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Revenue accounting reset - Presentation and disclosure · PwC's accounting podcast

0:00
SPEAKER_00: FIP leadership from PwC's National Office.
0:06
SPEAKER_02: Welcome to PWC's Accounting Podcast.
0:09
SPEAKER_02: I'm Heather Horn.
0:11
SPEAKER_02: Today we're wrapping up our revenue accounting series with an episode focusing on presentation and disclosure.
0:18
SPEAKER_02: From balance decation to the required disclosures under ASC 606 and how companies determine the right level of desigregation.
0:28
SPEAKER_02: We're covering the key elements that help users understand the nature and timing of revenue.
0:34
SPEAKER_02: Back as our guest host, I'm happy to welcome Diana Solstice, a partner in PwC's national office.
0:40
SPEAKER_02: Diana is joined by Mike Coleman, a partner, and Christine Moore, a director, who is also in our national office and who bring deep insight from both technical and practical perspectives on issues relating to revenue recognition.
0:54
SPEAKER_02: Let's go ahead and get the episode started.
0:59
SPEAKER_04: Mike and Christine, thanks so much for joining me today.
1:02
SPEAKER_04: We're doing a back to basics today, and we'll be covering the presentation and disclosure requirements related to revenue recognition.
1:09
SPEAKER_04: Although I'm calling it back to basics, it's certainly an area where we get lots of questions.
1:14
SPEAKER_04: And we look at some of the statistics related to what are some of the most frequent areas where people are asking questions or visiting our different types of guidance.
1:22
SPEAKER_04: This is definitely an area where we're getting a lot of questions and see people looking for answers.
1:27
SPEAKER_04: So maybe starting with you, Mike, you can just give us some background on the different presentation requirements in ASC 606.
1:35
SPEAKER_01: Sure.
1:35
SPEAKER_01: So let's just have some basic understanding.
1:40
SPEAKER_01: Companies typically have multiple sources of revenue that are presented in as revenue in the income statement.
1:47
SPEAKER_01: Things like revenue from customers, typically sales of services, or they might have lease revenue or interest revenue, grants, revenue from collaborations.
1:59
SPEAKER_01: There's more than one thing that they might have.
2:02
SPEAKER_01: And ASC 606, which covers revenue from contracts with customers, it requires a company to separately disclose revenue from those contracts from the other sources of revenue.
2:15
SPEAKER_01: So if I'm an entity that leases equipment and then also sells equipment or consumables, ASC 606 would say you need to present the lease income under a different guidance from the revenue from contracts with customer under 606 guidance, lease being 842.
2:36
SPEAKER_01: ASC 606 also has guidance for disclosures in annual and interim financial statements.
2:44
SPEAKER_01: We don't want to forget the interim disclosures.
2:47
SPEAKER_01: And then in addition to that, we always want to remind folks that if you're a public company, uh SX Rule 503 has guidance about what categories of revenue you would present on the income statement.
3:01
SPEAKER_01: Typically, it's uh if you have revenue categories that are 10% or greater than total revenue, and they list tangible products, services, rental income, and other.
3:11
SPEAKER_01: Um, so we always want to remind folks about the SX criteria.
3:15
SPEAKER_01: Um the other reminder is we'll have transactions that generate income that aren't revenue.
3:23
SPEAKER_01: Revenue is your major central ongoing operations.
3:27
SPEAKER_01: So let's say a company has fixed assets that are end of life and sells them, gets proceeds in a gain.
3:34
SPEAKER_01: That's not revenue.
3:36
SPEAKER_01: That's the sale of your fixed assets.
3:39
SPEAKER_01: Um, so that wouldn't be um covered by 606.
3:44
SPEAKER_01: That would be covered by some of the guidance.
3:46
SPEAKER_01: So for today, we're gonna talk about um the disclosure requirements and the presentation requirements for revenue from contracts with customers covered by ASC 606.
3:57
SPEAKER_01: For all that other stuff, you look to that other guidance.
4:00
SPEAKER_04: Right.
