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Full disclosure: Revenue · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC.
• 0:06
  SPEAKER_01: Welcome to PWC's Accounting Podcast.
• 0:09
  SPEAKER_01: I'm Heather Horn.
• 0:11
  SPEAKER_01: Thanks for tuning in to the next episode in our full disclosure summer series, a show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:21
  SPEAKER_01: While it may sound like accounting 101, I guarantee you'll learn something new each episode.
• 0:27
  SPEAKER_01: Today's focus, revenue.
• 0:30
  SPEAKER_02: You can't lose sight of the overarching principle.
• 0:34
  SPEAKER_02: And I know sometimes companies are looking for, you know, where is the specific requirement for something?
• 0:39
  SPEAKER_02: But if there's a judgment or a key estimate involved in revenue, it probably makes sense to add disclosure.
• 0:49
  SPEAKER_01: That's my guest, Angela Ferguson, PWC National Office Partner.
• 0:53
  SPEAKER_01: As we continue making our way through the financial statements, today we're hitting on one of our most popular podcast topics.
• 1:00
  SPEAKER_01: And although we've covered revenue extensively, today's episode will be the first time we're focusing squarely on presentation and disclosure.
• 1:09
  SPEAKER_01: We have a lot to cover, so let's get started.
• 1:14
  SPEAKER_01: Angela, thanks so much for joining me to talk about revenue disclosures.
• 1:19
  SPEAKER_01: And I know revenue is a perennially favorite topic from a podcast perspective, but I don't think we've focused just on presentation and disclosure before.
• 1:28
  SPEAKER_01: So I thought maybe before we got into some of the details, it'd be helpful to just provide some overview or background of what's required.
• 1:38
  SPEAKER_02: Sure.
• 1:38
  SPEAKER_02: So maybe just taking a little bit of a big picture approach, when you think about what is presented on the revenue line item and the financial statements, it could actually include multiple sources of income.
• 1:53
  SPEAKER_02: I mean, we're usually thinking about revenue from contracts with customers, which is going to be transactions in the scope of ASC 606, and what we are usually talking about when we have chats about revenue.
• 2:07
  SPEAKER_02: But there's also other types of revenue you might have in that line item, including lease revenue.
• 2:14
  SPEAKER_02: Some companies may have interest shown as revenue, collaboration revenue, or even grant revenue.
• 2:22
  SPEAKER_02: And generally, the principle we're looking to for determining what to present as revenue, we're going to look at concept statement six, which has a definition of revenue.
• 2:36
  SPEAKER_02: And just to quote that here, that's inflows from delivering or producing goods, rendering services, or other activities that constitute the entity's major or central operations.
• 2:51
  SPEAKER_02: So that's going to then depend on your company's business, what are your major or central operations?
• 2:59
  SPEAKER_02: That's going to drive what you're going to present as revenue.
• 3:03
  SPEAKER_02: If you have inflows that are not part of your major or central operations, those inflows would generally be presented as gains.
• 3:14
  SPEAKER_02: So something a common example would be selling a fixed asset and you have a gain, an inflow that's a gain, you know, rather than showing that as revenue.
• 3:26
  SPEAKER_02: There are a couple of requirements around what's presented in the revenue line item.
• 3:32
  SPEAKER_02: ASC 606 requires companies to either present separately or disclose the amount of revenue recognized from contracts with customers separately from other sources of revenues, like some of the examples I gave earlier.
• 3:52
  SPEAKER_02: And also, if you are an SEC registrant, there's some guidance in regulation SX that requires separate presentation in the income statement of certain revenue categories if they represent more than 10% of total revenue.
• 4:11
  SPEAKER_02: And that includes separating revenue from tangible goods, from revenue from services, rental income, and other revenues.
• 4:22
  SPEAKER_02: But for the rest of our discussion today, we're generally going to talk about presentation and disclosure requirements for revenue from contracts with customers.
• 4:33
  SPEAKER_02: So what's required by ASC 606.
• 4:37
  SPEAKER_02: For all those other sources of revenue, you're generally going to be looking to other gap.
• 4:42
  SPEAKER_02: For example, if you're talking about lease revenue, you'd be looking at the presentation and disclosure requirements in the lease guidance.
• 4:51
  SPEAKER_01: All right, that's helpful.
