were disclosed than would be expected given the variety of products and services described in other places within or outside of the financial statements. The SEC staff has challenged a registrant’s aggregation of revenue sources that, on the basis of other information provided by the registrant, appear to have different characteristics and risk profiles that would result in differences in the nature, amount, timing, and uncertainty of revenue and cash flows. For example, the following characteristics have been observed by the staff:
- A revenue source that may or may not be subject to returns.
- The dollar magnitude of contribution to margins.
- Sales by brand.
- Underlying market trends.
- Volatility in demand.
- Uncertainty regarding availability of resources.
- The regulatory environment.
- The business model or strategy.

For additional information and excerpts from a sample of SEC comment letters on this topic, see Section 2.18.4 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

The following illustrative disclosure of a company’s disaggregation of revenue highlights some of the questions an entity may think about when implementing the guidance on disaggregating revenue balances:

Connecting the Dots

The disclosure of disaggregated revenue does not need to be in any particular format and may be presented in a tabular format or a narrative format.

At the November 2016 TRG meeting, in response to a question about the form of this disclosure, the FASB staff indicated that a tabular reconciliation (such as that of Example 41 in ASC 606-10-55-296 and 55-297) is not required. However, the staff also noted that an entity must still provide the information required under ASC 606-10-50-6 (i.e., information that enables users to understand the relationship between the disclosure of disaggregated revenue and revenue disclosed for each reportable segment). A summary of the TRG’s discussion is available in TRG Agenda Paper 60.

15.2.3 Contract Balances

The table below summarizes the disclosure requirements discussed in this section through Section 15.2.3.5.2, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Contract balances	Opening and closing balances (receivables, contract assets, and contract liabilities).	No	Yes
	Amount of revenue recognized from beginning contract liability balance.	Yes	Yes
	Explanation of significant changes in contract balances (using qualitative and quantitative information).	Yes	No

According to paragraph BC343 of ASU 2014-09:

Users of financial statements emphasized that it was critical to them to have information on the movements in the contract balances presented separately because it would help them understand information about the following:

The amount of the opening balance of the contract liability balance that will be recognized as revenue during the period
The amount of the opening balance of the contract asset that will be transferred to accounts receivable or collected in cash during the period.

Because of this feedback, items (a) and (b) above were incorporated into the requirements in ASC 606-10-50-8(a) and (b) shown below. In a manner similar to how the FASB designed the disclosure requirements related to the disaggregation of revenue, the Board provided some optionality in terms of how contract balances and changes in contract balances should be presented (i.e., a tabular format is not required).

Questions that entities could consider in preparing these disclosures (and others) include, but are not limited to, the following:

On reassessment of disclosures already presented in the financial statements, are those disclosures sufficient?
What controls are in place to test the completeness and accuracy of the information disclosed?
Is the legacy accounting information system capable of providing this information? Is that system within the scope of internal control over financial reporting?
If the entity had any acquisitions or divestitures during the fiscal year, do those acquisitions or divestitures affect the revenue disclosures?
What qualitative information would the financial statement user find relevant to supplement quantitative information?
Have there been material changes in the timing of when performance obligations will result in revenue recognition?
What payment terms (e.g., payments in arrears, milestones, contingent payments, post-paid customers) give rise to contract assets?
What transactions (e.g., business combinations) would change future balances?
Why did the balance(s) change?
In a typical contract, how does the satisfaction of performance obligations correlate with customer payment?

ASC 606-10

50-8 An entity shall disclose all of the following:

The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed
Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
Subparagraph superseded by Accounting Standards Update No. 2016-20.

50-9 An entity shall explain how the timing of satisfaction of its performance obligations (see paragraph 606-10-50-12(a)) relates to the typical timing of payment (see paragraph 606-10-50-12(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.

50-10 An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:

Changes due to business combinations
Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification
Impairment of a contract asset
A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be reclassified to a receivable)
A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability).

15.2.3.1 Disclosure of Opening and Closing Balances — Receivables, Contract Assets, and Contract Liabilities

In a manner consistent with the disclosure requirement to present or disclose revenue from contracts with customers, an entity must present separately on the face of the financial statements or disclose the opening and closing balances of receivables, contract assets, and contract liabilities. In addition, an entity may consider disclosing where such balances are included in the statement of financial position.