4:01
SPEAKER_04: And sometimes it's not that easy, too.
4:02
SPEAKER_04: We actually recently recorded a podcast related to embedded leases.
4:06
SPEAKER_04: And sometimes these questions about what type of revenue it is, you know, or what model you're under can be quite complicated, actually.
4:13
SPEAKER_04: But today we're focusing on ASC 606.
4:16
SPEAKER_04: So, you know, ASC 606 provides a framework for the presentation and disclosure requirements related to revenue generated from contracts with customers.
4:25
SPEAKER_04: So, Mike, you hit on some of the income statement presentation requirements.
4:28
SPEAKER_04: Maybe, Christine, turning to you, can you talk about it from a presentation perspective on the balance sheet side?
4:36
SPEAKER_03: Sure.
4:36
SPEAKER_03: So there are certain presentation requirements for ASC 606 related assets and liabilities.
4:43
SPEAKER_03: So maybe first just a level set on what those assets and liabilities are.
4:48
SPEAKER_03: If a payment is received from the customer before the company performs, you would record a contract liability.
4:55
SPEAKER_03: So typically companies often call this deferred revenue on the balance sheet.
5:00
SPEAKER_03: Conversely, if the company performs before receiving payment from the customer, you have an asset.
5:06
SPEAKER_03: That asset is either a receivable or contract asset.
5:12
SPEAKER_03: The asset is a receivable if the right to consideration is unconditional, meaning the entity has the immediate right to bill or the right to bill is only based on the passage of time, sometimes referred to as an unbilled receivable.
5:26
SPEAKER_03: Typically, we would see this captioned as trade AR on the balance sheet.
5:31
SPEAKER_03: In contrast, the asset could also be a contract asset.
5:35
SPEAKER_03: So if the right to consideration is conditional on something other than the passage of time.
5:41
SPEAKER_03: So for example, a company has to perform more services or deliver something else before they have the right to consideration from the customer, that would be a contract asset.
5:52
SPEAKER_03: Um, we typically see this as an example when an entity provides services that are being performed over time, transferred over time to the customer.
6:00
SPEAKER_03: However, the entity may be only entitled to consideration from the customer based on achieving certain project milestones.
6:08
SPEAKER_03: Maybe one other thing to keep in mind when presenting contract assets and contract liabilities, companies also need to consider classification on the balance sheet.
6:18
SPEAKER_03: So either long-term or short-term classification for those assets and liabilities.
6:23
SPEAKER_04: So, Christine, you seem to make this distinction between when you're thinking about the asset side, whether something is a receivable or a contract asset.
6:31
SPEAKER_04: Why, from a presentation perspective, does it matter, you know, whether it's a receivable or a contract asset?
6:39
SPEAKER_03: So there's a few reasons why it's really important to distinguish between the two.
6:44
SPEAKER_03: First, receivables and contract assets need to be presented separately, and then they're subject to different requirements.
6:51
SPEAKER_03: So, for example, contract assets and contract liabilities from the same contract are presented on a net basis based on the guidance in ASC 606.
7:02
SPEAKER_03: However, receivables are not offset against contract liabilities unless you meet the specific requirements for balance sheet set-off in ASC 210.
7:13
SPEAKER_03: There are also then separate disclosure requirements with more specific disclosures for contract assets under ASC 606.
7:21
SPEAKER_03: We do get a number of questions on the difference between a contract asset and a receivable.
7:26
SPEAKER_03: And in some cases, judgment is required.
7:30
SPEAKER_03: But just keep in mind that there are definitely scenarios where you can have a receivable in advance of performing.
7:36
SPEAKER_03: So for instance, when the company has the right to consideration in advance of performance and the contract is non-cancelable, or the consideration is non-refundable.
7:46
SPEAKER_03: So really important to make sure you're distinguishing and understanding the difference between the billing terms and the contract when you're performing to make that assessment as to whether you have a receivable or a contract asset.
7:58
SPEAKER_04: Okay, great.
