The new revenue recognition standard (ASU 2014-09) is effective for public companies beginning with years ending after December 15, 2017, including interim reporting periods (nonpublic companies have until years beginning after December 15, 2018). For many, the first reporting period under the new revenue recognition standard has arrived. At this point, companies should have completed their implementation plan, determined the financial statement impact (if any) and have updated their internal policies. The disclosures surrounding revenue are going to expand significantly as a result of ASU 2014-09. In their simplest form, the disclosures surrounding revenue recognition should provide “sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” However, upon closer examination, the disclosure requirements may be more complex for certain companies.
In the current period of adoption, there are specific transitional disclosures that are required. These disclosures include (a) nature and reason of the change, (b) method of applying, (retrospective to each reporting period or retrospectively with the cumulative effect of initially applying the standard), (c) the effect on the balance sheet items at the beginning of the period reported and (d) the overall impact on retained earnings at the beginning of the period.
In addition, other specific disclosures speak directly to the revenue recognition standard are required. The following are the highlights of the specific items that are required under the new revenue standard.
Disaggregation of revenue—The intent of the disaggregation of revenue disclosure is meant to provide users of the financial statement with information about the “nature, amount, timing, and uncertainty of revenue.” There are no set categories under the standard that companies should follow. These categories may include types of service, geographical regions, or market or type of customer to name a few. It is up to a company to determine the appropriate level of disaggregation to be disclosed.
Disclosure on practical expedients—For instance, where there is a significant financing component or the expensing of costs incurred for obtaining a contract.
Contract balance information—Specifically, the disclosures relate to the roll-forward of receivables, contract assets and liabilities, mainly to show the total amount of revenue that was recognized in the reporting period. Further, a company should address timing of performance obligations and the overall impact on the timing of payments and contract assets and liability balances, if applicable.
Performance obligations—The overall satisfaction of the performance obligation, payment terms (i.e. variable consideration), nature of the goods that have been promised to be transferred, obligations for returns, and any warranties will need to be described in the financial statements.
Transaction price allocation—Disclosure is required if there is a remainder of the transaction price for a performance obligation at the end of the reporting period. Further, the expectation of the company as to when this will be recognized will need to be disclosed. This is generally found when a performance obligation is satisfied over a period of time.
Significant judgments—The significant judgments surrounding the transaction price allocated to performance obligations must be disclosed.
This is not meant to be an all-inclusive list, and companies should refer to the specific standard for all applicable requirements.
Aaron Kofira is a partner based out of our Rochester, NY office.