• 4:52
  SPEAKER_01: And I think one thing to highlight that you went through is you mentioned that the SEC rules require a breakout of specific things if they're more than 10% of revenues.
• 5:02
  SPEAKER_01: And in some of our other episodes, we've talked about other SEC rules that are based on a 5% threshold.
• 5:08
  SPEAKER_01: So just want to highlight to our listeners that for revenue, you're saying it's 10%.
• 5:12
  SPEAKER_01: So that's helpful.
• 5:13
  SPEAKER_01: And then Angela, you've been focused on the income statement, which makes sense because revenue is the income statement concept.
• 5:20
  SPEAKER_01: But obviously, going with revenue, we have the related balance sheet items.
• 5:26
  SPEAKER_01: So is there anything that you would highlight there?
• 5:29
  SPEAKER_02: Sure.
• 5:29
  SPEAKER_02: Yeah, there are some presentation requirements for contract-related assets and liabilities.
• 5:36
  SPEAKER_02: So just to level set the assets and liabilities I'm referring to, if you receive payment from a customer before the company performs, you're going to have what's called a contract liability.
• 5:51
  SPEAKER_02: Companies often label this line item deferred revenue.
• 5:55
  SPEAKER_02: So usually we're referring to it as deferred revenue.
• 5:58
  SPEAKER_02: Conversely, if the company performs before receiving payment, you're going to have an asset to record.
• 6:07
  SPEAKER_02: And this asset could either be first a receivable, if the right to that consideration is unconditional, or it's a contract asset.
• 6:18
  SPEAKER_02: And that's if the right to consideration is conditional on something other than the passage of time.
• 6:25
  SPEAKER_02: So an example could be if the company has to keep performing or deliver something else before they have the right to consideration from the customer.
• 6:35
  SPEAKER_01: All right.
• 6:36
  SPEAKER_01: And then Angela, why do we focus on that difference between receivables and contract assets?
• 6:43
  SPEAKER_02: There's a couple of reasons why the distinction is important.
• 6:47
  SPEAKER_02: First is that receivables should be presented separately from contract assets.
• 6:53
  SPEAKER_02: Also, contract assets and contract liabilities from the same contract are going to be presented on a net basis.
• 7:02
  SPEAKER_02: So they're offset in the balance sheet.
• 7:06
  SPEAKER_02: On the other hand, receivables are not offset against contract liabilities unless you meet the requirements in the balance sheet offsetting guidance, which is often going to be a pretty high, pretty high bar.
• 7:22
  SPEAKER_02: And then lastly, there are a few specific disclosure requirements for contract assets that we'll touch on later.
• 7:30
  SPEAKER_02: And we do get from time to time questions about differentiating between a contract asset and a receivable.
• 7:38
  SPEAKER_02: And in some cases, it's not black and white.
• 7:41
  SPEAKER_02: There's some judgment required.
• 7:43
  SPEAKER_02: But there are a couple key points there.
• 7:46
  SPEAKER_02: The first is that it's not based solely on billing.
• 7:50
  SPEAKER_02: So when you have a receivable, it could be billed or unbilled.
• 7:54
  SPEAKER_02: So the distinction is not based only on when you've billed for the receivable.
• 8:00
  SPEAKER_02: And then the other point is that it is possible to have a receivable before you've even performed.
• 8:08
  SPEAKER_02: So you'd have a gross up of a receivable and deferred revenue.
• 8:12
  SPEAKER_02: And that would only be if the company has the right to consideration before they perform and the contract is non-cancelable.
• 8:21
  SPEAKER_01: Okay.
• 8:22
  SPEAKER_01: And then on your point on offsetting, we did talk about that in the balance sheet episode.
• 8:26
  SPEAKER_01: So we'll include a link to that in the show notes.
• 8:29
  SPEAKER_01: And then Angela, I know another question that we often get is on short-term versus long-term presentation in the balance sheet.
• 8:35
  SPEAKER_01: So is there anything specific to consider there?
• 8:39
  SPEAKER_02: So there's no specific guidance in the revenue standard on short-term versus long-term.
• 8:45
  SPEAKER_02: So you're going to look at the general guidance in ASC 210 that would govern short-term versus long-term.
• 8:52
  SPEAKER_02: So if you have longer-term contracts, we would generally see companies splitting between short-term and long-term for both contract assets and contract liabilities.