7:59
SPEAKER_04: Maybe before we move on to the disclosures required under ASC 606, you know, one of the areas that a lot of our listeners are focused on, or obviously we have a lot of registrants that listen, is, you know, what's the SEC's perspective?
8:12
SPEAKER_04: And so, Mike, maybe can you touch on if, you know, what are the types of comment letters we're seeing related to presentation of revenue from the SEC?
8:21
SPEAKER_01: Uh sure.
8:22
SPEAKER_01: So I mentioned the SX requirement to present categories of revenue depending upon if they're greater than 10% in the total.
8:32
SPEAKER_01: We see a fair amount of SEC comment letters along those lines to see how companies comply with SX.
8:40
SPEAKER_01: So, for example, sometimes a company's revenue doesn't neatly fit into those SX categories as products or services.
8:49
SPEAKER_01: Um, and so depending on how they present it, uh, they may get a question from the staff: how did you comply with SX?
8:57
SPEAKER_01: So, an example that we like to use is let's say we have a software company, um, and they have revenue from licensing software, from providing uh post-contract customer support, and then says, um, SX doesn't really tell you what to do with licenses.
9:15
SPEAKER_01: And so sometimes you'll have a software company that says, here's our software or software-related revenue in one line.
9:21
SPEAKER_01: And so often that'll generate a comment that says, okay, how did you comply with SX?
9:26
SPEAKER_01: And not they're thinking, not breaking it down between the license, the post-customer contract support, and the SaaS.
9:34
SPEAKER_01: So that that's the most common example that we have.
9:37
SPEAKER_04: Okay, great.
9:38
SPEAKER_04: Well, maybe we'll move on to the disclosure requirements now.
9:41
SPEAKER_04: Maybe Mike, can you start with really talking about the overall objective of the disclosure requirements and then maybe talking about the main categories of requirements under ASC 606?
9:52
SPEAKER_01: Sure, sure.
9:53
SPEAKER_01: So the overall objective, and and it's always good to keep this in mind as you go through it.
10:00
SPEAKER_01: Uh, ASC 606 is a little unique in that they have required disclosures at a high level, but then don't tell you how to do the disclosure.
10:08
SPEAKER_01: So there's a lot of a lot of judgment.
10:10
SPEAKER_01: And then they give you suggestions on what you might do, right?
10:13
SPEAKER_01: And what you might consider.
10:14
SPEAKER_01: So it's hard to say that there's required.
10:17
SPEAKER_01: Okay.
10:17
SPEAKER_01: Yeah, there's required, but not the how of the required.
10:20
SPEAKER_01: So um, but the overall objective is always sort of the anchor, and that's an entity to disclose the sufficient information to enable the users of the financial statement, and here's the key, to understand the nature, the amount, the timing, and the uncertainty of revenue and cash flows.
10:39
SPEAKER_01: So the nature, the amount, the timing, and the uncertainty of the revenue and the cash flows.
10:44
SPEAKER_01: So that's the objective you're trying to meet.
10:46
SPEAKER_01: How is my disclosure helping a reader understand nature, amount, timing, and uncertainty of the revenue and cash flows?
10:54
SPEAKER_01: Okay.
10:54
SPEAKER_01: And now there's sort of five groupings, five categories that are are required disclosures.
11:01
SPEAKER_01: And I'm using air quotes.
11:02
SPEAKER_01: I don't know why I'm on a podcast, but for those following along at home, I'm using air quotes.
11:08
SPEAKER_01: Um they are disaggregated revenue, disclosures about your performance obligations, the significant judgments that you make in applying the standard, contract balances related to the assets that Christine was talking about, and then last is cost to obtain or fulfill a contract.
11:27
SPEAKER_01: And we'll cover all of those in detail.
11:30
SPEAKER_01: And I figure I'll start with the first group, which is disaggregated revenue, uh, because we tend to get a lot of questions about this disclosure.
11:39
SPEAKER_01: And it's also an area of significant SEC focus.
11:44
SPEAKER_01: And we get a lot of comment letters.
11:45
SPEAKER_01: Uh, companies get a lot of comment letters on disaggregated revenue.
