Heads Up | Volume 25, Issue 1 | January 22, 2018
by Emily Childs, Eric Knachel, and Rob Moynihan, Deloitte & Touche LLP
As a result of the recognition and measurement requirements in the FASB’s new revenue standard (ASC 6061), some companies will need to make wholesale changes to their financial statements. For other companies, the effect of the new requirements will be less significant. However, all entities will need to carefully consider the standard’s new and modified quantitative and qualitative disclosure guidance, which will significantly increase the amount of information they should disclose about revenue activities and related transactions. Accordingly, since the standard’s mandatory adoption date2 has either arrived or is rapidly approaching, companies are sharpening their focus on those disclosure requirements.3
This Heads Up provides insight into our review of the disclosures in the public filings of a group of companies that early adopted the standard in 2017. Entities adopting the standard beginning in 2018 may benefit from evaluating the disclosure trends we have observed as a result of this review. For a comprehensive discussion of the new revenue standard, see Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard.
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The new revenue standard requires entities to disclose information on both an interim and an annual basis. While the disclosures discussed in this Heads Up must all be considered annually, those related to disaggregated revenue, contract balances, and remaining performance obligations are also required in interim financial statements prepared under U.S. GAAP (at least for public entities).
Even though the new revenue standard specifies that certain disclosures are not required in interim financial statements, SEC registrants must provide both annual and interim disclosures in the first interim period after adopting any new accounting standard and in each subsequent quarter in the year of adoption.4 Specifically, Section 1500 of the SEC Financial Reporting Manual states:
S-X Article 10 requires disclosures about material matters that were not disclosed in the most recent annual financial statements. Accordingly, when a registrant adopts a new accounting standard in an interim period, the registrant is expected to provide both the annual and the interim period financial statement disclosures prescribed by the new accounting standard, to the extent not duplicative. These disclosures should be included in each quarterly report in the year of adoption.
Thus, SEC registrants must comply with the new revenue standard’s annual and interim disclosure requirements in each quarter of their first year of adoption to the extent that the information they provide is material and not duplicated.
The discussion in this Heads Up is based primarily on the quarterly Form 10-Q filings of a small number of Fortune 1000 companies that elected to early adopt the new revenue standard. The companies span a wide variety of industries, including aerospace, automotive, technology, life sciences, and financial services, and consist of large accelerated filers, accelerated filers, nonaccelerated filers, and smaller reporting entities.
Key — Disclosure Categories
Required for all entities.
Only required for public entities (nonpublic entities can elect to not disclose).
The discussion below summarizes several key categories of disclosures required under the new revenue standard and identifies trends related to early adopter filings. It also provides examples of disclosures and SEC comments, as applicable.
Under the new revenue standard, an entity is required to disaggregate revenue into categories as follows:
The categories must depict how revenue and cash flows are affected by economic factors.
The disclosures must contain sufficient information to convey the relationship between disaggregated revenue and each disclosed segment’s revenue information.
A nonpublic entity may elect not to apply the two requirements above; however, in accordance with ASC 606-10-50-7, it must still 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 . . . affect the nature, amount, timing, and uncertainty of revenue and cash flows.”
As discussed in paragraph BC336 of ASU 2014-09,5 “because the most useful disaggregation of revenue depends on various entity-specific or industry-specific factors, the Boards decided that [ASC] 606 should not prescribe any specific factor to be used as the basis for disaggregating revenue from contracts with customers.” Instead, ASC 606-10-55-91 provides examples of categories that may be appropriate for an entity’s disclosures in the financial statements.
When selecting the types of categories for disaggregated revenue, an entity should consider how and where it has communicated information about revenue for various purposes, including (1) disclosures outside the financial statements, (2) information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments, and (3) other information that is similar to the types of information identified in (1) and (2) and that is used by the entity or users of its financial statements for evaluating its financial performance or making decisions about resource allocation.
Approximately 80 percent of early adopters used a tabular format to disclose disaggregated revenue by category. However, very few used that format to disclose information about the timing of transfers; instead, they often presented it in narrative form as part of the description of each revenue stream.
