In 2014, the Financial Accounting Standards Board (FASB) issued new guidance, ASU 2014-09, Revenue from Contracts with Customers. The changes were implemented because of inconsistencies in revenue reporting and the subsequent impact on financial reporting. FASB’s goal was to provide a robust framework for addressing revenue recognition, improving financial statement comparability, and providing more useful financial information through enhanced disclosures. While most are generally aware of the 5-step revenue recognition model, the changes that result from the transition can be more difficult to determine. How will government contractors be impacted by the transition? What impact will there be on the timing of revenue recognition? What information are we required to disclose? These are important questions that contractors will “solve” as time progresses. Given the depth of the topic, there are several requirements to discuss and analyze. In this blog post, we have provided an outline of the financial statement disclosures that need to be made under the new guidance.
Financial Statement Disclosures
There are several disclosures, both qualitative and quantitative, that reveal important information about contracts and judgments used in applying the new guidance. While reviewing this information it’s important to candidly assess whether the systems, processes, and procedures currently exist to collect the necessary information.
- Disaggregated Revenue – Publicly held government contracts are required to disclose a disaggregation of revenue based on certain economic factors including the nature, amount, and timing of revenue recognition and cash flows. For nonpublic contractors, they can elect not to provide this level of information. However, they should disaggregate revenue based on when control of goods and services transfers to the customer. Concurrently, information on how economic factors may impact the nature, timing, and uncertainty of revenue and cash flows should also be provided.
- Contract Balances – All contractors should disclose the opening and closing balances of accounts receivable, contract assets, and liabilities. Publicly held contractors are also required to disclose the amount of revenue recognized included in contract liability for the prior period. An explanation of the timing used to determine the contractor’s satisfaction of performance obligations compared to when payment is typically received and how contract liability is impacted. In addition, an explanation of any variations in contract assets or liabilities during the reporting period is also required. It’s important to note that revisions of estimates should be evaluated for impact on contract balances and an explanation provided if material.
- Performance Obligations – All federal contractors are required to disclose when performance obligations are typically satisfied, payment terms, nature of promised goods or services provided, obligations in contracts about rights of return or refund, warranties, and other obligations, and revenue recognized related to performance obligations met in the prior reporting period.
- Transaction Price Allocated to Remaining Performance Obligations – These are obligations identified in the contract which were entered into before the end of a reporting period in which control of some goods or services has not been transferred. With limited exception, the following needs to be reported by publicly held contractors including the total amount of the transaction price allocated to those obligations and an explanation of when the contractor expects to recognize the allocated transaction price as revenue. This requirement can be met by providing either a quantitative or qualitative disclosure.
- Significant Judgements – Contractors should also disclose judgments made in applying the new guidance that impacts when and how much revenue is recognized. The disclosure should include judgments involved in determining contract price, allocation of price to performance obligations, and determination of when obligations are satisfied. In addition, for performance obligations satisfied over time, an explanation of why the specific input or output method used to recognize revenue provides an accurate picture of how control is transferred, (in satisfying performance obligations), information on when control transfers to the customer, judgments used when identifying methods, inputs, and assumptions used to determine the transaction price, judgments involved in identifying the methods, inputs, and assumption for contracts with more than one performance obligation used to estimate the stand-alone selling price and allocate discounts. Nonpublic government contractors need to disclose the input or output method used to recognize revenue for obligations satisfied over time and when applying variable consideration constraints, the methods, inputs, and assumptions used.
- Contract Costs – Publicly held government contractors are required to disclose information related to contract costs. This includes a description of the judgments made in identifying costs to capitalize, a description of the methods used in each reporting period to amortize the capitalized costs and related amortization, ending balance of capitalized costs (by main category) and any impairment losses related to capitalized costs.
The number and type of disclosures that need to be made are dependent on whether the contractor is publicly or privately held. For public companies the amount of disclosure information is significantly more than private companies., but in either case, the amount of information that needs to be disclosed has sharply increased.