• 9:02
  SPEAKER_01: Okay, that's helpful.
• 9:03
  SPEAKER_01: So then let's move on to the disclosure requirements.
• 9:06
  SPEAKER_01: And I know there are many, so I can't wait to hear how you keep this interesting.
• 9:11
  SPEAKER_01: But where would we start if we're thinking about disclosures?
• 9:15
  SPEAKER_02: So I'd start with saying that we often talk about principles-based versus rules-based.
• 9:22
  SPEAKER_02: Here we're going to get a bit of a mix of the two.
• 9:26
  SPEAKER_02: So there is, there are some principles set out for disclosure around revenue, but there's also a number of specific disclosure requirements to walk through as well.
• 9:39
  SPEAKER_02: So to start out with the sort of main principle or overall objective of revenue disclosures, I will quote from the standard, which says that an entity should disclose 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.
• 10:07
  SPEAKER_02: So it's obviously very broad, could cover lots of things.
• 10:12
  SPEAKER_02: But then there are five primary areas of disclosure that's required.
• 10:18
  SPEAKER_02: And I also caveat here all the disclosure requirements I'll walk through are for public companies.
• 10:26
  SPEAKER_02: The five primary areas of disclosure are first disaggregated revenue, secondly, information about performance obligations, third, significant judgments, fourth, contract balances, and last cost to obtain or fulfill a contract.
• 10:45
  SPEAKER_02: So I'm going to walk through each of these in more detail.
• 10:48
  SPEAKER_01: Before you go on, just one question for you, because you made a point that these are for public companies.
• 10:54
  SPEAKER_01: So either here or maybe we can do it at the end, because all of what you're going to talk about is focused on public companies, correct?
• 11:01
  SPEAKER_02: Right.
• 11:01
  SPEAKER_02: So there's a number of disclosure requirements required for public companies.
• 11:06
  SPEAKER_02: And then at the end, we can go through the ones that are not required for not public companies.
• 11:13
  SPEAKER_01: Perfect.
• 11:13
  SPEAKER_01: Just want to make sure all of our private company listeners didn't turn off the podcast because they thought it wasn't going to be applicable to them.
• 11:21
  SPEAKER_01: So with that, why don't we go?
• 11:24
  SPEAKER_01: I know you started to say that you were going to cover each of these areas in more detail.
• 11:28
  SPEAKER_02: Yeah.
• 11:28
  SPEAKER_02: So the first category is disaggregated revenue.
• 11:32
  SPEAKER_02: And if you were to think of what are the the big disclosures or the most important disclosures in revenue, this would probably make that make that list.
• 11:42
  SPEAKER_02: So in this area, the overall requirement is to disaggregate revenue into categories.
• 11:49
  SPEAKER_02: And the purpose goes back to that overall objective, which is to show how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
• 12:02
  SPEAKER_02: So the judgment comes into play here because the revenue standard doesn't prescribe what categories you should use to disaggregate revenue.
• 12:12
  SPEAKER_02: It does include some examples that could be appropriate.
• 12:16
  SPEAKER_02: So some of the more common ones that we see are disaggregation by type of good or service, such as major product lines, disaggregation by geographical region, by timing of transfer of goods or services.
• 12:35
  SPEAKER_02: So that would be like point-in-time revenue versus overtime revenue, or revenue by sales channel.
• 12:43
  SPEAKER_02: And you also see that companies may have to disaggregate by more than one type of category to meet that overall objective.
• 12:53
  SPEAKER_01: So then, Angela, if I'm a company thinking about this, how do companies decide which categories to use?
• 13:00
  SPEAKER_01: And then maybe a second question: would this typically be similar to how I'm thinking about my segments for my segment disclosure?
• 13:09
  SPEAKER_02: Yeah, there are a few different things to consider.
• 13:12
  SPEAKER_02: One is the information that's provided outside the financial statements.
• 13:17
  SPEAKER_02: So that could be in other parts of an SEC filing or earnings releases or investor presentations or on even on your website that talk about different revenue streams or different trends in revenue.
• 13:34
  SPEAKER_02: So if you're talking about your business by product line, for example, that would indicate that that would be an appropriate way to disaggregate revenue for purposes of this disclosure.
• 13:47
  SPEAKER_02: Another place to look too is what information is regularly reviewed by the chief operating decision maker for evaluating performance of the company.
