The finale of our series.

At the beginning of this series, we mentioned that revenue is the single largest line item in most companies’ financial statements, and yet when you look at footnote disclosures, you will see that in many cases, there is little to no disclosure as to the accounting for how you recognize revenue in your financials. With these new standards, this will change rather significantly, and many companies will see the need to add anywhere from a few paragraphs to several pages of disclosures about their revenue recognition policies. The intent of these standards was to create transparency for the users of the financials to better understand how you are picking up revenue on your books – because these new standards require significant judgment being applied, and the disclosure as to the basis behind those judgments is critical. The good news for nonpublic companies is that significantly fewer disclosures are required for your financials than your public company brethren.

You will need to disclose sufficient information to allow your financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with your customers. These disclosures will be required for each period in which an income statement is presented, and each period in which a balance sheet is presented.

There are certain quantitative disclosures, and certain qualitative disclosures, required by the new standards.

  • Quantitative – Amounts of revenues from your customers, disaggregated by how much was subjected to recognition over time vs. at a point in time; opening and closing balances of contract assets or liabilities, and impairment losses recognized on customer receivables or contract assets.
  • Qualitative – Risk factors on disaggregated revenues such as how economic factors affect the nature, timing and uncertainty of revenues and cash flows; significant judgements made to determine transaction pricing and timing of revenue recognition including explanation of whether you use input or output methods to recognize revenue over the lifetime of the contract, and disclosure relating to performance obligations – such as when the company generally satisfies these obligations, significant payment terms, financing components, nature of the goods and services to be transferred, return and refund obligations, and warranty obligations.

These disclosures can be very complex and will need to be customized for your specific business. This is not something that you will be able to cut and paste from other examples that you see in the public domain, such as public company filings, although such disclosure examples may be a good starting point to try to draft up your own disclosures.

Check out our entire Revenue Recognition Readiness Check series.

Please contact your BMF Advisor for additional information regarding the new standards.

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