Revenue disclosures: disaggregation, contract balances, obligations and judgments

• State the disclosure objective of Topic 606
• Prepare a contract balance disclosure that reconciles to the general ledger
• Describe the performance obligation and remaining performance obligation disclosures
• Identify the significant judgment disclosures and the private company relief

The objective

Under 606-10-50-1, the objective is to disclose enough information for users to understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. The entity gives qualitative and quantitative information about its contracts, the significant judgments and changes in them, and assets recognized from contract costs. The entity decides the level of detail and aggregation so useful information is not buried or combined with items that differ.

Revenue and impairment amounts

Under 606-10-50-4, unless presented separately on the income statement, disclose revenue from contracts with customers separately from other revenue (such as lease income or interest), and credit losses on receivables or contract assets arising from customer contracts separately from losses on other contracts.

Disaggregation

Under 606-10-50-5, disaggregate revenue into categories that depict how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows. Typical categories: type of good or service, geography, market or customer type, contract type (fixed price, time and materials), contract duration, timing of transfer, and sales channel. An entity that reports segments explains how the disaggregation relates to segment revenue (606-10-50-6). Look at what management already uses: earnings releases, board packages and investor materials.

Contract balances

Under 606-10-50-8, disclose:

• opening and closing balances of receivables, contract assets and contract liabilities (if not presented elsewhere);
• revenue recognized in the period that was in the opening contract liability balance; and
• revenue recognized in the period from performance obligations satisfied in prior periods (for example, a change in transaction price).

Add an explanation of how the timing of satisfaction relates to typical payment timing (606-10-50-9) and the significant changes in contract asset and liability balances, with qualitative and quantitative information such as business combinations, cumulative catch-ups, impairments and timing changes (606-10-50-10).

A rollforward is the cleanest way to support these numbers. The contract asset and liability rollforward template builds one.

Performance obligations

Under 606-10-50-12, describe:

• when the entity typically satisfies its obligations (shipment, delivery, as services are rendered, completion), including bill-and-hold;
• significant payment terms, including whether there is a significant financing component, variable consideration and a constraint;
• the nature of the goods or services, highlighting any arrangements where the entity is an agent;
• obligations for returns, refunds and similar; and
• types of warranties.

Remaining performance obligations

Under 606-10-50-13, disclose the aggregate transaction price allocated to unsatisfied (or partly unsatisfied) obligations at period end and when it is expected to be recognized, either in time bands or qualitatively. Under 606-10-50-14, the disclosure is not required for obligations in contracts with an original expected duration of one year or less, or recognized under the right-to-invoice expedient. If the entity uses that expedient, it says so (606-10-50-15).

Significant judgments

Under 606-10-50-17 to 50-20, disclose the judgments that significantly affect the timing and amount of revenue: the methods used for over-time obligations and why they faithfully depict transfer; for point-in-time obligations, the judgments about when control transfers; and the methods, inputs and assumptions used to determine and allocate the transaction price, including variable consideration, the constraint, financing and SSP.

Expedients and relief

606-10-50-22 requires disclosure of use of the financing and costs-to-obtain expedients. Entities that are not PBEs (and not the other listed entities) can elect out of many of these requirements, as covered in lesson 11. The election is per disclosure, and the minimums still apply.

Audit points

Tie every number in the note to a schedule that reconciles to the general ledger. Check the opening contract liability against the prior-year audited balance. Read the policy note against how contracts actually work; a note that says "revenue is recognized upon shipment" for a company with destination terms is a misstatement. Use the revenue disclosure checklist.

Building the contract liability disclosure