• 13:59
  SPEAKER_02: So you can see there is some overlap with segment disclosures because I talked about chief operating decision maker, which is a term that we use for segment disclosures as well.
• 14:10
  SPEAKER_02: So there is some similarities in looking at how the company internally looks at the business.
• 14:18
  SPEAKER_02: However, you may need to include more categories for this disclosure than you do for segments.
• 14:26
  SPEAKER_02: And there's a couple of reasons for that.
• 14:28
  SPEAKER_02: First is that you don't have to, you have all the characteristics of an operating segment to have a category for disclosure for revenue.
• 14:38
  SPEAKER_02: And there's also not a concept of like aggregating categories together, which is something that you do consider in segment disclosures.
• 14:48
  SPEAKER_02: Now, if you do disclose categories of revenue that are different from your segment disclosures, you have to provide information that the user so that the user can understand how they relate to each other.
• 15:04
  SPEAKER_02: In some cases, this could be self-explanatory or pretty obvious, but sometimes companies actually have to put like a table in the disclosure to show the relationship between the revenue categories and the segment revenues.
• 15:22
  SPEAKER_01: So, Angela, before we go to the next category, it may be difficult to draw a conclusion here, but from your experience, do you typically see or do you see cases where a company may conclude that only has one category?
• 15:37
  SPEAKER_01: And so there isn't a disaggregation of revenue.
• 15:41
  SPEAKER_02: It's possible, but it's it's rather unusual.
• 15:44
  SPEAKER_02: Companies would typically at least have perhaps like geographical locate, you geographical location as one of their categories of revenue.
• 15:55
  SPEAKER_02: So even if you have a single product line, if you're selling into different geographies, that might be a natural way to disaggregate revenue.
• 16:04
  SPEAKER_02: I mean, you sometimes do see that there's not more categories than are already provided in the segment disclosure, but it's not that common to uh have you no other way to describe or categorize your revenue.
• 16:21
  SPEAKER_01: Okay, that's helpful context.
• 16:23
  SPEAKER_01: So then the next category you mentioned were performance obligations.
• 16:26
  SPEAKER_01: So what should we think about there?
• 16:29
  SPEAKER_02: So in this category, we have a number of both quantitative and qualitative disclosures about performance obligations.
• 16:39
  SPEAKER_02: And we've talked about performance obligations a lot on various podcasts.
• 16:43
  SPEAKER_02: So as a reminder, these are the distinct promises in a contract or the unit of account for applying the revenue model.
• 16:54
  SPEAKER_02: And the first disclosure I'll talk about is probably the most time-consuming one.
• 17:01
  SPEAKER_02: It's called the remaining performance obligations disclosure.
• 17:06
  SPEAKER_02: And people often refer to this as the RPO disclosure.
• 17:11
  SPEAKER_02: And this disclosure is of the aggregate transaction price that's been allocated to performance obligations not yet satisfied.
• 17:21
  SPEAKER_02: So in English, you know, simple English, this is what revenue have you not yet recognized for open contracts?
• 17:28
  SPEAKER_02: So this is similar to like a backlog disclosure, which sometimes which companies often put in other parts of a filing.
• 17:38
  SPEAKER_02: But an important thing to remember is that the RPO disclosure includes only committed contracts.
• 17:46
  SPEAKER_02: So you can't include things like optional renewals.
• 17:51
  SPEAKER_02: You can only include committed contracts where there's no optionality for the customer to make the purchase.
• 18:01
  SPEAKER_02: The other requirement here is not only to disclose the aggregate amount of revenue, but when the company expects to recognize those amounts.
• 18:10
  SPEAKER_02: And this may be done a couple different ways.
• 18:13
  SPEAKER_02: It's not prescriptive, but could be done on a quantitative basis using time bands.
• 18:19
  SPEAKER_02: So, for example, if this is going to go out multiple years, you might show the amount in to be recognized in the next 12 months and then the next 24 months, etc.
• 18:31
  SPEAKER_02: Or you may be able to explain qualitatively when you expect to recognize the revenue.
• 18:38
  SPEAKER_02: It really depends on the facts and circumstances.
• 18:42
  SPEAKER_02: There's also a bunch of a number of optional exemptions to try to make this disclosure a little more operational.
