What Private Companies Should
Know About the New Revenue
by Lauren Hegg, Jennifer Burns, Amy Groves, Amy Steele, and Kristin Bauer, Deloitte & Touche LLP
In May 2014, the FASB issued its final standard on revenue from contracts with customers,
ASU 2014-091 (codified in ASC 6062). Since then, the Board has issued a number of additional
ASUs to amend and clarify the guidance in ASC 606, ASC 610-20, and ASC 340-40. The
new standard replaces almost all current revenue guidance, including industry-specific
requirements, and every company is likely to be affected by it. For private companies, the
rules take effect for annual reporting periods beginning after December 15, 2018, and interim
periods within annual reporting periods beginning after December 15, 2019.
Connecting the Dots
As used in this Heads Up, a “private company” is an entity that is not any of the
A public business entity (as defined in the ASC master glossary).
A not-for-profit entity that has issued, or is a conduit bond obligor for,
securities that are traded, listed, or quoted in an exchange or an over-the-counter
An employee benefit plan that files or furnishes financial statements with or
to the SEC.
In response to concerns from commenters regarding costs and complexities that may
overburden private companies, the FASB considered the needs of users of such companies’
financial statements throughout the new revenue standard’s development. The Board
ultimately concluded that while no specific changes to the recognition and measurement
guidance were necessary for private companies,3 it would be appropriate to modify the
required disclosure package and mandatory effective date for such companies. Accordingly,
the standard permits private companies to elect not to provide certain of the quantitative and
qualitative disclosures required for public companies.
This Heads Up provides a high-level overview of the new five-step model for recognizing
revenue under ASC 606 and discusses the standard’s mandatory effective date for private
companies. It also outlines the practical expedients available to private companies with
respect to certain of the new standard’s disclosure requirements (see Appendix A for a
comprehensive summary) and discusses internal control considerations. In addition, the Heads
Up provides some observations and lessons learned from the implementation of ASC 606 by
Effective Date for Private Companies
As discussed above, for private companies, the new revenue standard is effective for annual
reporting periods beginning after December 15, 2018, and interim reporting periods within
annual reporting periods beginning after December 15, 2019. Private companies may elect to
early adopt the new guidance as of the standard’s original effective date for public companies
(i.e., annual reporting periods beginning after December 15, 2016). If private companies elect
to early adopt the standard, they have the option to either (1) adopt it beginning with interim
periods within the first annual reporting period or (2) wait to present interim periods under
the new standard until the following annual reporting period.
Connecting the Dots
Effective-date relief to private companies is typically described as a one-year delay.
However, the delay is likely to be even greater than one year because of the different
adoption requirements for interim periods.
Public companies must adopt the new revenue standard for annual periods
beginning after December 15, 2017 (one year earlier than private companies).
However, public companies are also required to adopt the new guidance for interim
periods within those annual periods. Therefore, a calendar-year-end public company
will apply the new revenue standard when presenting its results for the first quarter
of 2018 (i.e., the period ending March 31, 2018), which the company is likely to issue
in April 2018.
By contrast, private companies are not required to adopt the new revenue standard
until they report their annual results. For example, a calendar-year-end private
company would typically produce the results of its year ended December 31, 2019,
in March or April 2020. In addition, if a private company’s financial statements for an
interim period are required or are otherwise produced, the private company is not
required to adopt the new revenue standard for that interim period if such period
occurred in the year ended December 31, 2019. However, given that the annual
results will be reported on a new basis (i.e., under ASC 606), a private company may
find it beneficial to early adopt the standard for interim periods since the company
would otherwise be required to revise the accounting for its revenue transactions
as presented in its interim financial statements when including full-year results in its
High-Level Overview of the Five-Step Model
The graphic below summarizes the five-step model for recognizing revenue under ASC 606.
The FASB gave private companies some relief related to applying the new revenue standard by
permitting them to elect not to provide certain of the standard’s quantitative and qualitative
disclosures. The paragraphs below discuss the disclosure requirements for private companies
under ASC 606.
Disaggregation of Revenue
ASC 606-10-50-5 requires public companies to “disaggregate revenue . . . into categories that
depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected
by economic factors.” ASC 606-10-55-91 provides the following examples of categories that
public companies may consider when preparing their disaggregated revenue disclosures,
including (but not limited to):
“Type of good or service.”
“Market or type of customer.”
“Type of contract.”
“Timing of transfer of goods or services.”
