ASU 2014-09 Revenue from Contracts with Customers Prepared by the PICPA Greater Philadelphia A&A Committee May 2015 Introduction The Greater Philadelphia Chapter s Accounting and Attest Committee has developed the following sample disclosure for non-public entities based on the disclosure requirements in ASU 2014-09. These disclosure requirements are far more extensive than the revenue disclosures required today and the Committee believes the development of these revenue disclosures will be a challenge for many non-public entities. The revenue example disclosure that follows below is non-authoritative and is presented as a service to Chapter members as they begin planning for complying with this new ASU. The ASU is effective for non-public entities for annual reporting periods beginning after December 15, 2017. ASU 2014-09 Non-Public Entity Disclosures ASU 2014-09 requires qualitative and quantitative information about all of the following: Its contracts with customers: Revenue recognized from contracts with customers must be disclosed separately from other sources of revenue Revenue disaggregated according to the timing of transfer Its performance obligations with customers: When the entity typically satisfies its performance obligations The significant payment terms in the contract The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services if the entity is acting as an agent Obligations for returns, refunds, and other similar obligations Types of warranties and relate obligations The significant judgments, and changes in those judgments, made in applying the new measurement and recognition guidance to those contracts: The timing and satisfaction of performance obligations (over time/point in time) The transaction price and amounts allocated to performance obligations
Sample Non-Public Entity Disclosure XYZ Inc. is in the business of providing consumer products, transportation and energy services to customers primarily located in North America, Europe and Asia. The business is broken down into 3 major goods/service lines. Goods are generally transferred at a point in time whereas services may be transferred to customers both at a point in time or over time. Consumer Products Transportation Energy Total Timing of Revenue Recognition Goods transferred at a point in time $1,990 $3,260 $1,000 $ 6,250 Services transferred over time -- -- 5,250 5,250 Total Revenue $1,990 $3,260 $6,250 $11,500 Contract Balances Receivables Contract Assets Contract Liabilities 1/1/20X4 $920 $420 $26 12/31/20X4 $950 $670 $44 Performance Obligations Timing of Satisfaction The Company typically satisfies its performance obligations as goods are delivered and as services are rendered. Goods that are shipped to customers are typically shipped FOB Destination. As such, ownership of goods in transit remains with the Company and the Company bears the associated risks (e.g., loss, damage, delay). In some cases, a customer will take delivery directly from the Company s inventory, at which point ownership and the associated risks pass to the customer. The Company s services are typically performed over time. Customers obtain the benefits of such services as the services are performed. Therefore, the Company satisfies its performance obligations as services are rendered. In some cases, the time required to render a service is trivially short; in those cases, the Company satisfies its performance obligation upon completion of the service.
Significant Payment Terms Payment for goods and services sold by the Company is typically due within 30 days after an invoice is sent to the customer. Invoices for goods are typically sent to customers within three calendar days of delivery. Invoices for services performed over time are typically sent to customers on the last business day of each calendar month. Invoices for services performed at a point in time are typically sent to customers within three calendar days of performance. The Company does not offer discounts if the customer pays some or all of an invoiced amount prior to the due date. In some cases (primarily contracts for services to be delivered over a period longer than six months), a contract will require the customer to pay 15%-25% of the total contract price in advance. For some contracts, the amount of consideration to which the Company will be entitled is variable. Under those contracts, some or all of the consideration for satisfied performance obligations is contingent on events over which the Company has no direct influence. For example, with regard to sales of equipment, a contract may stipulate that the Company will be entitled to bonus consideration if and only if the equipment s uptime-to-elapsed-time ratio exceeds a specified minimum over a specified assessment period. The Company excludes amounts of variable consideration from a contract s transaction price (and from the Company s disclosure of the amounts of contract transaction prices allocated to remaining performance obligations) to the extent that the amounts would be subject to significant reversals (that is, downward adjustments to the contract s transaction price and revenue recognized for satisfied performance obligations) if the Company were to include such amounts in the contract s transaction price and the consideration contingencies are ultimately resolved in a manner that does not favor the Company. When a consideration contingency is resolved in the Company s favor such that the Company obtains an unconditional entitlement to a specific amount of consideration, an invoice is typically sent to the customer within three calendar days. None of the Company s contracts have a significant financing component. Nature In most cases, goods that the Company contracts to transfer to customers are purchased by the Company for resale. Also, in most cases, services that the Company contracts to transfer to customers are performed by the Company. In no case does the Company act as an agent, i.e., the Company does not provide a service of arranging for another party to transfer goods or services to the customer. Returns, Refunds, etc. In most cases, goods that customers purchase from the Company may be returned within 30 days of delivery. Any consideration paid for those goods, whether before or after delivery, is refundable in full to customers until the return period expires. At the time revenue is recognized, the Company estimates expected returns and excludes those amounts from revenue. The Company also maintains appropriate accounts to reflect the effects of expected returns on the Company s financial position and periodically adjusts those accounts to reflect its actual return experience.
