Disclosures under the new revenue standard

Video Oct 24, 2017

Disclosures and the new revenue standard. Watch now to see what’s changing.


Hi, I’m Michelle Dion.

I would like to highlight five important revenue disclosure requirements and some thoughts on each. Let’s start with disaggregated revenue. The revenue standard requires revenue to be disaggregated into categories that show how economic factors affect the nature, timing, amount, and uncertainty of revenue and cash flows.

The standard provides examples, but it doesn't prescribe specific categories. These categories can be presented by major product line, by geography, customer type or a variety of others that you can see on the screen.

While you are looking those over, here are some things to think about. While segment disclosures include revenue data, don't assume this level of disaggregation will automatically meet the disaggregated data requirement under the revenue standard. A key driver of the difference is that segment disclosures have a criteria for aggregation, while the revenue standard does not. The way you disaggregate will be based on specific facts and circumstances. A good starting point would be looking at other information the company provides, such as your earnings releases or other investor communications. Also, recognize you may need to disaggregate revenue in more than one way to meet your disclosure objective, for example, by geography and sales channel. It all comes down to what is going to be useful to users of your financials.

Let's move onto disclosure of costs to obtain or fulfill a contract. The closing balances of these costs at a balance sheet date need to be disclosed by main category, such as setup costs, precontract costs, along with judgments made in determining what costs are capitalized. Additionally, you need to disclose the methods and amount of amortization, along with any impairment losses. Companies should also disclose whether they are applying the practical expedient that allows expensing costs of obtaining a contract if the amortization period is under a year.

Next up is information about contract balances. The standard doesn't mandate tabular presentation, but you will need to provide information similar to what would appear in a rollforward to comply with the requirement. Solely for illustrative purposes, let’s walk through an example for one year.

The first and most basic pieces are the opening and closing balances of receivables, contract assets and contract liabilities. Next, you’ll need to disclose revenue recognized that was included in the contract liability balance at the beginning of the period. Significant changes in the contract asset or liability balances also need to be disclosed. This could include changes due to an acquisition, a cumulative catch-up adjustment, or the impact from an impairment. You will also need to disclose how the timing of satisfaction of performance obligation compares to the typical timing of payment and how that affects contract asset and liability balances. This disclosure can be provided either qualitatively or quantitatively.

A fundamental concept in the revenue standard relates to performance obligations which will bring us to our fourth requirement. Entities must include information to help the readers understand the nature, timing and amount of future cash flows arriving from performance obligations. These disclosures should not be “boilerplate” and should supplement an entity's revenue accounting policy disclosure.

Within these disclosures, you should include information about the amounts of the transaction price allocated to the remaining performance obligations and when you expect to record the related revenue. This can be done on a quantitative basis using time bands, but the standard provides some flexibility in how you comply with this requirement.

There's a practical expedient to omit certain disclosures relating to remaining performance obligations. If you qualify for the practical expedient, you will need to disclose this fact and provide additional qualitative disclosures about the items being omitted. You should also include disclosures of significant payment terms, types of warranties offered and obligations related to rights of return.

Another important disclosure is revenue recognized in the current period that relates to past performance. For example, this would include changes in estimate of variable consideration related to a performance obligation that was satisfied in a prior period.

The final item relates to significant judgments. You need to disclose judgments that significantly impact the amount and timing of revenue recognition. This covers two main areas. For performance obligations that an entity satisfies over time, an entity should disclose the methods used to recognize revenue and why those methods used provide a faithful depiction of the transfer of control for goods or services. For performance obligations satisfied at a point in time, an entity should disclose the significant judgments made in evaluating when a customer obtains control of the promised goods or services.

Additionally, an entity should disclose information about the methods, inputs, and assumptions used in determining the transaction price. This includes things like estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring non-cash consideration, to name a few. Understanding the requirements is the first step, but then assessing your systems, processes and controls to ensure you are accumulating the data to prepare the disclosures is the next.

For more information on the revenue disclosures, refer to chapter 12 in our Revenue from contracts with customers global guide, available on CFOdirect.com

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Beth Paul
US Strategic Thought Leader, National Professional Services Group

David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group

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