With 2019 underway and the new revenue recognition standard in full swing, now is the time to start planning for the additional disclosures that will be required for private companies on this year’s financial statements and to create your organization’s formal revenue recognition policy. 

The 8 Items You Need in Your Revenue Recognition Policy

Each entity should consider developing a revenue recognition policy under ASC 606. The policy should be documented, reviewed and approved by appropriate levels of management and include the following for each performance obligation: 

1. Description of performance obligation
2. Form of contract arrangement for the performance obligation
3. Timing of transfer of performance obligation to customer
   1. Transfer occurs at a single point in time (upon shipment or delivery, as services are rendered, at completion, etc.)
   2. Transfer occurs over time (a description of the output method or input methods used and how those methods were applied)
4. Qualitative information about economic factors (type of customer, geographical location of customers and type of contract) that affect the nature, amount, timing, and uncertainty of revenue and cash flows of a performance obligation
5. Significant payment terms for a performance obligation, such as when payment is typically due, whether the consideration is fixed or variable, and whether the estimate of variable consideration is constrained
6. How the timing of satisfaction of the performance obligation relates to the typical timing of payment and the effect these factors have on contract asset and liability balances
7. Obligations for returns or refunds or types of warranties, and related obligations relating to the performance obligation
8. Discussion of whether the company is a principal or agent for the performance obligation and how that determination was made 

What Are the Required Financial Statement Disclosures Under the New Revenue Recognition Rules?

Establishing a revenue recognition policy also will help with the preparation of the financial statement disclosures. As public companies have now implemented the new standard, resources that include disclosure examples for private companies will be forthcoming. Disclosure requirements for private companies include the following: 

General Disclosures

• Revenue from contracts with customers and related contract assets and liabilities must be presented clearly enough so the financial statement user will be able to understand the nature, amount, timing and any uncertainties of revenues and cash flows of such contracts.
• The beginning and ending values of contract assets, contract liabilities and related receivables must be disclosed.
• Transition disclosures (period of adoption only) are required. 

Disaggregated Revenue

• At a minimum, a disclosure must be made of revenue disaggregated based on the timing of transfer of goods (point in time vs. over time) and how economic factors impact each of the disaggregated revenue streams. 

Performance Obligations

• Disclose the nature of goods or services the entity has promised to transfer (including when acting as agent).
• Disclose when performance obligations are typically satisfied (including under bill and hold arrangements). If these obligations are satisfied over time, also disclose input or output methods and how they were applied.
• Any significant payment terms must be disclosed (such as typical due dates, whether the contract includes a significant financing component, if the consideration amount is variable and whether the estimate of variable consideration is generally constrained).
• Disclose obligations for returns, refunds and any similar obligations.
• Warranty types and related obligations also must be disclosed. 

Significant Judgments

• Disclose the judgments significantly affecting the determination of the amount and timing of revenue from contracts with customers and any changes to those judgments.
• Disclose judgments relating to the timing of satisfaction of performance obligations and transaction price and amounts allocated to performance obligations.
• Disclose methods, inputs and assumptions used for assessing whether an estimate of variable consideration is constrained. 

As noted, the information included in the revenue recognition policy will help you prepare the disclosures you will need to include on this year’s financial statements. Use the summer to prepare your organization by creating your revenue recognition policy and be ready for year-end. 

Additional Insights

Learn more in our comprehensive resources related to the new Revenue Recognition Rules: 

>> 7 Lessons Learned from Implementing the New Revenue Recognition Standard

>> New Revenue Recognition Standard: Are You Ready?

>> New Revenue Recognition Standard for Contracts with Customers: Why It Matters Now

>> A Timeline to Help Your Business Prepare for the New Revenue Recognition Standard for Contracts with Customers

>> Implementation Strategies to Help Not-for-Profits Prepare for the New Revenue and Lease Standards

>> New Revenue Recognition Affects Nonprofits, Too!

>> 4 Ways Software Entities May Benefit from the New Revenue Recognition Rules

Please contact a member of your service team, or contact Tina Dzik at tdzik@cohencpa.com or Jessica Foster at jfoster@cohencpa.com for further discussion.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.