Further, roughly 45 percent of early adopters disclosed disaggregated revenue by category in a newly incorporated revenue footnote, 30 percent disclosed such information in the segment footnote (which eliminates duplicate information), and 25 percent disclosed it as part of their footnote for newly adopted accounting pronouncements. Regardless of the location of the disclosures in the financial statements, the companies’ disaggregation of revenue provided by early adopters was significantly more granular than the information they disclosed in footnotes before adopting the new standard.
ASC 606 contains an illustrative example6 of a disaggregated revenue disclosure along with the related illustrative segment disclosures, which includes a reconciliation of disaggregated revenue to the segment disclosures. At the November 7, 2016, meeting of the FASB’s transition resource group (TRG), the FASB staff clarified that although a tabular reconciliation is not required under ASC 606-10-50-6, entities should disclose enough information to permit a financial statement user to understand the relationship between disaggregated revenue and the revenue disclosed by reportable segment.
The graph below visually depicts the categories used for disaggregated revenue in the early adopters’ disclosures:
As the graph illustrates, all the early adopters identified which revenue streams were related to performance obligations satisfied at a point in time, versus over time. In addition, a variety of other categories were used to depict the nature, amount, and uncertainty of revenue recognition. While ASC 606-10-55-91 states that “contract duration” and “sales channels” are examples of appropriate disaggregation categories, we observed that no early adopters chose to use them.
We also analyzed how many different disaggregation categories each early adopter considered relevant. Most adopters (approximately 80 percent) appeared to use three or fewer categories of disaggregation, whereas just over 50 percent used only two categories, and approximately 20 percent used four or more categories.
Under the new revenue standard, companies must disclose the following information about contract balances:7
Opening and closing balances (receivables, contract assets, and contract liabilities), if not otherwise separately presented or disclosed.
The amount of revenue recognized in the reporting period from the beginning contract liability balance.
An explanation of significant changes in contract balances during the reporting period (by using quantitative and qualitative information).
An explanation of “how the timing of satisfaction of its performance obligations. . . relates to the typical timing of payment . . . and the effect that those factors have on the contract asset and the contract liability balances.”
Because the new revenue standard does not prescribe a specific format for disclosures about contract balances, entities can present them in tabular or narrative form. Whether a rollforward of contract balances should be included in the disclosures was discussed at the FASB’s November 7, 2016, TRG meeting. Although such a rollforward is not required under ASC 606-10-50-8, the staff noted that it may be an effective means of helping users understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, which is consistent with the overall objective of the new revenue standard.
There was diversity in how early adopters chose to meet the contract balance disclosure requirements. On the basis of our observations, those with significant contract balances (approximately 80 percent) tended to use a tabular format for the disclosures. Of the early adopters that disclosed the contract balances in a tabular format, approximately 40 percent included a rollforward. In rare instances, they used a separate footnote for the contract balance disclosures.
The new revenue standard introduces various quantitative and qualitative requirements related to performance obligations. Under ASC 606-10-50-12, an entity must disclose 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.”
In addition, under ASC 606-10-50-12A, an entity must disclose:
8 “[R]evenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).”
Given the unique nature of a company’s goods and services and the many significant judgments it needs to make in applying the new standard, its disclosures about performance obligations may be the most detailed and time-consuming to prepare. Each company we observed tailored its disclosures, and the type of information disclosed was not necessarily consistent across industries. In addition, a narrative (rather than tabular) format was most commonly used for these disclosures. The following are excerpts from disclosures about performance obligations:
The SEC staff has issued comments asking early adopters to include additional information in their disclosures about performance obligations. Below is an example of one such comment.
ASC 606-10-50-13 requires an entity to disclose the following 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 [above requirement], which the entity shall disclose in either of the following ways:
- On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
- By using qualitative information.”
Several practical expedients are available for the disclosure of remaining performance obligations (see discussion of practical expedients below).