11:50
SPEAKER_01: All right.
11:51
SPEAKER_01: So again, the requirement for disaggregated revenue, and and it's again that principle again.
11:57
SPEAKER_01: It says you companies should disaggregate the revenue in categories that will show the reader the impact of the nature, the amount, and the timing uncertainty on revenue and cash flows, right?
12:12
SPEAKER_01: So that's the idea.
12:13
SPEAKER_01: I'm going to disaggregate into categories that give me information about those four characteristics.
12:20
SPEAKER_01: Um, again, the guidance doesn't tell you what categories have to be.
12:26
SPEAKER_01: The company has to make the judgment as to whether they provide that information, but they do suggest some examples, which would be like the type of good or service, so a major product line, the geography or region, uh the market or type of customer.
12:41
SPEAKER_01: So, like think of a government customer and a non-government customer, or the timing of when the goods or services are transferred.
12:49
SPEAKER_01: So point in time versus overtime, the channel, retail versus wholesale.
12:53
SPEAKER_01: So those types of categories that give uh the user of the financial statements better insight as to the nature, amount, timing, and uncertainty of the relevance.
13:04
SPEAKER_01: I'm gonna say it over and over and over again.
13:06
SPEAKER_01: Yeah.
13:08
SPEAKER_01: Um, and then depending upon the business, you might aggregate into one or more.
13:13
SPEAKER_01: There's no requirement that you have to do a said number, but again, you want to be fulsome in your disclosure.
13:21
SPEAKER_04: Right.
13:22
SPEAKER_04: And I guess maybe that's some of the reason why there's a lot of ability for companies to decide is because you companies have such different models, too, right?
13:30
SPEAKER_04: And so it's hard to be prescriptive if you have to have these categories you may not be able to capture, and obviously businesses are evolving and changing over time.
13:38
SPEAKER_04: So, Mike, when it comes to disaggregating revenue, how should companies decide which categories to use to meet the disclosure requirements?
13:47
SPEAKER_01: Okay.
13:48
SPEAKER_01: So the guidance tells you the types of information that you should consider when determining your categories for disaggregation.
13:59
SPEAKER_01: Um and those types of information include disclosures presented outside of the financial statements.
14:06
SPEAKER_01: So think of other parts of SEC filings, earnings releases, annual reports, investor presentations, et cetera.
14:15
SPEAKER_01: Information regularly reviewed by the chief operating decision maker, the CODM, for their evaluation of the financial performance.
14:25
SPEAKER_01: You may want to consider that information, or other information that's used by the entity and users to evaluate the performance of the company.
14:33
SPEAKER_01: So that's the types of information that the guidance suggests you look at, a company to look at, in order to figure out what to disaggregate.
14:41
SPEAKER_01: And all this information, there's a the theme here that the SEC tends to like to look for inconsistencies in what you're saying.
14:52
SPEAKER_01: And so oftentimes as you're coming to figure out your disaggregated revenue disclosure, you should look at those other areas where you're disclosing information and making sure that your disaggregated revenue is consistent with that or not inconsistent with that.
15:09
SPEAKER_01: Right.
15:10
SPEAKER_04: Okay.
15:11
SPEAKER_04: Well, one thing that you mentioned is the cheap operating decision maker, CODM.
15:17
SPEAKER_04: And, you know, we hear that a lot when we're thinking about segments and segment reporting requirements and information regularly reviewed by them.
15:24
SPEAKER_04: That's obviously an important component to consider when we're reporting, you know, determining segments and reporting in accordance with that standard.
15:32
SPEAKER_04: So how do you think about the overlap between the revenue standard and segment reporting requirements?
15:38
SPEAKER_01: Sure.
15:39
SPEAKER_01: Um ASC 606 actually requires the company, and again, this is the theme of the presentation and disclosure.
15:48
SPEAKER_01: They require disclosure that helps the user understand the relationship between what was disclosed for segment reporting and what was disclosed for revenue.
16:00
SPEAKER_01: Doesn't tell you how to do that.
