Chapter 16 — Nonpublic-Entity Elections
Chapter 16 — Nonpublic-Entity Elections
16.1 Background
During the final years of development of the revenue standard, the
FASB was under pressure from the AICPA and others regarding the establishment of
U.S. GAAP for nonpublic entities. Specifically, some criticized the FASB for setting
standards for large public companies that increase the complexity (and, therefore,
the cost) associated with producing financial statements. As a result, the Financial
Accounting Foundation, the FASB’s parent organization, created the Private Company
Council to help the FASB determine when there should be differences in U.S. GAAP for
nonpublic entities (see Deloitte’s May 25, 2012, journal entry and June 5, 2012,
Heads
Up for more information). Accordingly, throughout the
redeliberations and final development of the revenue standard, the FASB considered
the disparate needs of users of nonpublic entities’ financial statements.
Ultimately, the FASB concluded that no specific recognition or measurement
differences for nonpublic entities were necessary. However, the Board also
concluded, largely on the basis of feedback from the nonpublic-entity community,
that differences in the required disclosure package and mandatory effective date of
the revenue standard would be appropriate for nonpublic entities. In addition, after
the revenue standard was finalized, the FASB decided to provide recognition
exceptions for franchisors that are not public business entities (“private-company
franchisors”) by issuing ASU
2021-02, which allows private-company franchisors to use a practical
expedient and a policy election when identifying performance obligations in their
contracts with customers (i.e., franchisees) under ASC 606. See Section 5.3.5 for additional
details.
At the same time the FASB was developing the revenue standard, it was working on a
separate project to clarify which entities would be within the scope of the relief
available to nonpublic entities under financial reporting standards. In that
project, the Board decided to answer the question of which entities qualified for
nonpublic-entity relief indirectly by determining, in stages, which entities would
not qualify for such relief. The Board began its analysis by determining what
constitutes a “public business entity” (PBE). In ASU
2013-12, and as noted in Chapter
2, the Board defined the term as follows:
A public business entity is a business entity meeting any one of the criteria
below. Neither a not-for-profit entity nor an employee benefit plan is a
business entity.
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It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
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b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
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c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
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It 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.
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It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because
its financial statements or financial information is included in another
entity’s filing with the SEC. In that case, the entity is only a public
business entity for purposes of financial statements that are filed or
furnished with the SEC.
In defining PBEs to exclude not-for-profit entities and employee benefit plans, the
Board deferred to future deliberations, on a standard-by-standard basis, its
determination of which, if any, not-for-profit entities and employee benefit plans
would be eligible for relief available to nonpublic entities. Accordingly, the Board
subsequently determined that an entity would be eligible for such relief under the
revenue standard if it does not meet the definition of any of the following:
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A PBE.
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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.
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An employee benefit plan that files or furnishes financial statements with or to the SEC.
After determining which entities could be afforded relief in application, the FASB
considered the costs and benefits of making the requirements in the revenue standard
applicable to nonpublic entities and decided to provide those entities with relief
related to:
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Disclosures.
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Mandatory effective date.
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Identification of performance obligations related to preopening services provided by a franchisor (refer to Section 5.3.5 for additional information).
16.2 Disclosure Elections
The Background Information and Basis for Conclusions of ASU 2014-09 explains that one of the goals of
ASC 606 is to improve the revenue disclosure guidance under U.S. GAAP. As a result
of the disclosure requirements in ASC 606 (which are discussed in detail in
Chapter 15), financial statement users
will have better information to help them make financial decisions. However, when
the FASB was developing the revenue standard, it received feedback from nonpublic
entities related to (1) the increased costs that nonpublic entities would incur to
meet the expanded disclosure requirements and (2) questions about why nonpublic
entities should be required to provide the same level of disclosure as public
entities given that users of nonpublic-entity financial statements, typically debt
holders, have greater access to management. The FASB considered the costs and
benefits of its disclosure package and decided to provide various relief to
nonpublic entities.
The table below summarizes the disclosures that a nonpublic entity may elect not to
apply (the ASU’s disclosure requirements are covered in Chapter 15 as well as in the left column below).