15.2.3.2 Disclosure of Revenue Recognized From Contract Liability Balance

Drawing on the components of a rollforward of contract balances, the revenue standard requires quantitative disclosure of amounts recognized in the current reporting period (and comparative periods presented) that were in the prior period-end’s contract liability balance.

For example, suppose that an entity had a deferred revenue (contract liability) balance of $2,000 as of December 31, 20X7. In accordance with ASC 606-10-50-8(b), the entity is required to disclose what amount of that $2,000 was recorded in 20X8 (or the first quarter of 20X8, depending on the reporting period presented). If $1,500 of the $2,000 was recognized as revenue in the first quarter of 20X8, the entity should disclose $1,500 as the amount of revenue recognized during that period that was previously included in the deferred revenue (contract liability) balance as of December 31, 20X7.

15.2.3.3 Election Available to Nonpublic Entities

ASC 606-10

50-11 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide any or all of the disclosures in paragraphs 606-10-50-8 through 50-10 and 606-10-50-12A. However, if an entity elects not to provide the disclosures in paragraphs 606-10-50-8 through 50-10 and 606-10-50-12A, the entity shall provide the disclosure in paragraph 606-10-50-8(a), which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.

15.2.3.4 Disclosure Examples

The example below, which is reproduced from the FASB’s and IASB’s 2011 exposure draft on revenue (issued by the FASB as a proposed ASU), illustrates a reconciliation of contract assets and contract liabilities. Although such a reconciliation is not required, the example shows how some entities may present some of the required information on contract balances.

Example in the FASB’s and IASB’s 2011 Exposure Draft

Example 19 — Reconciliation of Contract Assets and Contract Liabilities

An entity has two main business units: a services business and a retail business. Customers of the services business typically pay a portion of the promised consideration in advance of receiving the services and the remaining amount upon completion of the services. The service contracts do not include a significant financing component. Customers of the retail business typically pay in cash at the time of transfer of the promised goods.

During 20X1, the entity recognized revenue of $18,500 from contracts with customers ($1,000 of which was cash sales from the entity’s retail business). The entity received $3,500 payments in advance.

Included in the transaction price of one of the entity’s services contracts is a performance bonus that the entity will receive only if it meets a specified milestone by a specified date. The entity includes that performance bonus in the transaction price and recognizes revenue over time using an appropriate method of measuring progress. As of December 31, 20X0, the entity was not reasonably assured to be entitled to the cumulative amount of consideration that was allocated to the entity’s past performance at that date. However, during 20X1 the entity became reasonably assured to be entitled to the performance bonus. Consequently, the entity recognized a contract asset and revenue of $500 for the portion of the bonus relating to the entity’s performance in the previous reporting period.

As a result of a business combination on December 31, 20X1, the entity’s contract assets increased by $4,000 and its contract liabilities increased by $1,900.

The illustrative disclosure below shows how an entity might provide the information required under ASC 606-10-50-8 through 50-10.

15.2.3.5 Additional Considerations

15.2.3.5.1 Rollforward of Contract Balances

Under ASC 606, an entity is required to present or disclose opening and closing contract balances in its annual and interim financial statements. In addition, an entity is required under ASC 606-10-50-8(b) to disclose revenue recognized from the prior year-end contract liability balance.10 However, an entity does not need to provide a full rollforward of the information required under ASC 606-10- 50-8(b) about revenue recognized from the prior year-end contract liability balance.

Paragraph BC346 of ASU 2014-09 states, in part:

[The FASB and IASB] decided that, instead of requiring a tabular reconciliation of the aggregate contract balances [as they had proposed in their 2010 and 2011 exposure drafts on revenue], they would require an entity to disclose qualitative and quantitative information about the entity’s contract balances (see paragraphs 606-10-50-8 through 50-10). This approach balances the needs of users of financial statements with preparers’ concerns because the qualitative and quantitative disclosures provide users of financial statements with the information they requested (that is, information on when contract assets are typically transferred to accounts receivable or collected as cash and when contract liabilities are recognized as revenue). In addition, the Boards decided that those disclosures would be more cost-effective than a reconciliation. The Boards also observed that this approach would not result in a significant change for many entities that are already disclosing similar information.

Accordingly, a rollforward of contract balances is not required because the FASB decided that in a manner consistent with paragraph BC346 of ASU 2014-09, entities should be given some flexibility to determine how to present contract balances and changes in those balances.