16:02
SPEAKER_01: Just you have to have enough information that someone can understand the relationship between those two accounting principles.
16:09
SPEAKER_01: Um, the other thing is that uh there's a requirement in ASC 606 for a company to consider what the CODM is evaluating for purposes of this disaggregated revenue disclosure.
16:22
SPEAKER_01: So you don't have to take it, but you have to just consider whether that's important enough to influence your categories.
16:29
SPEAKER_04: Okay.
16:30
SPEAKER_04: So one of the other things that you mentioned um in the beginning of talking about disaggregated revenue was that the this is a big area of focus from the SEC.
16:40
SPEAKER_04: So maybe can you give us an example of some of the different types of comments that we're seeing from the SEC in this area?
16:46
SPEAKER_01: Sure.
16:47
SPEAKER_01: Um I'll give you two that have been more significant as of late.
16:52
SPEAKER_01: Uh first is where the company is providing information at a disaggregated level in other spots in their um financial statements or any other public disclosure they're making, the staff will also ask for um how they considered that in doing the disaggregated revenue.
17:15
SPEAKER_01: So, for example, if in the MDNA there's some discussion about uh sales channel, the staff might ask, well, how did you consider sales channel in your disaggregated revenue if it's not included in that?
17:29
SPEAKER_01: So they're constantly looking for the making sure they're consistent or not inconsistent.
17:34
SPEAKER_01: Uh the other one we've seen um quite a bit actually is the staff asking for how the company considered the information provided to the chief operating decision maker.
17:45
SPEAKER_01: Um, even so far as to ask for the CODM package for them to go look for themselves to see that whatever reason you gave made sense to them.
17:56
SPEAKER_01: Right.
17:57
SPEAKER_01: A lot of times when we help companies um deal with those comment letters, the biggest question is are they asking a segment question or are they asking a revenue aggregation?
18:07
SPEAKER_01: But it they're very interjoined.
18:09
SPEAKER_01: So um, you know, you want to give a lot of thought if you get that comment to what was the process you did to consider that information because the standard does require you to consider what the chief operating decision maker sees.
18:22
SPEAKER_04: Right.
18:23
SPEAKER_04: Well, it seems like a good point.
18:24
SPEAKER_04: And I think this is probably, you know, obviously relevant for these standards, but probably across when companies are making their public disclosures anyway, is thinking about all these different documents and how you're preventing presenting information and making sure that you have consistent kind of messaging and evaluation across your different public documents.
18:40
SPEAKER_04: Okay, so maybe we'll turn now to the next disclosure category.
18:44
SPEAKER_04: So, Christine, I think that's performance obligations.
18:46
SPEAKER_04: Maybe can you give us um some information on the disclosure requirements there?
18:50
SPEAKER_03: Yeah, of course.
18:52
SPEAKER_03: So as Mike mentioned, the second area of focus that we'll talk about is performance obligations.
18:57
SPEAKER_03: As a reminder, the performance obligations in a contract are the distinct promises as determined under step two of the 606 model.
19:06
SPEAKER_03: In other words, we would refer to them as the units of account for applying the revenue standard.
19:12
SPEAKER_03: Entities must meet various quantitative and qualitative disclosures related to their performance obligations.
19:19
SPEAKER_03: So maybe I'll start with one of the key quantitative disclosure requirements.
19:24
SPEAKER_03: It's referred to as the remaining performance obligations disclosure.
19:29
SPEAKER_03: And for this requirement, an entity must determine the transaction price allocated to their remaining performance obligations in the contract that have not yet been satisfied as a period end, and then disclose that amount with the expected timing of when such amounts will be recognized as revenue.
19:48
SPEAKER_03: So think about this as it's similar to what companies typically refer to as backlog.
19:53
SPEAKER_03: However, it's important to note that the disclosure is only for amounts related to committed non-cancelable contracts and should not include any goods or services that are optional to the customer.
20:06
SPEAKER_03: For example, when an entity enters into a contract for an initial term with the customer and provides options to renew or extend, the amounts related to the subsequent renewals should not be included in your remaining performance obligations disclosure.
20:22
SPEAKER_03: In terms of how companies then go about disclosing when the amounts are expected to be recognized as revenue, the guidance obviously isn't prescriptive for that.
20:32
SPEAKER_03: So what we do often see companies do is disclose quantitatively using time bands.
20:39
SPEAKER_03: So for example, disclosing a table in the footnotes with the amounts to be recognized one year out, two years out, et cetera.
20:47
SPEAKER_03: And it may be appropriate in some scenarios to instead qualitatively describe the timing of when the entity expects to recognize the amounts as revenue.
20:56
SPEAKER_03: So again, no prescriptive guidance there, just make sure that you're hitting on the specific requirements.
21:01
SPEAKER_03: There is an optional exemption related to this disclosure for contracts with a term that have one year or less.
21:08
SPEAKER_03: However, keep in mind that the entity then also must disclose the use of that uh exemption.
21:14
SPEAKER_04: Okay, great.
21:15
SPEAKER_04: So you've talked about several different disclosure elements that are tied to performance obligations.
21:21
SPEAKER_04: What other information are companies required to disclose?
21:25
SPEAKER_03: So one of the other key quantitative disclosures related to performance obligations is the requirement to disclose revenue that's recognized in the current period for performance obligations that were satisfied in prior periods.
21:38
SPEAKER_03: So this disclosure typically includes amounts recognized in revenue due to changes in estimates of variable consideration that were allocated to that performance obligation that was previously satisfied, maybe any changes in the estimated measure of progress.
21:53
SPEAKER_03: And it also may include recognition of royalties when sales occur under the Sales and usage-based royalty exception for licenses that were transferred in prior periods.
22:06
SPEAKER_03: Maybe then shifting to qualitative disclosures.
22:09
SPEAKER_03: So in terms of qualitative disclosures for performance obligations, an entity should consider disclosing the nature of the goods or services being provided, when the entity typically satisfies its performance obligations.
22:23
SPEAKER_03: So think are your performance obligations satisfied at shipment, upon delivery, as services are provided, et cetera.
22:31
SPEAKER_03: The significant payment terms, including when the payment is typically due, whether the contract has a significant financing component, or whether the consideration in the contract associated with that performance obligation is variable.
22:45
SPEAKER_03: And then also companies need to consider disclosing any potential repurchase obligations for that performance obligation, or if there's any warranties that are associated with that performance obligation, and then the nature of that warranty.
22:58
SPEAKER_03: So is it an assurance type of warranty or a sales service type warranty?
23:04
SPEAKER_03: The disclosures should be specific to the entity's revenue transactions.
23:09
SPEAKER_03: So it's really best to avoid any boilerplate or generic language.
23:14
SPEAKER_03: Otherwise, you can probably expect that you're gonna get a comment from the staff requesting more information that's specific to your entity's revenue contracts.
23:24
SPEAKER_04: Okay, that's really helpful.
23:25
SPEAKER_04: So maybe we'll turn to the third disclosure area, significant judgments.
23:30
SPEAKER_04: So, Mike, what are some of the judgments that ASC 606 would expect companies to disclose?
23:37
SPEAKER_01: Two broad areas, um judgments and changes in judgments related to the timing of revenue recognition and then determining and allocating the transaction price.
23:48
SPEAKER_01: And so the purpose of providing information for these two judgments is to give the reader more information about areas of the model where the entity made significant judgments.
24:00
SPEAKER_01: Um some examples that hopefully crystallize it a little bit.
24:06
SPEAKER_01: So when let's say when revenue is recognized over time, the methods that are used, so overtime can be a function of time rateable or an input method, uh, such as costs, or an output method.
24:19
SPEAKER_01: Um so the types of methods that a company is going to use to recognize over time would be one of those significant judgments.
24:28
SPEAKER_01: And then why is that method a faithful depiction of when the transfer of goods or services occurs?
24:35
SPEAKER_01: Um, when revenue is recognized at a point in time, some judgments evaluated for when a customer obtains control, because that can happen at different points in time for different reasons.