Disclosure Requirement
|
Election for Nonpublic Entities
|
---|---|
Present or disclose revenue and any impairment losses
recognized separately from other sources of revenue or
impairment losses from other contracts. (ASC 606-10-50-4;
see Section 15.2)
|
None.
|
A disaggregation of revenue to “depict how
the nature, amount, timing, and uncertainty of revenue and
cash flows are affected by economic factors” (the ASU also
provides implementation guidance). (ASC 606-10-50-5 and
50-6; see Section
15.2.2)
|
An entity may elect not to provide the
quantitative disclosure but should, at a minimum, provide
revenue disaggregated according to the timing of transfer of
goods or services (e.g., goods transferred at a point in
time and services transferred over time). (ASC 606-10-50-7;
see Section
15.2.2)
|
Information about (1) contract assets and
contract liabilities (including changes in those balances)
and the amount of revenue recognized in the current period
that was previously recognized as a contract liability (ASC
606-10-50-8 through 50-10) and (2) the amount of revenue
recognized that is related to performance obligations
satisfied in prior periods (ASC 606-10-50-12A). (See
Sections 15.2.3
and 15.2.4)
|
An entity may elect not to provide the
disclosures but should disclose the opening and closing
balances of receivables, contract assets, and contract
liabilities (if not separately presented or disclosed). (ASC
606-10-50-11; see Section
15.2.3.3)
|
Information about performance obligations
(e.g., types of goods or services, significant payment
terms, typical timing of satisfying obligations, and other
provisions). (ASC 606-10-50-12; see Section 15.2.4)
|
None.
|
Information about an entity’s transaction
price allocated to the remaining performance obligations,
including (in certain circumstances) the “aggregate amount
of the transaction price allocated to the [remaining]
performance obligations” and when the entity expects to
recognize that amount as revenue. (ASC 606-10-50-13 through
50-15; see Section
15.2.4.3)
|
An entity may elect not to provide these
disclosures. (ASC 606-10-50-16; see Section 15.2.4.3)
|
A description of the significant judgments, and changes in
those judgments, that affect the amount and timing of
revenue recognition (including information about the timing
of satisfaction of performance obligations, the
determination of the transaction price, and the allocation
of the transaction price to performance obligations). (ASC
606-10-50-17 through 50-20; see Sections 15.3 through 15.3.2)
|
In accordance with ASC 606-10-50-21, an entity may elect not
to provide any or all of the following disclosures:
(ASC 606-10-50-21; see Section
15.3.2)
|
Information about an entity’s accounting for costs of
obtaining or fulfilling a contract (including account
balances, judgments, amortization methods and amounts, and
impairment losses). (ASC 340-40-50-2 and 50-3; see Section 15.4)
|
An entity may elect not to provide these disclosures. (ASC
340-40-50-4; see Section
15.4)
|
Information about the entity’s policy
decisions (i.e., when the entity used the practical
expedients allowed by the ASU). (ASC 606-10-50-14 through
50-16, ASC 606-10-50-22, and ASC 340-40-50-5; see Sections
6.4.1, 15.2.4.3.1, and
15.5)
|
An entity may elect not to provide these
disclosures. (ASC 606-10-50-14 through 50-16, ASC
606-10-50-23, and ASC 340-40-50-6; see Sections
15.2.4.3.1 and 15.5). However,
private-company franchisors that elect to use the practical
expedient and policy election in ASC 952-606-25-2 and 25-3
must disclose those elections (ASC 952-606-50-1 and 50-2;
see Section 5.3.5).
|
Connecting the Dots
Interim reporting requirements, including those related to disclosure, are
outlined in ASC 270. In particular, public entities are required to
disclose, at a minimum, the financial information required under ASC
270-10-50-1. Revenue disclosures are specifically addressed in ASC
270-10-50-1(a), which requires the disclosure of “[s]ales or gross revenues,
provision for income taxes, net income, and comprehensive income.”
Section B of ASU 2014-09, Conforming
Amendments to Other Topics and Subtopics in the Codification and Status
Tables, expands this interim reporting requirement by
adding the following guidance:
50-1A Consistent with paragraph 270-10-50-1, 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, shall disclose all of the
following information about revenue from contracts with customers
consistent with the guidance in Topic 606:
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A disaggregation of revenue for the period, see paragraphs 606-10-50-5 through 50-6 and paragraphs 606-10-55-89 through 55-91.
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The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers (if not otherwise separately presented or disclosed), see paragraph 606-10-50-8(a).
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Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period, see paragraph 606-10-50-8(b).
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Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price), see paragraph 606-10-50-12A.
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Information about the entity’s remaining performance obligations as of the end of the reporting period, see paragraphs 606-10-50-13 through 50-15.
Many nonpublic entities are not subject to interim financial reporting
requirements and therefore would not be required to comply with the interim
disclosure requirements in ASC 270. In addition, the same entities that are
determined to be nonpublic for purposes of applying ASC 606 are outside the
scope of the requirements in ASC 270-10-50-1A. As a result, even if a
nonpublic entity produces interim financial information, it is not required
to provide the disclosures outlined above that are required to be presented
for public entities.