As illustrated in the pie chart below, more than half of the early adopters did not provide disclosures regarding remaining performance obligations. There are various reasons an entity would not disclose its remaining performance obligations in a filing (e.g., it may have elected one or more practical expedients). Of the early adopters that provided these disclosures, approximately one-third indicated that they used one or more practical expedients. While there was diversity in the format they chose to use, most preferred a narrative presentation. In addition, their disclosures were relatively broad and specified the total amount of revenue to be recognized over the next one to two years as opposed to breaking down the remaining performance obligations by revenue categories or some other level of detail.
When revenue is recognized over time (rather than at a point in time), and when consideration is fixed (rather than variable), it appears from our review that the companies often needed to provide relatively more information to satisfy the remaining performance obligation disclosure requirements.
There are many significant judgments and estimates that entities must make and disclose when they adopt the new revenue standard. ASC 606-10-50-17 through 50-20 state the following:
- “An entity shall disclose the judgments, and changes in the judgments, made in
applying the guidance in this Topic that significantly affect the determination of the
amount and timing of revenue from contracts with customers. In particular, an entity
shall explain the judgments, and changes in the judgments, used in determining both
of the following:
- The timing of satisfaction of performance obligations (see paragraphs 606-10- 50-18 through 50-19)
- The transaction price and the amounts allocated to performance obligations (see paragraph 606-10-50-20).”
- “For performance obligations that an entity satisfies over time, an entity shall disclose
both of the following:
- The methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied)
- An explanation of why the methods used provide a faithful depiction of the transfer of goods or services.”
- “For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.”
- “An entity shall disclose information about the methods, inputs, and assumptions used
for all of the following:
- Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring noncash consideration
- Assessing whether an estimate of variable consideration is constrained
- Allocating the transaction price, including estimating standalone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable)
- Measuring obligations for returns, refunds, and other similar obligations.”
Disclosures about significant judgments and estimates in the application of revenue recognition guidance are expected to increase as entities adopt ASC 606. We observed that many early adopters included such disclosures in the significant accounting policies or the management estimates section of their footnotes, or as part of the revenue footnote. In addition, given the unique nature of the goods and services companies provide as well as the significant judgments they must make in applying the new standard, their disclosures were tailored and were not necessarily consistent across industries. Further, the extent of disclosures related to judgments depended substantially on whether performance obligations were satisfied at a point in time or over time. The disclosures of entities that satisfy performance obligations over time were generally more extensive (e.g., methods of measuring progress and why the methods provide a faithful depiction of the transfer of goods or services). Along with explaining the timing of revenue recognition, the disclosures must outline the various assumptions used to support this judgment. Some early adopters also disclosed that they exercised significant judgment in connection with the principal-versus-agent analysis, and others referred to judgments they applied when evaluating costs to complete projects under a cost-based input method of revenue recognition.
The following are excerpts from disclosures about significant judgments and estimates associated with the above requirements:
The SEC staff has issued comments asking early adopters to include additional information in their disclosures about significant judgments related to performance obligations. Below is an example of one such comment.
Under the new revenue standard and in accordance with ASC 340-40, entities capitalize certain costs associated with obtaining and fulfilling a revenue contract.10 These costs are subsequently amortized. Accordingly, entities are required to disclose:
The judgments used to determine the amount of costs incurred to obtain and fulfill a contract.
The method used to determine amortization for each reporting period.
The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract, by asset category.
The amortization and impairment loss recognized in the reporting period.
Disclosures about contract costs generally apply only to companies that incur material costs to acquire or fulfill revenue contacts. We observed that approximately 55 percent of the early adopters did not appear to incur material costs to obtain or fulfill revenue contracts, and another 15 percent elected to use the practical expedient described below related to incremental costs to obtain a contract. Accordingly, neither group disclosed detailed information about contract costs. All of the approximately 30 percent of companies that did capitalize and disclose information about contract costs appear to amortize them on a straight-line basis.
Entities are generally required to disclose and explain the practical expedients they used under the new revenue guidance. Although the standard does not dictate where they should present these disclosures, entities typically included them in their “Significant Accounting Policies” disclosure or in the revenue footnote.