• 18:52
  SPEAKER_02: So you do not have to include contracts that have an original term of one year or less.
• 18:59
  SPEAKER_02: But you have to apply that consistently.
• 19:02
  SPEAKER_02: So you either include everything or you exclude all of those short-term contracts.
• 19:08
  SPEAKER_02: And you can also exclude certain types of variable consideration.
• 19:13
  SPEAKER_02: And this is trying to, again, make it more operational if you so you don't have to estimate a lot of variable consideration that you're not having to estimate for recognition purposes.
• 19:26
  SPEAKER_01: Okay, that's helpful.
• 19:27
  SPEAKER_01: So obviously a lot there on the RPO, but I know you said that there are many uh disclosures on performance obligations.
• 19:36
  SPEAKER_01: So, what other things should companies be focused on?
• 19:39
  SPEAKER_02: So another quantitative disclosure is to disclose revenue recognized in the current period that relates to performance obligations satisfied in a past period.
• 19:54
  SPEAKER_02: I sometimes call this the out-of-period disclosure, but it's not because you have an error.
• 20:01
  SPEAKER_02: It's because the model results in recognizing revenue sort of out of period.
• 20:07
  SPEAKER_02: And that might be because you've changed an estimate of variable consideration, you've changed your estimate of measure of progress for a long-term contract, or if you're recognizing royalties for a license, but you delivered that license in a prior period.
• 20:26
  SPEAKER_02: And then there are a number of qualitative disclosures required.
• 20:32
  SPEAKER_02: So I'll just run through these fairly quickly.
• 20:35
  SPEAKER_02: You need to disclose when the company typically satisfies its performance obligations, the significant payment terms, including whether you have significant financing components and variable consideration.
• 20:50
  SPEAKER_02: You need to disclose the nature of the goods or services being provided, including highlighting situations where you're an agent for someone else providing goods or services.
• 21:02
  SPEAKER_02: You also need to disclose obligations for returns and refunds and any kinds of warranties that you provide on your products.
• 21:11
  SPEAKER_01: So, Angela, my eyebrows raised when you said out of period, because I do think for many uh companies and auditors, that term is sort of pejorative, but it does make sense once you explained it.
• 21:22
  SPEAKER_01: So I think people need to focus there on the substance.
• 21:25
  SPEAKER_01: So then moving on, Angela, I think our next category was our third one out of five, and that would be significant judgments.
• 21:33
  SPEAKER_01: So, what do we need to disclose there?
• 21:36
  SPEAKER_02: So this category is fairly broad and includes disclosure of judgments and changes in judgments related to both the timing of revenue recognition as well as determining and allocating transaction price.
• 21:53
  SPEAKER_02: So, this kind of covers a bunch of different areas of the revenue model.
• 21:57
  SPEAKER_02: So, some examples include.
• 22:00
  SPEAKER_02: If you're recognizing revenue over time, what are the methods being used?
• 22:04
  SPEAKER_02: Are you using an input method or an output method?
• 22:07
  SPEAKER_02: And why is that the method that best best reflects the company's performance in the transfer of the goods or services?
• 22:15
  SPEAKER_02: If you're recognizing revenue at a point in time, you disclose judgments that you've made about what is the point in time that the customer obtains the good or service.
• 22:27
  SPEAKER_02: And then for transaction price, the disclosure is around the methods, inputs, and assumptions for a number of different areas, including estimating variable consideration, accounting for the time value of money, measuring non-cash consideration.
• 22:45
  SPEAKER_02: And this also includes things like estimating standalone selling price and how you've allocated transaction price, and also how you've measured different obligations for things like returns, refunds, and other similar obligations.
• 23:03
  SPEAKER_01: All right.
• 23:04
  SPEAKER_01: So it sounds like that's mostly qualitative.
• 23:06
  SPEAKER_01: Any quantitative disclosures to think about in this category?
• 23:10
  SPEAKER_02: Yeah, so that category is primarily going to be qualitative.
• 23:15
  SPEAKER_02: But one point I'd make is that it should be company specific.
• 23:20
  SPEAKER_02: So it's not just re-rehashing what the guidance says, but explaining how that got applied in the company's specific fact pattern.
• 23:30
  SPEAKER_02: If we move on to the next category, which is the fourth category, we get back to more quantitative disclosures.