Private companies may elect not to disclose the disaggregated revenue information required
by ASC 606-10-50-5; however, under ASC 606-10-50-7, such companies should, at a minimum,
provide revenue information “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 . . . over time).” Further, because
private companies are not required to provide segment reporting information, they need not
reconcile such data to the disaggregated revenue information.
Private companies are required to disclose the opening and closing balances of receivables,
contract assets, and contract liabilities from contracts with customers, if not separately
presented or disclosed. However, they may elect not to disclose the other contract balance
information required by ASC 606-10-50-8 through 50-10 and ASC 606-10-50-12A. That is,
private companies are not required to disclose:
The amount of revenue recognized in the current period that was previously
recognized as a contract liability.
The amount of revenue recognized that is related to “performance obligations
satisfied . . . in previous periods” (e.g., because of changes in the transaction price).
“[H]ow the timing of satisfaction of its performance obligations . . . relates to the typical
timing of payment and the effect . . . on the contract asset and the contract liability
“[A]n explanation of the significant changes in the contract asset and the contract
liability balances during the reporting period.”
ASC 606-10-50-12 requires private companies to disclose information about the nature of
their performance obligations, including:
“When the entity typically satisfies its performance obligations (for example, upon
shipment . . . as services are rendered . . .).”
Significant payment terms, including information about variable consideration and
significant financing components.
“The nature of the goods or services that the entity has promised to transfer,”
including arrangements in which the company is acting as an agent.
“Obligations for returns, refunds, and other similar obligations.”
“Types of warranties and related obligations.”
Remaining Performance Obligations
ASC 606-10-50-13 requires a public company to disclose the “aggregate amount of the
transaction price allocated to the [remaining] performance obligation” and when the company
expects to recognize that amount as revenue (either on a quantitative or qualitative basis).
Many refer to this requirement as the “backlog” disclosure because a company must describe
expected future revenue to be recorded on partially completed contracts.
For example, suppose that a calendar-year-end public company sells a two-year magazine
subscription to a customer on April 1, 20X8, for an up-front payment of $24. As of December
31, 20X8, the company 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
company is required to quantitatively disclose for December 31, 20X8, the $15 remainder as
the transaction price allocated to the outstanding performance obligations since it expects
to fulfill the 15 months left in the subscription and recognize the remaining $15 in revenue in
future periods (i.e., in the years ending December 31, 20X9, and December 31, 20Y0).
The FASB decided to permit private companies to elect, as a practical expedient, not to
disclose the information required by ASC 606-10-50-13 through 50-15 about their remaining
ASC 606-10-50-17 through 50-20 require public companies to disclose information about
the significant judgments they used in (1) determining the amount and timing of revenue
recognition, including information about the timing of satisfaction of performance obligations;
(2) determining the transaction price; and (3) allocating the transaction price to the
performance obligations in the contract.
Private companies may elect not to disclose the majority of the information required for public
companies; however, at a minimum, they must disclose:
The methods they used to recognize revenue for performance obligations satisfied
over time (e.g., output or input methods).
The methods, inputs, and assumptions they used to evaluate whether an estimate of
variable consideration is constrained.
ASC 340-40-50-1 through 50-4 require public companies to disclose quantitative and
qualitative information about their contract costs, including the closing balances of their
capitalized contract costs, the amount of amortization and impairment losses they recognized
in the reporting period, certain judgments they made in determining the costs to be
capitalized, and the amortization method they used. Private companies, however, may elect
not to disclose any information about their contract costs.
While ASC 606-10-50-22 requires public companies to disclose their election of practical
expedients related to the determination of whether a significant financing component exists
and the capitalization of incremental costs to obtain a contract, private companies do not have
to disclose whether they have used any of the ASC 606 or ASC 340-40 practical expedients.
Interim Disclosure Requirements for Private Companies
Interim reporting requirements, including those related to disclosure, are outlined in ASC 270.
In particular, ASC 270-10-50-1(a) requires public companies to disclose, at a minimum, “[s]ales
or gross revenues, provision for income taxes, net income, and comprehensive income.”
The new revenue standard amended the interim reporting requirements in ASC 270 to add
ASC 270-10-50-1A, under which public companies must provide certain annual revenue
disclosures on an interim basis.4
Many private companies are not subject to interim financial reporting requirements and
therefore need not comply with those in ASC 270. In addition, ASC 270-10-50-1A applies only
to public business entities, not-for-profit entities, and employee benefit plans. Thus, even if
a private company produces interim financial information, it is not required to provide the
interim disclosures that public companies must provide.
Internal Control Considerations Related to the New Revenue Standard
While the regulatory rules related to internal control may be less stringent for private
companies than their public counterparts, internal controls are still an important topic,
particularly regarding changes in the accounting, reporting, and disclosure of revenue. Below
are some considerations for private companies as they implement ASC 606.
Internal Controls Over the Adoption of New Standards
The unique circumstances and considerations associated with the adoption of a new
accounting standard can often result in an increased risk of material misstatement. Private
companies should therefore consider circumstances that may be present only during
the adoption period and evaluate whether there are any unique risks that require “one-time”
internal controls (i.e., controls that operate exclusively during the adoption period).
Management should also consider the internal controls, documentation, and evidence it may
need to support:
Entity-level controls such as the control environment and general “tone at the top.”
Identification of material revenue streams and different contract types within those
Accounting conclusions reached (e.g., as a result of preparing accounting white papers
or internal memos memorializing management’s considerations and conclusions),
including the effect on other account balances such as costs of sales or services,
contract assets and liabilities, and income tax accounts.
Information used to support accounting conclusions, new estimates, adjustments to
the financial statements, and disclosure requirements.
Identification and implementation of changes to information technology (IT) systems,
including the logic of reports.
The transition approach selected.
The accounting logic used and journal entries (including the transition adjustments)
that record the adoption’s impact.
Any practical expedients applied and related disclosures.
Changes to the monthly, quarterly, or annual close process and related reporting
requirements (e.g., internal reporting, and disclosure controls and procedures).
See Appendix B for considerations related to additional risks and internal controls.
Risks and Internal Controls Associated With the Five-Step Model
As a result of the new revenue standard’s requirement that companies apply a five-step model
for recognizing revenue, it is possible that new financial reporting risks will emerge, including
new or modified fraud risks, and that new processes and internal controls will be required.
Companies should therefore consider whether they need to modify their internal controls to
address such risks.
For example, in applying the five-step model, management will need to make significant
judgments and estimates (e.g., the determination of variable consideration and whether
to constrain such consideration). It is critical for management to (1) evaluate the risks of
material misstatement associated with these judgments and estimates, (2) design and
implement controls to address those risks, and (3) maintain documentation that supports the
assumptions and judgments that underpin its estimates. Appendix B outlines the five-step
revenue recognition model and contains examples of risks and controls for consideration.
Significant Changes in Information and Related Data-Quality Needs
Private companies may need to gather or track new information to comply with the five-step
model and related disclosure requirements. Management should consider whether
appropriate controls are in place to support (1) the necessary IT changes (including change
management controls and, once the IT changes have been implemented, the testing of
their design and operating effectiveness) and (2) the accuracy of the information used by
the company to recognize revenue and provide the required disclosures. The table below
illustrates some potential challenges and examples of internal control practices.
Example of Internal Control Practice
Information systems have not
been updated to support the new
standard’s reporting requirements
(e.g., annual requirements, including
Control expectations have not been
considered for new information
required under the standard.
Internal controls over source data,
report logic, or report parameters
have not been reconsidered.
Management establishes data governance policies for
identifying and resolving data gaps and implements
processes to verify the quality of information needed
for implementation of the new standard.
The revenue recognition implementation team meets
periodically with the control team (and control owners
as appropriate) to share relevant information about the
adoption of the new standard so that the control team
can prepare and plan accordingly.
Management takes steps to update and review the
appropriate flowcharts, data flow diagrams, process
narratives, procedure manuals, and control procedures
to reflect the new processes as a result of the standard.
Applying the COSO Principles
The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Internal
Control — Integrated Framework provides 17 principles and related guidance that private
companies may want to consider in their evaluation and design of controls in response to the
new revenue standard. They may also want to consider any evidence and documentation they
will need to support the operation of those controls. For further discussion, see Deloitte’s May
9, 2017, Heads Up on internal control considerations related to adoption of the new revenue
Lessons Learned From Public Companies’ Experiences
The experiences of public companies may prove helpful to private companies as they
implement the new revenue standard’s requirements, particularly its recognition and
measurement principles. The following graphic illustrates some lessons learned from public
companies regarding the implementation process:
At a minimum, a private company must, under ASC 606-10-50-7, disclose “revenue disaggregated according to the timing of transfer of goods or services (for example,
revenue from goods or services transferred to customers over time).”