However, at the November 2016 TRG meeting,11 the FASB staff noted that although a full rollforward is not required, an entity may elect to present the disclosures related to contract balances in the form of a full rollforward. Further, when doing so, an entity may:

Present such information on a quarterly basis to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, which is the disclosure objective stated in the revenue standard.
Provide a gross figure that includes revenue recognized (1) from the prior recorded contract liability balance and (2) that flowed in and out of the balance in the same period (i.e., the typical line item [deduction] that would be present in a full rollforward of the contract liability balance).
Include a quarterly rollforward of each quarter separately, but omit a year-to-date rollforward. For example, a calendar-year-end public company reporting its second-quarter financial information may provide a rollforward of the three months ended March 31 and a separate rollforward of the three months ended June 30, but may forgo providing a rollforward of the six months ended June 30.

15.2.3.5.2 Contract Liability Balance Disclosures

An entity should present certain liabilities, such as refund liabilities, separately from contract liabilities (see Section 14.3 for a discussion about the need to present refund liabilities separately from contract liabilities). These liabilities may commonly arise when an entity sells products with a right of return and the entity expects that a certain quantity of those products will be returned (see Sections 6.3.5.2 and 6.3.5.3). These liabilities may also arise when an entity receives cash in advance, but the agreement is cancelable because of certain termination provisions in the agreement (see Section 4.4.1).

Assume that an entity chooses to present a full rollforward of its contract liability. Further assume that (1) some of the entity’s arrangements contain termination provisions and (2) amounts received by the entity that are related to such contracts have been recorded as a liability separate from the contract liability. The entity would not be permitted to include the separate liability in its contract liability balance disclosures required by ASC 606-10-50-8. However, one approach may be to reclassify the separate liability as a contract liability when, for example, the contract is no longer cancelable without penalty and the amounts are recharacterized as deferred revenue. The illustrative disclosure below demonstrates the contract liability rollforward approach for entities that elect such presentation related to their separate liabilities.

Illustrative Disclosure — Contract Liability Balance Rollforward

Changes in the contract liability balance were as follows for the years ended December 31, 20X8, and December 31, 20X7:

15.2.4 Performance Obligations

The table below summarizes the disclosure requirements discussed in this section through Section 15.2.4.3.2, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Performance obligations (including remaining performance obligations)	Qualitative information about (1) when performance obligations are typically satisfied, (2) significant payment terms, (3) the nature of goods or services promised, (4) obligations for returns or refunds, and (5) warranties.	No	No
	Amount of revenue recognized from performance obligations satisfied in prior periods (e.g., changes in transaction price estimates).	Yes	Yes
	Transaction price allocated to the remaining performance obligations: Disclosure of quantitative amounts. Quantitative or qualitative explanation of when remaining performance obligation amounts will be recognized as revenue.	Yes	Yes
		Yes	Yes

Quantitative and qualitative information about an entity’s performance obligations should also be disclosed. These required disclosures should complement an entity’s accounting policy disclosure and, like the other disclosures required under the revenue standard, should be tailored and written in a manner that avoids boilerplate language. Questions that entities may consider helpful in developing the required disclosures related to performance obligations include the following:

What are the typical promises made to the customer?
Does the entity satisfy the performance obligation(s) upon shipment, upon delivery, as services are rendered, or upon completion of service?
If bill-and-hold arrangements are in place, have performance obligations associated with these contracts been disclosed?
How is the entity’s performance tied to its payment terms?
When is payment typically due?
Does the contract contain a significant financing component?
Is the consideration amount variable (e.g., because of return or refund rights)? If so, what drives the variability (e.g., assumptions and judgments)?
Is the estimate of variable consideration typically constrained? Is it consistent with estimates in prior periods?
Is there a performance obligation to arrange for another party to transfer goods or services (i.e., is the entity acting as an agent)?
Are there any material rights created by (1) favorable renewal terms or (2) customer loyalty or incentive programs?
Does the entity offer warranties? If so, are they assurance-type warranties or promised services?

15.2.4.1 Nature of Performance Obligations

ASC 606-10

50-12 An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following:

When the entity typically satisfies its performance obligations (for example, 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 (for example, when payment typically is 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 in accordance with paragraphs 606-10-32-11 through 32-13)
The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent)
Obligations for returns, refunds, and other similar obligations
Types of warranties and related obligations.

The illustrative disclosure below shows how an entity might provide the information required under ASC 606-10-50-12.