24:45
SPEAKER_01: As far as the transaction price, think methods, inputs, and assumptions for estimating variable consideration, whether there's time value and money, uh, measuring non-cash consideration, and then whether that variable consideration is constrained.
25:02
SPEAKER_01: And then the other thing that we get a lot of questions on is estimating standalone selling price for the purpose of allocating the transaction price to the different things.
25:10
SPEAKER_01: Um, so those are types of things you would go for the transaction price.
25:14
SPEAKER_01: Last, you always get this refunds, um, returns, other types of obligations.
25:20
SPEAKER_01: Again, the judgments around what type of obligations those are, like return terms, refund terms, et cetera.
25:27
SPEAKER_04: Right.
25:28
SPEAKER_04: So it seems like this is a lot of qualitative information.
25:31
SPEAKER_04: You know, sometimes we think about requirements being more quantitative.
25:33
SPEAKER_04: Any perspective on that?
25:35
SPEAKER_01: Um Yeah, this is fairly consistent with uh direction the FASB's gone on to give readers more information to be able to digest and understand the financial statements.
25:46
SPEAKER_01: Quantitative, yeah, but both qualitative so that they um have decision-making usefulness.
25:52
SPEAKER_01: Um the other thing though is there's a sometimes um companies will fall into the trap of, well, it's uh a qualitative disclosure, and so they borrow other things that they've done or other folks that have done before.
26:09
SPEAKER_01: And what you don't want is to have boilerplate language.
26:12
SPEAKER_01: You want that qualitative disclosure to be company specific.
26:16
SPEAKER_04: And I think, you know, maybe a good point on that too, Mike, is making sure that you're refreshing them every year, too, because most of the time facts and circumstances can change over time and it's not exactly the same thing every year.
26:28
SPEAKER_01: That's a great point.
26:29
SPEAKER_01: That's absolutely a great point.
26:30
SPEAKER_04: Okay, so maybe we'll move to the fourth category now.
26:33
SPEAKER_04: Maybe going back to you, Christine, on contract balances.
26:37
SPEAKER_03: Sure.
26:37
SPEAKER_03: So this one is going to be a little more quantitative than significant judgments.
26:41
SPEAKER_03: Um, so for contract balances, ASC 606 includes a requirement to reconcile the activity that's presented on the balance sheet.
26:51
SPEAKER_03: So in particular, the requirements would require an entity to disclose the opening and closing balances of receivables, contract assets, and contract liabilities, and then also disclose significant changes in the contract asset and liability balances during the period.
27:10
SPEAKER_03: So this would include disclosing revenue that's been recognized during the reporting period that was included in the contract liability balance as of the beginning of the period.
27:20
SPEAKER_03: Entities should also explain how the timing of performance and the timing of payment affects the balance sheet accounts.
27:27
SPEAKER_03: So again, this will provide the reader with further insights as to the appropriate classification of contract balances as an asset or a liability, as well as then current versus non-current on the balance sheet.
27:39
SPEAKER_04: It sounds a lot like a roll forward.
27:41
SPEAKER_04: So are companies being asked to roll forward the contract balances?
27:45
SPEAKER_03: So the standard doesn't necessarily require a roll forward of the contract balances.
27:50
SPEAKER_03: However, we do see many companies provide that required information in a roll forward table, more so for ease of presentation.
27:59
SPEAKER_03: Additionally, companies do need to consider whether it's necessary to disclose any qualitative information related to the significant change in the activity of the balances, such as if there were any business combinations during the period, any cumulative catch-up adjustments, as well as any impairments of a contract asset.
28:19
SPEAKER_03: We do see the staff frequently comment on contract balance disclosures or potentially lack thereof.
28:26
SPEAKER_03: So, including, for example, requesting further information on the contract balance disclosures reconciling to the amounts presented on the face of the balance sheet, as well as requesting entities to revise their disclosures to further explain typical billing and payment terms under the contracts and how those impact any contract balances.
