The purpose of this article is to provide an overview regarding disclosure requirements of the FASB Accounting Standards Codification – Topic 606, Revenue from Contracts with Customers (ASC 606).
This article, and the related articles, provides a brief overview of ASC 606 and omits requirements specific to public entities and many optional disclosures for non-public entities. ASC 606 and related guidance should be referred to for additional information and detail.
ASC 606 contains significant disclosure requirements. The objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard requires entities to disclose both qualitative and quantitative information. Expanded disclosure requirements will be needed for the majority of small and mid-sized businesses affected by the new standard.
The following table provides a summary of the disclosure categories and the corresponding disclosure requirements within each category:
| Category | Disclosure Requirement | Status | ||
| Disaggregation of revenue | Disaggregate revenue based on the timing of transfer of goods or services and qualitative information to address how revenue and cash flows are affected by economic factors including the nature, amount, timing, and uncertainty. | Optional[i] | ||
| Sufficient information to understand the relationship between disaggregated revenue and each disclosed segment’s revenue information. | Optional | |||
| Contract balances | Opening and closing balances of receivables, contract assets, and contract liabilities. [Required only if not otherwise separately presented or disclosed] | Required | ||
| Amount of revenue recognized from beginning contract liability balance. | Optional | |||
| Amount of revenue recognized from performance obligations satisfied in prior periods (e.g., changes in transaction price estimates). | Optional | |||
| Explanation of significant changes in contract balances (using qualitative and quantitative information). | Optional | |||
| Performance obligations
|
Qualitative information about (a) when performance obligations are typically satisfied, (b) significant payment terms, (c) the nature of goods or services promised, (d) obligations for returns or refunds, and (e) warranties. | Required | ||
| Transaction price allocated to the remaining performance obligations | Aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied at the end of the reporting period. | Optional | ||
| Quantitative or qualitative explanation of when remaining performance obligation amounts are expected to be recognized. | Optional | |||
| Significant judgments and estimates used in determining the amount and timing of revenue | For performance obligations satisfied over time: the methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied) | Required | ||
| For performance obligations satisfied over time: an explanation why the methods used provide a faithful depiction of the transfer of goods or services. | Optional | |||
| Performance obligations that an entity satisfies at a point in time: disclosure of significant judgments made in evaluating when a customer obtains control of goods or services. | Optional | |||
| Information about the methods, inputs and assumptions used in: | ||||
| Determining the transaction price (e.g., estimating variable consideration, adjusting for the time value of money, noncash consideration). | Optional | |||
| Assessing whether an estimate of variable consideration is constrained. | Required | |||
| Allocating the transaction price, including estimating stand-alone selling prices and allocating discounts and variable consideration. | Optional | |||
| Measuring obligations for returns, refunds, and other similar obligations. | Optional | |||
| Contract Costs | Judgements made in determining the amount of the costs incurred to obtain or fulfill a contract. | Optional | ||
| The method the entity uses to determine the amortization for each reporting period. | Optional | |||
| The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract, by main category of asset. | Optional | |||
| The amount of amortization and any impairment losses recognized in the reporting period. | Optional | |||
| Practical expedients | Disclosure of practical expedients used pursuant to ASC 606-10-32-18 (significant financing component) or ASC 340-40-25-4 (incremental costs of obtaining a contract). | Optional | ||
[i] Per ASC 606-10-50-7, if an entity elects not to provide those disclosures the entity should, at a minimum, disclose 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) and qualitative information about how economic factors (such as type of customer, geographic location of customers, and type of contract) affect the nature, amount, timing and uncertainty of revenue and cash flows.
Illustrative Example 1 – Disaggregation of Revenue
The Company reports the following sales segments: Supplies, Equipment, Maintenance. The Company disaggregates revenue from contracts with customers by geographical area, major product or service lines, and timing of revenue recognition which depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
| Segment | Supplies | Equipment | Maintenance | Total | ||||
| Geographical region: | ||||||||
| East | $900 | $5,100 | $2,500 | $8,500 | ||||
| Midwest | 1,100 | 6,200 | 3,000 | 10,300 | ||||
| West | 600 | 4,000 | 2,000 | 6,600 | ||||
| International | 400 | 3,200 | – | 3,600 | ||||
| 3,000 | 18,500 | 7,500 | 29,000 | |||||
| Major products/services: | ||||||||
| Batteries | 1,000 | – | – | 1,000 | ||||
| Machines | – | 18,500 | – | 18,500 | ||||
| Maintenance | – | – | 7,500 | 7,500 | ||||
| Parts | 2,000 | – | – | 2,000 | ||||
| 3,000 | 18,500 | 7,500 | 29,000 | |||||
| Timing of revenue recognition: | ||||||||
| Goods transferred at a point in time | 3,000 | 18,500 | – | 21,500 | ||||
| Services performed over time | – | – | 7,500 | 7,500 | ||||
| $3,000 | $18,500 | $7,500 | $29,000 | |||||
Illustrative Example 2 – Contract Balances
The Company discloses on the face of the financial statements the trade receivables, contract assets, contract liabilities, and related reserves. Note that if contract assets and liabilities are separately presented on the financial statements then the quantitative disclosures presented in this example are not necessary (ASC 606-10-50-11). Other disclosure requirements for contract balances include:
Contract liabilities represent payments received from customers prior to the satisfaction of the corresponding performance obligations. Contract liabilities are recognized as revenue once the corresponding performance obligations are satisfied based on the contract with the customer. Contract assets represent the Company’s right to consideration based on satisfied performance obligations from contracts with customers.
| 2019 | 2020 | |||||
| Contract asset | $1,000 | $1,200 | ||||
| Contract liability | (2,200) | (2,300) | ||||
| Optional Disclosures: Revenue recognized in the period: |
||||||
| Performance obligations satisfied in a prior period | 350 | 400 | ||||
| Amounts included within contract liabilities at the beginning of the reporting period | 500 | 450 | ||||
The changes in the contract balances occurred in the ordinary course of business.
Illustrative Example 3 – Transaction Price Allocated to the Remaining Performance Obligations
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied at the end of the reporting period and an explanation of when the entity expects to recognize revenue by either a quantitative basis or a qualitative basis.
When contracts are entered into with customers for the manufacture and sale of equipment, it is typical that a maintenance component exists for periods in excess of one year. The following table illustrates the revenue anticipated to be recognized on these contracts as of December 31, 2019:
| 2020 | 2021 | |||||
| Revenue expected to be recognized on contracts | $5,000 | $3,500 | ||||
Illustrative Example 4 – Significant Judgments
ASC 606 requires disclosure of judgments used in determining the timing of satisfaction of performance obligations and the transaction price and the amounts allocated to performance obligations. For performance obligations satisfied over time, disclose the methods used to recognize revenue and explanation of the appropriateness of the methodology. Information about the methods, inputs and assumptions used for (a) determining the transaction price, (b) assessing whether an estimate of variable consideration is constrained, (c) allocating the transaction price, (d) measuring obligations for returns and refunds, and (e) warranties. An illustrative example of these disclosures is as follows:
The Entity generates revenue primarily by delivering supplies, manufacturing and installing equipment, and performance of maintenance contracts with customers.
Revenues from the sale of supplies and equipment are recognized when the supplies or equipment are transferred to the customer, the customer obtains control of the product (risk of loss passes to the customer), no significant obligations remain, and return and warranty liabilities can be reasonably estimated. Progress billings and upfront payments received as part of a contract to manufacture equipment are deferred until control of the equipment transfers to the customer based on contract terms. Revenue is recognized from the performance of maintenance services when the services have been provided or delivered. Furthermore, revenue from performance of maintenance services are recognized only if the collectability is likely and the fees charged are determinable.
Sales of products and services are evaluated in order to recognize revenue based on the net amount earned as revenue. For multi-element contracts, including the sale of equipment and installation, we allocate revenue to each component based on each component’s relative selling price.
As summarized above, the new revenue standard vastly expands disclosure requirements related to contracts with customers. The implementation of the new requirement will require careful consideration and significant judgment, and, while the standard provided a number of practical expedients for non-public entities in the application of the recognition and measurement principles within the standard, management should still anticipate devoting substantial amount of time and resources to meeting these disclosure requirements.
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