The following practical expedients were elected by the early adopters we reviewed and are listed in order of their frequency of use:
- Remaining performance obligations:
- If the original expected duration of the contract is one year or less, the remaining performance obligation disclosure requirements in ASC 606-10-50-13 do not need to be disclosed.
- If consideration is variable, and revenue from the satisfaction of the performance obligation is recognized in the amount invoiced (ASC 606-10-55-18), the remaining performance obligation disclosure requirements in ASC 606-10-50-13 do not need to be disclosed.
- “An entity need not disclose the information in [ASC] 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 [ASC] 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 [ASC] 606-10-25-14(b), for which the criteria in [ASC] 606-10- 32-40 have been met.”
- If the full retrospective transition method is adopted, “an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations” for the reporting periods presented before the date of initial adoption.
- Contract costs — Incremental costs related to obtaining a contract may be expensed if they will be amortized over less than one year.
- Determining the transaction price:
- An entity may exclude certain taxes from the transaction price (e.g., sales, use, value add, and some excise taxes). This practical expedient does not apply to taxes on an entity’s total gross receipts or those imposed during the inventory process.
- “[A]n entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.”
- Transition — Entities that use the modified retrospective transition method may apply the new guidance only to contracts that are not completed as of the date of initial application (i.e., not to all revenue contracts).
Most entities used more than one practical expedient (depending on the facts and circumstances). The most common practical expedients used were those related to disclosures about remaining performance obligations.
The following excerpts illustrate how entities have disclosed management’s election of practical expedients under the new revenue standard:
The adoption of the new revenue standard has led to a noticeable increase in the amount and type of information entities have disclosed about revenue activities and related transactions. Although we observed some consistency in their disclosures, companies’ interpretations of the requirements and the amount of information to disclose have varied. We expect diversity in practice to reduce, however, as more entities adopt the standard. Further, as accounting standard setters clarify guidance and regulators issue more comments, entities will continue to refine the information they disclose.
When analyzing the disclosure requirements, entities should consider materiality, relevance, the information they will need, how to get that information, and the controls necessary for the preparation and review of the disclosures and the related underlying data. Because entities can use the same information to comply with multiple disclosure requirements (e.g., information related to performance obligations and estimates of variable consideration), or use different information from similar sources, they should consider developing a comprehensive strategy to collect the data they need to effectively and efficiently tell their revenue “story.”
FASB Accounting Standards Codification Topic 606, Revenue From Contracts With Customers.
Public business entities reporting under U.S. GAAP are required to adopt the new revenue standard for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2017. Early adoption is permitted as of reporting periods (including interim periods) beginning after December 15, 2016. For nonpublic entities, the new revenue standard is effective for annual periods beginning after December 15, 2018, and early adoption is also permitted.
For additional discussion of companies’ disclosures about implementing the new standard, see Deloitte’s November 21, 2017, Heads Up.
The second year after adoption, entities may exclude annual disclosures from their interim financial statements.
FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606).
ASC 606-10-55-295 through 55-297.
See Sections 13.2 and 13.3 of Deloitte’s A Roadmap to Applying the New Revenue Recognition Standard for more information about contract liabilities and contract assets, respectively.
If a nonpublic entity elects under ASC 606-10-50-11 to omit the information in ASC 606-10-50-12A, the entity would instead provide the disclosure required by ASC 606-10-50-8(a) related to contract balances.
Note that ASC 606-10-50-9 discusses how the timing of the satisfaction of an entity’s performance obligations is related to the typical timing of payment and the effect such timing has on the contract asset and the contract liability balances. ASC 606-10-50- 12(b) discusses significant payment terms (e.g., 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).
Entities may elect to use the practical expedient in ASC 340-40-25-4, which permits them to expense incremental costs related to obtaining or fulfilling a contract if such costs will be amortized over less than one year (see Practical Expedients for more information). The early adopters in our study used this practical expedient most often in connection with sales commission expenses.
FASB Accounting Standards Update No. 2016-10, Identifying Performance Obligations and Licensing.
FASB Accounting Standards Update No. 2016-12, Narrow-Scope Improvements and Practical Expedients.
FASB Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers.