Disclosure and presentation requirements
As part of its continued deliberations surrounding the Exposure Draft Revenue from Contracts with Customers (Revenue ED), the Boards deliberated on disclosure and presentation requirements.
The Boards made a number of tentative decisions in the conduct of these deliberations, which included retention of the disclosures proposed in paragraphs 69-83 of the Revenue ED, subject to the following clarifications and changes:
In the disaggregation of revenues, the final standard should:
- include additional examples of potential categories (e.g., contract duration, timing of transfer and sales channel) of which to disaggregate but should not prescribe how an entity should disaggregate revenue
- require an entity to use several categories to disaggregate revenue if necessary to meet the disaggregation objectives outlined in the Revenue ED
- not require an entity to disaggregate any expected impairment loss
- permit an entity to disaggregate revenues either on the face of the statement of comprehensive income or in the notes to the financial statements.
In the presentation of contract assets and liabilities, the final standard should:
- require the presentation of net contract assets and net contract liabilities as separate line items in the statement of financial position
- permit providing additional detail about contract assets and receivables either on the face of the financial statements or in the notes
- permit the use of labels other than contract asset' or contract liability' on the statement of financial position in describing these balances, assuming sufficient information is available to users to distinguish between conditional and unconditional rights to consideration
- require a reconciliation of contract assets and contract liabilities during the period.
Regarding remaining performance obligations as of period end, the final standard should:
- require a maturity analysis of remaining performance obligations from contracts with an original expected duration of more than one year on the basis of the transaction price determined under the proposed model.
Regarding assets derived from acquisition and fulfilment costs, the final standard should:
- require reconciliation of the carrying amount of an asset arising from the costs to acquire or fulfil a contact with a customer, by major classification, at the beginning and end of the period, in conjunction with separate disclosure of additions, amortisation, impairments and impairment losses reversed.
The IASB and FASB staffs presented a proposal to retain the disclosures proposed in paragraphs 69-83 of the Revenue ED, absent certain clarifications and changes regarding disclosure and presentation in the disaggregation of revenues, contract assets and liabilities and assets from acquisition and fulfilment costs.
Disaggregation of revenues
Regarding the disaggregation of revenues, the Boards consider disclosures proposed in paragraph 74 of the Revenue ED which required disaggregation of revenue into various categories that reflect how revenue and cash flows are affected by economic factors.
Multiple Board members requested more prescription in relevant disclosures of revenue disaggregation in highlighting that current accounting guidance, such as IFRS 8 Operating Segments already specifies certain minimum disclosure requirements surrounding disclosure of different types of products and services from which each reportable segment derives its revenues. Likewise, two Board members noted that more prescriptive guidance exists in disaggregating expenses in the statement of comprehensive income than that of the revenues. The staffs discussed that it was not their intention to override current disclosure requirements regarding disaggregation, but rather, provide additional disaggregation platforms for preparers to consider.
The majority of the Boards believed that disaggregation requirements should be based on a principle that clearly identifies the purpose of the disaggregation rather than listing prescribed categories that might provide disaggregation that is useful in some, but not all, cases. These Board members cited a need to provide appropriate flexibility considering different industries and business environments.
As a result, the Boards tentatively decided that the final standard should include additional examples of potential categories for disaggregation (e.g., contract duration, timing of transfer and sales channel) but should not prescribe how an entity should disaggregate revenue.
Responding to outreach feedback requesting clarification as to whether revenue should be disaggregated into one category or several categories (i.e., to disaggregate revenue by type of good and by geography), the Boards tentatively decided that an entity should be required to use several categories to disaggregate revenue streams if multiple disaggregations are necessary to meet the objectives of disaggregation expressed in the Revenue ED (e.g., to best depict how the amount, timing and uncertainty of revenue and cash flows are affected by economic factors).
Following the Boards' March 2011 decision to require an entity to present an allowance for any expected impairment loss adjacent to revenue in the statement of comprehensive income, the staffs recommended that a separate line item for that allowance should not be subject to disaggregation in the context of paragraph 74 of the Revenue ED. One Board member expressed concern in not disaggregating impairment or allowances to highlight relevant future uncertainties, but the Boards tentatively decided not to require an entity to disaggregate any expected impairment loss.