15.2.4.2 Disclosure of Revenue Recognized From Past Performance

In accordance with ASC 606-10-50-12A, an entity is required to disclose “out of period” adjustments attributable to changes in estimates. That is, if an estimate of variable consideration is adjusted (or a royalty is received after a right-to-use license has been transferred to the customer) and an adjustment to revenue is accordingly recognized in the period, the adjustment to revenue should be disclosed.

ASC 606-10

50-12A An entity shall disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).

The example below illustrates the application of ASC 606-10-50-12A.

Example 15-1

An entity has entered into a long-term construction contract that includes two forms of consideration: a fixed component of $3,000 and a potential performance bonus of $1,000. Therefore, the total potential consideration in this contract is $4,000. However, at contract inception, no variable consideration is included in the transaction price — that is, the transaction price is constrained (see Chapter 6 for further discussion on estimating and constraining the transaction price).

As of June 30, 20X8, the entity’s performance under the contract is 50 percent complete. Therefore, using the original estimate of the transaction price, the entity recognizes revenue of $1,500 (50 percent of $3,000).

Subsequently, on the basis of further information and estimation during the entity’s third-quarter close process, it is believed to be probable that the entity will receive the performance bonus. Therefore, the entity includes a cumulative catch-up adjustment in accordance with ASC 606-10-32-42 through 32-45 (see Chapter 6) and updates its transaction price to $4,000. As a result, on September 30, 20X8, in addition to recording the revenue associated with the incremental progress in performance achieved during the third quarter of 20X8, the entity records $500 in revenue to catch up during that quarter for the prior periods of performance under the contract.

In accordance with ASC 606-10-50-12A, this $500 cumulative catch-up adjustment should be disclosed. The entity may make this disclosure as follows:

The disclosure may be presented in a narrative format in the entity’s financial statements. For example, the entity could provide a narrative disclosure that states, “For the three-month period ending September 30, 20X8, the Company recognized $500 in revenue from performance obligations satisfied in prior periods; the cumulative catch-up adjustment resulted from a change in transaction price related to variable consideration that was constrained in the prior period.”12

15.2.4.3 Transaction Price Allocated to the Remaining Performance Obligations

The requirement in ASC 606-10-50-13 to provide information on the transaction price allocated to the remaining performance obligations is a new and challenging disclosure requirement; however, it is viewed as a critical disclosure by users of financial statements. Many refer to this disclosure as the “backlog” disclosure because it requires disclosure of expected future revenue to be recorded on partially completed contracts.

Specifically, ASC 606-10-50-13 requires disclosure as follows:

ASC 606-10

50-13 An entity shall disclose 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 unsatisfied) as of the end of the reporting period
An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the entity shall disclose in either of the following ways:
1. On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
2. By using qualitative information.

For example, suppose that a calendar-year-end entity sells a two-year noncancelable magazine subscription to a customer on April 1, 20X8, for an up-front payment of $24. Therefore, as of December 31, 20X8, the entity has fulfilled nine months of the contract by delivering nine magazines to the customer and has recognized $9 of revenue. In accordance with ASC 606-10-50-13, the entity is required to include in its disclosures for December 31, 20X8, a quantitative disclosure of the remainder ($15) as the transaction price allocated to the remaining performance obligations since it expects to fulfill the remaining 15 months of the subscription and recognize the remaining $15 in revenue in future periods (i.e., in the years ending (1) December 31, 20X9, and (2) December 31, 20Y0).

Since determining when performance obligations are satisfied is a matter of judgment, as discussed above and in Section 15.3, the required disclosures related to remaining performance obligations may be subjective and difficult to determine. In light of this, entities could consider the following questions when developing their disclosures in accordance with ASC 606-10-50-13 through 50-15:

