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Revenue recognition disclosure changes for professional services | Baker Tilly
Article
Significant revenue recognition disclosure changes for nonpublic companies
Feb. 9, 2020 · Authored by Kellie McKenna, Allison Kelly
Effective for annual reporting periods beginning on or after Dec. 15, 2018, nonpublic companies — regardless of industry — became subject to the Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) Topic 606, Revenue from Contracts with Customers.
In addition to the amended accounting guidance and presentation requirements, ASC 606 requires additional revenue disclosures, both qualitative and quantitative. As a result, many companies will likely need to update their accounting policies and revenue disclosures to address the new requirements.
Under ASC 606, nonpublic companies are required to disclose information about their contracts with customers — including disaggregation of revenue, contracts balances, and performance obligations — and the significant judgments made in applying the guidance within ASC 606. Nonpublic companies must also disclose information in regards to accounting policies, the transition method, and related effects of adoption.
The following summary is only applicable to nonpublic companies — public companies are subject to additional disclosure requirements under ASC 606. Further, the disclosures described below are only applicable for revenue recognized from contracts with customers.
Contracts with customers
Companies are required to disclose revenue recognized from contracts with customers separately from other sources of revenue. Companies should disclose the amount of any impairment loss recognized on receivables or contracts assets arising from contracts with customers.
Disaggregation of revenue
ASC 606 requires 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. The following are some examples of how a company may disaggregate revenue:
Type of service — managed ongoing services or a one-time project
Geographic region — state or country
Type of customer — the industry or sector they operate in
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Contract duration
— short term or long term
Sales channel — direct or subcontract work
Individual contract size — from under $10,000 or more than $100,000, for example
At a minimum, nonpublic companies should disclose information in regard to the timing of transfer of goods or services — such as revenue recognized over time versus a point in time — and qualitative information about how economic factors — such as type of customer and geographical information — impact the nature, amount, timing, and uncertainty of revenue and cash flows.
Contract balances
A nonpublic company should disclose, at a minimum, the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers.
Performance obligations
Under ASC 606, companies are required to disclose information about their performance obligations in contracts with customers, including a description of the following:
When an entity typically satisfies its performance obligations, such as a point in time upon shipment or over time as services are rendered.
Significant payment terms, including when payment is due, whether the contract has a significant financing components, whether consideration is variable and whether the variable consideration is constrained.
Revenue recognized in the current reporting period related to performance obligations satisfied or partially satisfied in previous periods.
The nature of goods or services to be transferred, highlighting any performance obligations to arrange for another party to transfer goods or services.
Obligations for returns, refunds, and other similar obligations for professional services, although these aren’t typically applicable.
Types of warranties and related obligations.
Significant judgments
Nonpublic companies are required to disclose the judgments, and changes in those judgments, made in applying ASC 606.
Specifically, a nonpublic company should provide the following disclosures for judgments involved in determining the timing of satisfaction of performance obligations and determining the transaction price and the amounts allocated to performance obligations:
Methods used to recognize revenue for performance obligations satisfied over time, including a description of the output or input method used
Assumptions and inputs used in assessing whether an estimate of variable consideration is constrained
Accounting policies
A company may make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction and collected by the entity from a customer — for example, sales, use, value added, and some excise taxes.
If shipping and handling activities are preformed after a customer obtains control of the good, then a company may elect to account for shipping and handling as activities to fulfill the promise to transfer the good.
A company must comply with the disclosure requirements within paragraphs 235-10-50-1 through 50-6 if either of the above accounting policies are elected.
Transition methods
Along with disclosing how revenue is recognized, companies also need to update their accounting policies and disclosures to indicate which transition method is utilized during the year of adoption. Topic 606 requires retrospective application, and companies must adopt the new guidance using either the full adoption method or the modified retrospective approach.
Full retrospective
Companies that adopt ASC 606 using the full retrospective method must apply the standard to each period presented in the financial statements. The following disclosures are required when the full retrospective method is elected:
Nature of, and reason for, the change in accounting principle, including an explanation of why the newly adopted amounting principle is preferable
Method of applying the change
Description of the prior-period information that has been retrospectively adjusted
Effect of the change on income from continuing operations, net income, and any other affected financial statement line items for any prior periods retrospectively adjusted
Cumulative effect of the change on retained earnings or other components of equity or net assets
Use of transition practical expedients and a qualitative assessment of the effect of utilizing the expedient
Modified retrospective
Companies that adopt ASC 606 using the modified retrospective approach will only apply the guidance to the most current period presented in the financial statements. Prior periods are presented using legacy GAAP. The following disclosures are required when the modified retrospective approach is elected:
Whether the company has applied ASC 606 to all contracts or only to contracts that aren’t completed at the date of initial application
Use of transition practical expedients and a qualitative assessment of the effect of utilizing the expedient
Amount by which each financial statement line items is affected in the current reporting period by ASC 606, as compared with legacy GAAP, and an explanation for any significant changes
When the modified retrospective approach is elected, the footnote disclosures for prior periods presented should follow legacy GAAP requirements.
Deferred revenue
Additionally, regardless of the transition method selected, a company may have to accelerate the recognition of deferred revenue due to the implementation of ASC 606.
Full retrospective
Under the full retrospective approach, existing deferred revenue balances will generally be reflected in the restated prior period and as such, never be reported as revenue in a current period.
Modified retrospective
Under the modified retrospective approach, the deferred revenue will typically be reflected as part of the cumulative adjustment to retained earnings and never be recognized as revenue.
Special purpose framework
Special-purpose financial statements are prepared according to a financial reporting framework other than generally accepted accounting principles (GAAP), such as cash, modified cash, or income tax basis.
When these financial statements contain amounts for which GAAP would require disclosure, they should provide informative disclosures similar to those required by GAAP. This means companies need to identify financial statement items for which GAAP would require disclosure, such as revenue from contracts with customers.
The required revenue disclosures, including qualitative information about how economic factors impact the nature, amount, timing, and uncertainty of revenue and cash flows, are required for non-GAAP reporters. As was required previously, the primary differences between GAAP and the financial reporting framework used should be disclosed, though these need not be quantified.