Regarding the location of the disaggregation requirements in either the statement of comprehensive income or the notes to the financial statements, the majority of the Boards did not think it necessary to prescribe whether an entity should present the disaggregation of revenue on the face of the financial statements or in the notes. One FASB member expressed a desire to require distinction of continuance service revenues from point-in-time revenues on the face of the financial statements and highlighted that U.S. SEC guidance for U.S. public companies prescribes distinction of product and service revenues.
Contract assets and liabilities
The staffs proposed that contract assets and contract liabilities should be disclosed in accordance with existing requirements in IFRSs and U.S. GAAP, whereby separate presentation is required for each material class of similar items as well as items of dissimilar nature or function unless they are immaterial. The Boards, in considering this proposal, tentatively decided to require the presentation of net contract assets and net contract liabilities as separate line items in the statement of financial position (i.e., contract assets and contract liabilities cannot be netted, and absent separate disclosure of material contract assets and / or contract liabilities on the face of the financial statements, separate disclosure of such balances would be required in the notes to the financial statements), permit entities to provide additional detail about contract assets and receivables (e.g., billed and unbilled receivables) either on the face of the financial statements or in the notes, and permit entities to use labels other than contract asset' or contract liability' on the statement of financial position in describing these balances, assuming sufficient information is available for users to distinguish between conditional and unconditional rights to consideration.
Board members also discussed the isolation of revenue from other working capital balances in considering the need to reconcile contract assets and liabilities from the opening to closing balance, and the majority of the Boards noted that a reconciliation requirement is consistent with the disclosure objectives of providing information to understand the amounts arising from contracts with customers that have been recognised in the financial statements. Thus, the Boards tentatively decided to require an entity to disclose a reconciliation of contract assets and contract liabilities.
Remaining performance obligations
Paragraph 78 of the Revenue ED proposed disclosure of the amount of the transaction price allocated to the performance obligation remaining at the end of the reporting period and the expected timing of the satisfaction of those performance obligations (e.g., a maturity analysis). Outreach feedback received on this disclosure was mixed, but considered by many to be costly and result in consequences related to disclosing forward-looking information.
Multiple Board members cited the relevance of this information to investors who are attempting to project revenues, and likewise, noted that many industries regularly communicate this information in press releases to highlight booking and backlog information, although such Board members also noted that the disclosure is generally industry specific. Opposing Board members highlighted that the disclosure is prone to error or change in circumstances, and may therefore lead to litigation risk.
One Board member proposed the retention of a maturity analysis disclosure remaining performance obligations from contracts with an original expected duration of more than one year on the basis of the transaction price determined under the proposed model. His proposal did not recommend the retention of one-year time bands for relevant performance obligation disclosure, but rather, he proposed a quantitative and qualitative disclosure which operated at a level of specificity which was considered appropriate given the underlying business environment. The Boards tentatively decided to apply the proposal suggested by this particular Board member.
Assets from acquisition and fulfilment costs
The Boards considered disclosure requirements surrounding an asset arising from the costs of acquiring a contract with a customer as well as information about an asset arising from the costs of fulfilling a contract with a customer, following a March 2011 decision to recognise an asset for the incremental costs of obtaining a contract.
The Boards considered a disclosure requirement which would require a reconciliation of the carrying amount of the major classifications of assets arising from the costs of acquiring or fulfilling a contract at the beginning and end of the period, showing additions (including the nature of the amount), expenses recognised in satisfaction of performance obligations (and the method used to determine that amount), impairments and impairment losses reversed, in conjunction with circumstances that led to the reversal of a write-down of an asset as well as the method used to determine the amortisation amount for the period, similar to current reconciliation disclosures in IAS 2, IAS 38 and ASC Topic 350.
One Board member did not like the naming convention of fulfilment costs, given that the costs within the scope of this discussion were limited to the pre-contract costs incurred in obtaining a contract as opposed to all costs necessary to fulfil a contract (including inventory and fixed asset costs), and the definition of fulfilment costs as applied herein was inconsistent with fulfilment costs in the insurance project. Other Board members highlighted the consistency of the above proposal with IAS 11 in accounting for construction contracts. As a result, the Boards tentatively decided to require the full package of disclosures as outlined above.
Certain members of the Boards requested that outreach activities should be performed surrounding overall disclosures, but other Board members noted that the responses to outreach are expected to be consistent with previous feedback (e.g., preparers believe it is disclosure overload while users approve of the additional disclosures). Other Board members hoped to see a practical example of what the financial statements would look like in meeting the tentative disclosure requirements in order to assess potential disclosure overload.