For existing contracts, do the entity’s disclosures accurately portray:
- The amount and expected timing of revenue to be recognized from the remaining performance obligations?
- Trends related to the amounts and expected timing of revenue to be recognized from the remaining performance obligations?
- Risks associated with expected future revenue? (Risks may increase if remaining performance obligations are not satisfied until much later.)
- The effect of changes in judgments or circumstances?
Is the timing of revenue recognition uncertain? (If so, qualitative disclosures may be appropriate.)
Are there contracts and associated performance obligations that have an original expected duration of one year or less? (See Section 15.2.4.3.1.)
Has the entity recognized revenue as invoiced in accordance with ASC 606-10-55-18? (See Section 15.2.4.3.1.)
Has the entity recognized sales- or usage-based royalties in exchange for a license of intellectual property (IP) in accordance with ASC 606-10-55-65 through 55-65B? (See Section 15.2.4.3.1.)
Has the entity allocated variable consideration entirely to a wholly unsatisfied performance obligation or distinct good or service that forms part of a series in accordance with ASC 606-10-32-40? (See Section 15.2.4.3.1.)
What is the relationship between the required disclosures about remaining performance obligations and other disclosures, such as MD&A disclosures and backlog disclosures in filings outside the financial statements, if applicable? (For example, entities that voluntarily disclose information about future revenues in backlog disclosures within filings outside the financial statements should consider where this information is coming from, whether it would satisfy the revenue standard’s disclosure requirements, and whether the appropriate controls for reviewing this information are already implemented and operating effectively.)

15.2.4.3.1 Election Not to Provide Certain Disclosures

Under ASC 606-10-50-16, certain nonpublic entities can elect not to provide the disclosures described in ASC 606-10-50-13 through 50-15. In addition, an election under ASC 606-10-50-14 or 50-14A is available to all entities for contracts in any of the following circumstances:

The original expected duration of the contract is one year or less.
Revenue from the satisfaction of the performance obligations is recognized in the amount invoiced in accordance with ASC 606-10-55-18 (see Section 8.5.8.1).
The contract provides for variable consideration constituting a sales- or usage-based royalty promised in exchange for a license of IP that is accounted for in accordance with ASC 606-10-55-65 through 55-65B (see Section 12.7).
Certain instances in which the guidance in ASC 606-10-32-40 is applied (see Section 7.5.4).

ASC 606-10

50-14 An entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if either of the following conditions is met:

The performance obligation is part of a contract that has an original expected duration of one year or less.
The entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18.

50-14A An entity need not disclose the information in paragraph 606-10-50-13 for variable consideration for which either of the following conditions is met:

The variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property accounted for in accordance with paragraphs 606-10-55-65 through 55-65B.
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b), for which the criteria in paragraph 606-10-32-40 have been met.

50-14B The optional exemptions in paragraphs 606-10-50-14(b) and 606-10-50-14A shall not be applied to fixed consideration.

50-15 An entity shall disclose which optional exemptions in paragraphs 606-10-50-14 through 50-14A it is applying. In addition, an entity applying the optional exemptions in paragraphs 606-10-50-14 through 50-14A shall disclose the nature of the performance obligations, the remaining duration (see paragraph 606-10-25-3), and a description of the variable consideration (for example, the nature of the variability and how that variability will be resolved) that has been excluded from the information disclosed in accordance with paragraph 606-10- 50-13. This information shall include sufficient detail to enable users of financial statements to understand the remaining performance obligations that the entity excluded from the information disclosed in accordance with paragraph 606-10-50-13. In addition, an entity shall explain whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 606-10-50-13. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 606-10-32-11 through 32-13).

50-16 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide the disclosures in paragraphs 606-10-50-13 through 50-15.

As noted in ASC 606-10-50-14B above, if an entity elects to use the optional exemptions from the requirement to disclose the information described in ASC 606-10-50-13, the entity would still need to disclose the amount of fixed consideration allocated to outstanding performance obligations. That is, the entity would still need to disclose the amount of consideration allocated to outstanding performance obligations that is not contingent on the resolution of an uncertainty (i.e., not variable consideration).

The example below illustrates a situation in which an entity would not be required to disclose information about its remaining performance obligations because the contract is cancelable within one year or less without substantive penalty.

Example 15-2

On November 1, 20X0, Company A enters into a two-year term software license agreement to provide a right-to-use license of IP and postcontract customer support (PCS) during the contract term to Customer B in exchange for a fixed fee of $2,400, which is prepaid by B at contract inception. Customer B can terminate the contract for convenience at any time by providing 90 days’ notice to A in exchange for a pro rata refund of its prepaid consideration. For example, if B notifies A that it intends to terminate the agreement at the beginning of month 2, B would no longer be able to use the IP after the end of month 4 (i.e., 90 days later) but would receive a refund of $2,000 (i.e., consideration for months 5 through 24). As a result of the cancellation provision, the contract would be accounted for as a three-month term license (and PCS) with optional renewals. See Section 4.4.1.1.2.

