For Revenue Recognition, ‘Don’t Sleep on the Disclosures’by
During the last few minutes of his talk on the revenue recognition standard at the 2016 CCH Connections User Conference on Oct. 24, Scott Taub quickly fast-forwarded a slew of slides that contained all the different disclosures under the new accounting rule.
“They keep coming! Why do they keep doing that?” Taub joked, as slide after slide went by on the screen in a blur.
Why are these disclosures such a big deal? Because current revenue recognition guidance has almost no required disclosures, said Taub, managing director of Chicago-based Financial Reporting Advisors LLC and a member of the FASB/IASB Joint Transition Resource Group for Revenue Recognition.
“Because there are no requirements in GAAP, revenue recognition disclosures these days are, to use a technical term, crappy,” Taub told the audience. “The FASB and the IASB spent a lot of time coming up with a set of disclosures that they believe will be useful: disaggregated information about revenue, information about when you expect to recognize the rest of the revenue from a contract that you’re part way through, information about what triggers revenue recognition. Is it over time or point in time? If it’s over time, what’s your measure of progress? If it’s point in time, what usually is your trigger for transfer of control?
“There’s a long list of disclosures,” he added. “It’s a much shorter list for private companies than public companies, but it’s still infinitely longer than the zero disclosures that we have today.”
So, because of that, Taub said he gives his clients the following advice: Don’t sleep on the disclosures. Here’s what he told the audience at the end of his presentation:
“Don’t wait until you’re preparing your financial statements under this new standard to think about the disclosures because you may well find out that you haven’t captured the information you need. There is some quantitative information required, and if you don’t capture it when you actually do the transaction, it’s going to take you a lot of time to do the disclosures. So, if your financial statements need to be filed with the bank on March 31, and you look at the disclosures on March 25, it will be too late.
“So, don’t sleep on the disclosures. It’s a big change. Actually, if you talk to analysts and other financial statement users who understand this stuff, they will tell you that these disclosure changes are probably the biggest deal for them because they can’t really see what’s behind the changes in when the revenue gets recognized. If they ask a lot of questions, they might get that stuff, but they can’t really see what’s behind that. But the footnote disclosures, that’s going to give them additional information that they could never have gotten in today’s GAAP.
“If you think you’re up on the revenue recognition standard, and you’ve concluded it’s not going to affect your clients very much, look at the disclosures. Because if you have revenue, you’ll be disclosing more under the new standard than under the old.”
The new FASB revenue recognition standard, Revenue from Contracts with Customers (Topic 606), will go into effect for public companies for annual reporting periods beginning after Dec. 15, 2017 (2018 for calendar-year public companies) and interim periods therein. Nonpublic companies will be required to adopt the standard for annual reporting periods beginning after Dec. 15, 2018, and interim periods within annual reporting periods beginning after Dec. 15, 2019.