28:46
SPEAKER_03: So it is really important to consider all of the relevant qualitative as well as quantitative information related to contract balances, including how that information then actually reconciles back to the balance sheet.
28:59
SPEAKER_04: Okay, well, great.
29:00
SPEAKER_04: Well, maybe we'll turn to our final category now: costs to obtain or fulfill a contract.
29:05
SPEAKER_04: And Mike, what are the key disclosure requirements here?
29:09
SPEAKER_01: Yeah, I think for this category, the focus is really on what amounts have been capitalized.
29:14
SPEAKER_01: So the standard prescribes conditions for where costs should be capitalized.
29:21
SPEAKER_01: And so the disclosure requirements are the judgments around the types of costs, the method of amortization and the impairment conditions, and then quantitatively, how many, what are the balances that have been capitalized and the amount of amortization and impairment?
29:38
SPEAKER_01: But the focus is on if those costs are capitalized, judgments and amounts.
29:43
SPEAKER_04: Okay.
29:43
SPEAKER_04: Okay, got it.
29:44
SPEAKER_04: Well, maybe one last question, Christine, before we move on from disclosure requirements, is there anything else you think our listeners should know?
29:52
SPEAKER_03: Maybe one last item to note there are various practical expedients that entities can elect under ASC 606.
29:59
SPEAKER_03: And the companies need to do need to disclose the use of any practical expedients in their uh in their financial statements.
30:07
SPEAKER_03: So the common examples that we see as a reminder for disclosure would be when an entity does not account for a significant financing component because the contract is less than 12 months, the use of the right to invoice practical expedient when recognizing revenue, or the use of the practical expedient to expense costs to obtain a contract as incurred, again, because the amortization period would be less than 12 months.
30:34
SPEAKER_03: So uh just a quick reminder on some of those practical expedient disclosures that also um do are required in the financial statements.
30:43
SPEAKER_04: Okay, well, we've covered a lot today.
30:45
SPEAKER_04: We've talked about presentation, we've talked about the five different disclosure categories.
30:50
SPEAKER_04: Maybe, Mike, I'll start with you.
30:52
SPEAKER_04: Um, any key takeaways if our listeners are thinking about different ways that they could enhance their revenue disclosures?
30:58
SPEAKER_01: Uh sure, I have three, and you you can probably guess the first one, which is as you evaluate your revenue disclosures, always make sure that they are providing information that has the nature, amount, timing, and uncertainty of revenue and cash flows.
31:14
SPEAKER_01: So that's the overarching principle.
31:16
SPEAKER_01: Um, don't just use boilerplate language, be specific to the company's uh conditions, and then make sure you're consistent with or not inconsistent with um the other disclosures that you're making outside of the financials.
31:33
SPEAKER_04: Well, I think that's great advice.
31:34
SPEAKER_04: Christine?
31:35
SPEAKER_03: Yeah, maybe just to echo Mike's point on consistency.
31:39
SPEAKER_03: So with the continued focus on disaggregation, it's make sure you have a good basis for determining how to disaggregate revenue in your disclosures.
31:48
SPEAKER_03: And then again, that that disaggregation aligns with how you talk about the business in other financial statement disclosures or other parts of the filing.
31:55
SPEAKER_04: Okay, well, great.
31:56
SPEAKER_04: Well, I think this has been really informative podcast and very helpful.
32:00
SPEAKER_04: So maybe one last thing is Mike, if our listeners want to find out more information or get more guidance related to revenue presentation and disclosure requirements, um, where should they go?
32:11
SPEAKER_01: So, chapter 33 of our financial statement presentation guide is the place we talk about specifically the presentation and disclosure requirements.
32:20
SPEAKER_01: And then if there are any accounting and reporting issues related to revenue, our ASC 606 revenue guide.
32:26
SPEAKER_04: Well, thank you so much both for joining me today.
32:28
SPEAKER_01: Yeah, happy to be here.
32:29
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32:30
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32:52
SPEAKER_02: From Thought Leadership at PwC, I'm Heather Horn.
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