Company A’s year-end is December 31. As of December 31, 20X0, A is not required to disclose information about its remaining performance obligations in its contract with B in accordance with the disclosure requirement in ASC 606-10-50-13. This is because ASC 606-10-50-14 states that an entity does not need to disclose information about its remaining performance obligations (as required under ASC 606-10-50-13) if the performance obligation is part of a contract that has an original expected duration of one year or less.

Although A’s contract with B has a stated contract term of two years, the contract is legally enforceable for only three months because of B’s ability to terminate the contract for convenience with no penalty by providing 90 days’ notice. Therefore, for purposes of applying the guidance and disclosure requirements in ASC 606, the contract term is only three months. If the election is not made and B has not given notice to cancel the contract, the remaining performance obligation that could be included in the disclosure would be limited to the three-month obligation to provide PCS.

In addition, because $2,100 of the up-front consideration received from B is related to potential contract renewals that are, in effect, optional purchases (i.e., consideration for months 4 through 24), that amount should initially be presented as a deposit liability (or similar liability) rather than a contract liability. That is, on November 1, 20X0, the $2,100 does not represent A’s obligation to transfer goods or services to a customer for which the entity has received consideration (or for which the amount is due) from the customer. This is because A is not obligated to transfer additional term licenses and PCS to the customer until the customer exercises its option to renew the contract (by electing not to terminate the contract).

This presentation and the disclosure requirements could be the same for other contracts that include cancellation provisions with no substantive termination penalties or pro rata refund provisions (e.g., a contract to provide two years of consulting services or SaaS for $2,400 that is cancelable without a substantive penalty by giving 90 days’ notice).

15.2.4.3.2 Illustrative Examples

The Codification examples below illustrate how an entity could disclose its allocation of the transaction price to the remaining performance obligations to meet the requirements of ASC 606-10-50-13.

ASC 606-10

Example 42 — Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations

55-298 On June 30, 20X7, an entity enters into three contracts (Contracts A, B, and C) with separate customers to provide services. Each contract has a two-year noncancellable term. The entity considers the guidance in paragraphs 606-10-50-13 through 50-15 in determining the information in each contract to be included in the disclosure of the transaction price allocated to the remaining performance obligations at December 31, 20X7.

Contract A

55-299 Cleaning services are to be provided over the next two years typically at least once per month. For services provided, the customer pays an hourly rate of $25.

55-300 Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with paragraph 606-10-55-18. Consequently, the entity could elect to apply the optional exemption in paragraph 606-10-50-14(b). If the entity elects not to disclose the transaction price allocated to remaining performance obligations for Contract A, the entity would disclose that it has applied the optional exemption in paragraph 606-10-50-14(b). The entity also would disclose the nature of the performance obligation, the remaining duration, and a description of the variable consideration that has been excluded from the disclosure of remaining performance obligations in accordance with paragraph 606-10-50-15.

Contract B

55-301 Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of four visits per month over the next two years. The customer pays a fixed price of $400 per month for both services. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.

55-302 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The information for Contract B included in the overall disclosure is as follows.

Contract C

55-303 Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed consideration of $100 per month plus a one-time variable consideration payment ranging from $0–$1,000 corresponding to a one-time regulatory review and certification of the customer’s facility (that is, a performance bonus). The entity estimates that it will be entitled to $750 of the variable consideration. On the basis of the entity’s assessment of the factors in paragraph 606-10-32-12, the entity includes its estimate of $750 of variable consideration in the transaction price because it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.

55-304 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The entity also includes a qualitative discussion about any significant variable consideration that is not included in the disclosure. The information for Contract C included in the overall disclosure is as follows.

55-305 In addition, in accordance with paragraph 606-10-50-15, the entity discloses qualitatively that part of the performance bonus has been excluded from the disclosure because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the guidance on constraining estimates of variable consideration.

55-305A The entity does not meet the criteria to apply the optional exemption in paragraph 606-10-50-14A because the monthly consideration is fixed and the variable consideration does not meet the condition in paragraph 606-10-50-14A(b).

Example 43 — Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations — Qualitative Disclosure

55-306 On January 1, 20X2, an entity enters into a contract with a customer to construct a commercial building for fixed consideration of $10 million. The construction of the building is a single performance obligation that the entity satisfies over time. As of December 31, 20X2, the entity has recognized $3.2 million of revenue. The entity estimates that construction will be completed in 20X3 but it is possible that the project will be completed in the first half of 20X4.

