Accounting: The Language of Business - Vol. 2 (Intermediate: Part 133)

As currencies became available and tradesmen and merchants began to build material wealth, bookkeeping evolved. Then, as now, business sense and ability with numbers were not always found in one person, so math-phobic merchants would employ bookkeepers to maintain a record of what they owed and who owed debts to them.

Until the late 1400s, this information was arranged in a narrative style with all the numbers in a single column—whether an amount was paid, owed, or otherwise. This is called “single-entry” bookkeeping.

*Investopedia*

Revenue Recognition (Part T)

by

Charles Lamson

Disclosures Related to Revenue Recognition

Some companies provide extensive revenue recognition disclosures for financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Specifically, companies provide both qualitative and quantitative information in two main areas:

• Contracts with customers

• Significant judgments made, and changes in judgments in applying, the revenue recognition standards.

We discuss each of the two areas next. Additionally, companies must disclose any assets recognized from the costs to obtain or fulfill a contract with a customer.

Contracts with Customers

Companies disclose revenue recognized from a contract with customers separately from other sources of revenue.

Disaggregation of Revenue. Companies provide a detailed disaggregation of their revenues into categories such as revenues by type of goods or services, geographical region, market type of customer, or contract duration. Companies are permitted to choose the approach for disaggregating revenues based on the information about revenue they have presented for other purposes, including earnings releases, annual reports, or investor presentations. Companies should also consider presenting information consistent with what managers regularly review to evaluate the performance of operating segments.

Contract Balances. Quantitative information includes the beginning and ending balances of receivables and unearned revenue from contracts with customers and significant changes in these accounts. Any revenue recognized in the period that was included in the beginning unearned revenue balance should be reported. Further, companies should disclose revenue recognized in the period from performance obligations satisfied (or previously satisfied) in previous periods, such as changes in transaction price. Companies must explain how the timing of satisfaction of their performance obligations relates to the typical timing of payment. In turn, companies should discuss how the timing of satisfaction of their performance obligations affect the contract asset and contract liability balances.

Performance Obligations. Companies provide information about performance obligations in contracts with customers, including descriptions of:

• When the company typically satisfies its performance obligations [for example, upon shipment, upon delivery, or as services are rendered, including when performance obligations are satisfied in a bill-and-hold arrangement (A bill-and-hold is a type of sales arrangement that enables payment ahead of the delivery of the item. It constitutes a sales arrangement in which a seller of a product bills a customer for the product upfront but does not ship the product until a later date.)]

• Significant payment terms, when payment is due, whether there is variable consideration and if it is constrained, whether there is a significant financing component.

• The nature of goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (an entity or acting as an agent).

• Obligations for return, refunds, or similar obligations.

• Types of warranties and related obligations.

Transaction Price Allocated to the Remaining Performance Obligations. Companies disclose the total of amount of transaction prices related to any performance obligations that are unsatisfied (or partially satisfied) at the end of the period. Companies also explain when they expect to recognize the amount as revenue. As a practical matter, companies need not provide disclosure if the performance obligation is part of a contract that has an original expected duration of one year or less or there is a right to consideration based on the value of performance to date. Example 8.27 illustrates disclosure of the transaction price allocated to the remaining performance obligations.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 415-416*

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