• 23:37
  SPEAKER_02: And this is around disclosures of contract-related assets and liabilities.
• 23:43
  SPEAKER_02: So these are the contract assets and deferred revenue that we talked about earlier.
• 23:48
  SPEAKER_02: So there is a requirement to provide specific information about contract balances, including the opening and closing balances of receivables, contract assets and contract liabilities, significant changes in the contract asset and contract liability balances, and then also the revenue recognized during the period that was included in the contract liability balance at the beginning of the period.
• 24:18
  SPEAKER_01: All right.
• 24:19
  SPEAKER_01: So then based on that description, Angela, it almost just sounds like a roll forward of the balance sheet accounts.
• 24:26
  SPEAKER_02: Yeah, the standard actually stops short of actually requiring a roll forward.
• 24:32
  SPEAKER_02: However, like you just pointed out, the information you have to provide, you know, including opening, closing balances and significant changes, is basically a roll forward.
• 24:42
  SPEAKER_02: So some companies do put this information in a roll forward table.
• 24:47
  SPEAKER_02: But again, that's not required.
• 24:50
  SPEAKER_02: You could provide this information in a different way, but you're basically going to have to have a roll forward in order to have the information to put into the footnote.
• 25:02
  SPEAKER_01: All right.
• 25:02
  SPEAKER_01: And then my guess would be in many cases that roll forward is probably helpful to the users of the financial statements.
• 25:07
  SPEAKER_01: So something to think about.
• 25:09
  SPEAKER_01: So then, Angela, last category, and this one was cost to obtain and fulfill a contract.
• 25:15
  SPEAKER_01: So what do we need to think about there?
• 25:17
  SPEAKER_02: Yeah, so in this category, um, this is related to revenue, but involves costs that are capitalized that relate to obtaining or fulfilling a contract.
• 25:30
  SPEAKER_02: So there are specific disclosures required here, including the judgments for recognizing and amortizing assets, including how did you determine the method for amortizing and whether those assets are impaired.
• 25:46
  SPEAKER_02: And you also need to describe the judgments being made around determining which cost should be capitalized.
• 25:54
  SPEAKER_02: And you also need to disclose the balances of these assets by major category of asset and disclose the amount of amortization and impairment.
• 26:07
  SPEAKER_01: All right.
• 26:08
  SPEAKER_01: As you said up front, there's definitely a lot of disclosures, but anything else that our listeners should be thinking about?
• 26:16
  SPEAKER_02: Yeah, well, I didn't make it a separate category here, but companies also do have to disclose if they are taking advantage of any of the practical expedients that are provided in the standard.
• 26:28
  SPEAKER_02: So a couple of ones that are more common are things like not accounting for significant financing in certain short-term contracts, or not capitalizing certain costs to obtain a contract again for shorter-term contracts.
• 26:44
  SPEAKER_02: Those types of expedients need to be disclosed.
• 26:48
  SPEAKER_01: All right.
• 26:49
  SPEAKER_01: And then I know we often get questions around interim requirements.
• 26:53
  SPEAKER_01: So are these disclosures also required from an interim perspective or only at your end?
• 26:59
  SPEAKER_02: So unfortunately, there's not a lot of relief for interim disclosures.
• 27:03
  SPEAKER_02: Many of these same disclosures are specifically required in the interim periods and particularly the quantitative disclosures.
• 27:13
  SPEAKER_02: So, you know, the big ones I talked about, disaggregated revenue, RPO disclosures, those are also required in the interim, as well as the quantitative disclosures about contract balances.
• 27:26
  SPEAKER_01: All right.
• 27:27
  SPEAKER_01: Well, hopefully, if companies have processes in place, it's not too hard to create that on an interim basis.
• 27:32
  SPEAKER_01: But I guess if you have any change in your business, definitely need to pay attention to make sure you're picking up anything new that you need to disclose.
• 27:40
  SPEAKER_01: So then, Angela, we did promise our private company listeners that we give some highlights.
• 27:45
  SPEAKER_01: So are there any key things you'd point out that are not required for uh non-public companies?
• 27:51
  SPEAKER_02: Yes, so the FASBE did decide not to require all of these disclosures for non-public companies.
• 27:59
  SPEAKER_02: So there's really pretty significant relief for non-public companies, um, such that a number of the disclosures are optional.