55-307 At December 31, 20X2, the entity discloses the amount of the transaction price that has not yet been recognized as revenue in its disclosure of the transaction price allocated to the remaining performance obligations. The entity also discloses an explanation of when the entity expects to recognize that amount as revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most appropriate for the duration of the remaining performance obligation or by providing a qualitative explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this information qualitatively as follows:

As of December 31, 20X2, the aggregate amount of the transaction price allocated to the remaining performance obligation is $6.8 million, and the entity will recognize this revenue as the building is completed, which is expected to occur over the next 12–18 months.

The illustrative disclosure below further demonstrates how an entity may provide a quantitative disclosure of the transaction price to be allocated to the remaining performance obligations.13

15.2.5 Impact of Termination Provisions on Disclosure

Termination provisions may significantly affect revenue recognition for entities. In addition, contracts with termination provisions may affect an entity’s financial statement disclosures.

15.2.5.1 Effect of Termination Provisions on Disclosures Related to Remaining Performance Obligations

In an arrangement with a termination provision, an entity should not include amounts that are subject to termination without penalty in its required disclosures related to remaining performance obligations. Under the requirements outlined in ASC 606-10-50-13, an entity must disclose the “aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied . . . as of the end of the reporting period.”

When arrangements include provisions for termination without penalty, the amounts excluded from the assessment under step 1 of ASC 606 are, in effect, optional purchases. Any amounts that are paid or due are thus accounted for as a refund liability (or similar liability) and not a contract liability. Because these amounts are related to a cancelable arrangement for which a contract does not exist (as determined under step 1), they do not represent any part of the transaction price (as determined under step 3) related to unsatisfied performance obligations (which would be identified as part of step 2).

15.2.5.2 Supplemental Disclosures Related to Termination Provisions

An entity is not necessarily precluded from separately disclosing the amounts of refund liability within the financial statement notes that discuss remaining performance obligations. An entity must not indicate that the refund liabilities are part of the transaction price related to its remaining performance obligations. However, the entity generally would not be precluded from specifying the refund liability in its financial statement notes if it properly describes this GAAP amount.

For example, an entity might provide the disclosure below.

Illustrative Disclosure — Transaction Price Allocated to Remaining Performance Obligations

As of December 31, 20X7, approximately $4.5 million of revenue is expected to be recognized from remaining performance obligations. The Company expects to recognize revenue on approximately 65 percent of these amounts over the next 12 months, with the remaining balance recognized thereafter.

In addition, approximately $0.8 million is recorded as a refund liability in the Company’s consolidated balance sheet that is not included in the above remaining performance obligations. This liability is generally related to amounts received from customers but is associated with termination provisions for arrangements that are cancelable at the customer’s discretion (and the Company would be required to refund such amounts).

15.2.5.3 Effect of Termination Provisions on Contract Balance Disclosures

When some of an entity’s arrangements contain termination provisions, any amounts received that are not associated with contracts identified under step 1 of ASC 606 should be recorded as a separate liability apart from the contract liability. Therefore, the entity would not be permitted to include the refund liability in its contract liability balance disclosures required by ASC 606-10-50-8. However, if the entity chooses to present a full rollforward of its contract liability, one approach may be to reclassify the refund liability as a contract liability when the termination right lapses (i.e., when the contract is no longer cancelable without penalty and the amounts are recharacterized as deferred revenue). Under this approach, the reclassification of the refund liability as a contract liability would be presented in a manner consistent with the illustrative disclosure in Section 15.2.3.5.2.

Footnotes

See footnote 5.

In December 2016, the FASB issued ASU 2016-20, which clarified (by moving the content previously in ASC 606-10-50-8(c) to ASC 606-10-50-12A) that “the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.”

For more information about the November 7, 2016, TRG meeting, see TRG Agenda Paper 60 and Deloitte’s November 2016 TRG Snapshot.

The illustrative disclosure example above demonstrates how an entity might provide information in its interim financial statements. When considering their annual financial statements, most entities provide an annual disclosure of revenue recognized in the current reporting period from performance obligations satisfied (or partially satisfied) in the previous annual reporting period.

This illustrative disclosure includes the optional exemptions applied in ASC 606-10-50-14 and 50-14A. In addition to disclosing the optional exemptions applied, an entity should disclose the qualitative information required in ASC 606-10-50-15.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.