• 28:06
  SPEAKER_02: So some of the ones that are optional include disaggregated revenue.
• 28:11
  SPEAKER_02: However, if a non-public company does not decide to show disaggregated revenue, they at a minimum have to just have to disclose revenue disaggregated by timing of transfer.
• 28:24
  SPEAKER_02: So point in time versus overtime.
• 28:27
  SPEAKER_02: Nonpublic companies also do not have to provide the RPO disclosure or remaining performance obligations, although they do need to provide some qualitative disclosures about remaining performance obligations.
• 28:41
  SPEAKER_02: And then many of the disclosures about significant judgments are not required.
• 28:47
  SPEAKER_02: And they can also elect to disclose only the opening and closing balances of contract assets and liabilities instead of also disclosing all of the significant changes.
• 28:59
  SPEAKER_01: Okay, so it's definitely a lot to think about.
• 29:02
  SPEAKER_01: And I know the disclosure checklist tool is always a good place to start, but where else should companies go if they want to read more about all these different requirements?
• 29:11
  SPEAKER_02: Well, we have a chapter in our financial statement presentation guide.
• 29:17
  SPEAKER_02: And the chapter for revenue disclosures, I believe, is chapter 33.
• 29:23
  SPEAKER_01: Okay, great.
• 29:24
  SPEAKER_01: So we will include a reference to that in the show notes.
• 29:27
  SPEAKER_01: So then before we wrap up, I'm getting to my favorite part of the podcast, which is my chance to try to stump you.
• 29:34
  SPEAKER_01: And I do have a few questions for you.
• 29:36
  SPEAKER_01: So I think depending on your point of view, it's either more chances for me to stump you or more chances for you to get it right.
• 29:42
  SPEAKER_01: So we'll see how this goes.
• 29:44
  SPEAKER_01: But first question I actually think you will know the answer to is I know we see a lot of SEC comments in the area of revenue.
• 29:53
  SPEAKER_01: And so, not just on disclosures, but more broadly, if you were to think of the list of SEC comments and the the relative occurrence of these, do you know where revenue would show up on that list?
• 30:06
  SPEAKER_02: I think revenue has pretty consistently been the second most popular area of comment.
• 30:11
  SPEAKER_02: I think right after non-gap measures.
• 30:14
  SPEAKER_02: So we've had that that spot for a while.
• 30:17
  SPEAKER_01: I will confirm.
• 30:18
  SPEAKER_01: I think you might have dropped to three, but I do think you are number two right now.
• 30:27
  SPEAKER_01: Fact check.
• 30:28
  SPEAKER_01: Angela's right that non-gap measures is number one in the comment letter trends and revenue recognition falls right after is number two.
• 30:36
  SPEAKER_01: Check out viewpoint.pwc.com for the top 10 SEC comment letter trends during the last fiscal year.
• 30:46
  SPEAKER_01: Maybe for bonus, do you know what the main theme of those comments are right now, or is it too hard to say?
• 30:53
  SPEAKER_02: It's probably performance obligations.
• 30:55
  SPEAKER_02: And remember, there were a lot of disclosures required about performance obligations, and the staff is often uh asking questions when those disclosures are too generic, right?
• 31:07
  SPEAKER_02: They're not specific enough to really understand the nature of the goods and services being provided.
• 31:14
  SPEAKER_01: All right, I'll check your facts, but I I do think you're right, and it's a little unfair because we've been talking about this recently, but still good that you knew the answer.
• 31:24
  SPEAKER_01: Fact check.
• 31:26
  SPEAKER_01: Score two for Angela.
• 31:28
  SPEAKER_01: Performance obligations is definitely one of the main themes of the SEC comments, along with transaction price, variable consideration, recognizing revenue, gross versus net presentation, and disaggregated revenue.
• 31:44
  SPEAKER_01: And then maybe on the tougher side, although I think I've asked you this one too, clearly lots of disclosures here.
• 31:50
  SPEAKER_01: And you know, 606, when it was codified, obviously brought together a lot of different guidance.
• 31:57
  SPEAKER_01: So, any sense for how many different standards were sort of combined when 606 was issued?
• 32:04
  SPEAKER_02: Meaning how many standards were superseded when 606?
• 32:08
  SPEAKER_01: Yes, or maybe amended.
• 32:10
  SPEAKER_01: You can kind of pick your own way to answer.
• 32:12
  SPEAKER_01: I'll give you options here.
• 32:14
  SPEAKER_01: And no looking it up, I can see what you're doing.
• 32:17
  SPEAKER_02: Well, I know that the list of consequential amendments when 606 was issued was almost as long as the standard itself.
• 32:26
  SPEAKER_02: Actually, it's probably longer.
• 32:28
  SPEAKER_02: Uh, so I mean, it probably touched at least a couple of dozen other standards when um when 606 was issued.
• 32:35
  SPEAKER_02: All right.
• 32:36
  SPEAKER_02: But I would be making a wild guess for the exact number.
• 32:39
  SPEAKER_02: That's the point here.
• 32:39
  SPEAKER_02: I'm trying to stump you.
• 32:40
  SPEAKER_01: So, okay, well, that's a good guess.
• 32:45
  SPEAKER_01: Fact check.
• 32:46
  SPEAKER_01: Angela's unstoppable.
• 32:48
  SPEAKER_01: Right again.
• 32:49
  SPEAKER_01: There were dozens of standards amended when 606 was issued.
• 32:53
  SPEAKER_01: Topic 606 superseded topic 605, most industry specific guidance throughout the industry topics of the codification, as well as a few other areas.
• 33:07
  SPEAKER_01: And then maybe to wrap up on a slightly more serious note, I do know you get lots of questions from companies on revenue in general, and in particular on, you know, in this topic on disclosures.
• 33:17
  SPEAKER_01: So, any key takeaways or advice you would give to companies when they're dealing with all these different revenue disclosures?
• 33:24
  SPEAKER_02: Well, a couple of thoughts here.
• 33:26
  SPEAKER_02: I mean, there are a lot of specific disclosure requirements as we just went through, but you can't lose sight of the overarching principle as well.
• 33:35
  SPEAKER_02: And I know sometimes companies are looking for, you know, where is the specific requirement for something?
• 33:41
  SPEAKER_02: But if there's a judgment or a key estimate involved in revenue, it probably makes sense to add disclosure about how the company made that judgment or the conclusions that they came to.
• 33:54
  SPEAKER_02: That would just fall under the overarching principle.
• 33:57
  SPEAKER_02: The other important reminder, which I touched on before, is that it's important not to just regurgitate the guidance when you're providing these qualitative disclosures, but to be specific to the company's conclusions, the judgments they came to, and how they relate to the company's specific business.
• 34:19
  SPEAKER_02: Like we often see disclosures that say something like, you know, revenue is recognized when control transfers.
• 34:26
  SPEAKER_02: But that's just you, that's just the requirement and the standard.
• 34:30
  SPEAKER_02: It doesn't tell you what the company concluded for its specific arrangements.
• 34:35
  SPEAKER_02: And then the other thing I would remind people is that your financial statement disclosures should be consistent with how you discuss your business outside of the financials.
• 34:48
  SPEAKER_02: So things like earnings releases, websites, other parts of the SEC filing.
• 34:53
  SPEAKER_02: And this is also an area of frequent SEC staff comment is if you've got disclosures in your footnotes that aren't consistent with how you've described your business elsewhere.
• 35:06
  SPEAKER_02: So it's something to always take a fresh read of and just make sure that those uh those disclosures are consistent.
• 35:14
  SPEAKER_01: Very helpful.
• 35:15
  SPEAKER_01: And I think our colleague, Andreas Ole, who's also a frequent guest on the podcast, would say all this transparency you are encouraging is probably beneficial from a company valuation perspective, users and the financials, et cetera.
• 35:28
  SPEAKER_01: So very good advice.
• 35:29
  SPEAKER_01: Uh so, Angela, as always, very helpful to have you on and really appreciate all your insights.
• 35:34
  SPEAKER_02: Thanks for having me.
• 35:38
  SPEAKER_01: That does it for today.
• 35:40
  SPEAKER_01: Thanks for tuning in.
• 35:42
  SPEAKER_01: Join me back here every Tuesday and Thursday for new podcast episodes.
• 35:46
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• 35:59
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• 36:04
  SPEAKER_01: From Thought Leadership at PWC, I am Heather Horn.
• 36:08
  SPEAKER_01: Thanks for tuning in.
• 36:15
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• 36:19
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• 36:21
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