In most cases, consideration paid for services that customers purchase from the Company is nonrefundable. Therefore, at the time revenue is recognized, the Company does not estimate expected refunds for services nor does the Company exclude any such amounts from revenue. Warranties In most cases, goods that customers purchase from the Company are covered by manufacturers warranties for periods that exceed one year from the date of delivery. In cases where a manufacturer s warranty period is less than one year from the date of delivery, the Company provides a warranty for the period not covered by the manufacturer s warranty up to one year from the date of delivery. The Company does not sell warranties separately. The Company s warranties provide customers with assurance that purchased goods comply with published specifications. At the time revenue is recognized, the Company estimates the cost of expected future warranty claims but does not exclude any amounts from revenue. The Company maintains appropriate accounts to reflect the effects of expected future warranty claims on the Company s financial position and periodically adjusts those accounts to reflect its actual warranty claim experience. Significant Judgments Most of the Company s contracts with customers obligate the Company to perform services. The Company typically satisfies its performance obligations for services over time. For service performance obligations that are satisfied over time, the Company typically uses input methods to measure progress. The use of input methods results in the recognition of revenue on the basis of the Company s efforts toward the satisfaction of the performance obligations. The most common input method that the Company uses is labor hours expended relative to the total labor hours expected to be expended in satisfying each performance obligation. In some cases, the Company s performance obligations for services are satisfied at a point in time. Management exercises judgment in determining when such performance obligations have been satisfied. In making such judgments, management typically relies on information obtained from the Company employees who have rendered services to evaluate when the customer has obtained control of the services. The Company typically satisfies its performance obligations for goods at a point in time. In most cases, goods are shipped by common carrier to customers under FOB Destination terms. As such, customers typically obtain control of the goods upon delivery. The Company s management exercises judgment in determining when performance obligations for goods have been satisfied. In making such judgments, management typically relies on delivery information obtained from common carriers to evaluate when the customer has obtained control of the goods.
Determining the Transaction Price and the Amounts Allocated to Performance Obligations The transaction price of a contract is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. Transaction prices do not include amounts collected on behalf of third parties (e.g., sales taxes). To determine the transaction price of a contract, the Company considers its customary business practices as well as the terms of the contract. For the purpose of determining transaction prices, the Company assumes that the goods or services will be transferred to the customer as promised in accordance with existing contracts and that the contracts will not be cancelled, renewed, or modified. Most of the Company s contracts with customers have fixed transaction prices that are denominated in U.S. dollars and payable in cash. For some contracts, however, the amount of consideration to which the Company will be entitled is variable. Under those contracts, some or all of the consideration for satisfied performance obligations is contingent on events over which the Company has no direct influence. For example, with regard to sales of equipment, a contract may stipulate that the Company will be entitled to bonus consideration if and only if the equipment s uptime-to-elapsed-time ratio exceeds a specified minimum over a specified assessment period. For each contract that involves variable consideration, the Company estimates the contract s transaction price as the single most likely amount in a range of possible consideration amounts (i.e., the single most likely outcome of the contract). Relative to other possible estimation methods, the Company expects the most-likely-amount method to better predict the amount of consideration to which it will be entitled because for most variable consideration there are only two possible outcomes (e.g., the Company either becomes entitled to an uptime bonus or it does not). In estimating a contract s transaction price, the Company considers all the information (historical, current, and forecasted) that is reasonably available to it and identifies a reasonable number of possible consideration amounts. The information that the Company uses to determine the transaction price is similar to the information that the Company s management uses in establishing the prices of goods and services. The Company includes amounts of variable consideration in a contract s transaction price only to the extent that the Company has a relatively high level of confidence that the amounts will not be subject to significant reversals, that is, downward adjustments to revenue recognized for satisfied performance obligations. In determining amounts of variable consideration to include in a contract s transaction price, the Company relies on its experience and other evidence that supports its qualitative assessment of whether revenue would be subject to a significant reversal. The Company considers all the facts and circumstances associated with both the risk of a revenue reversal arising from an uncertain future event and the magnitude of the reversal if that uncertain event were to occur. Under some contracts, the Company becomes obligated to pay consideration to the customer in the form of cash or credit that the customer can apply against amounts owed to the Company. Such payments are typically contingent on events over which the Company has no direct influence. For example, the Company may offer a seasonal rebate to encourage customers to make purchases during periods of
seasonally low demand. The Company accounts for consideration payable to a customer as a reduction in the revenue transaction price. The Company does not adjust the transaction prices of contracts for the time value of money when it accounts for revenue, related assets, and related liabilities. The Company s practice of not adjusting transaction prices for the time value of money is appropriate because none of the Company s contracts have a significant financing component. The practice is not the result of using a practical expedient under U.S. GAAP that would allow the Company to avoid adjusting transaction prices for the time value of money in the case of short-term contracts that have a significant financing component. To determine the transaction price for contracts in which the customer promises consideration in a form other than cash, the Company measures the non-cash consideration (or promise of non-cash consideration) at fair value. If the Company cannot reasonably estimate the fair value of the non-cash consideration, it measures the consideration indirectly by reference to the stand-alone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration. Customers do not contribute goods or services to facilitate the Company s fulfillment of contracts. The Company does not adjust the transaction prices of contracts for collectability (i.e., the customer s credit risk). At the end of each calendar quarter, the Company updates the estimated transaction prices of contracts having unsatisfied performance obligations. At those times, revenue and related account balances are adjusted to reflect any changes in transaction prices. To allocate an appropriate amount of consideration to each separate performance obligation, the Company determines the stand-alone selling price at contract inception of the good or service underlying each separate performance obligation and allocates the transaction price on a relative stand-alone selling price basis. The stand-alone selling price is the price at which the Company would sell a promised good or service separately to a customer. To estimate the standalone selling prices of promised goods and services, the Company uses the observable price of a good or service when the Company sells that good or service separately in similar circumstances and to similar customers. In most cases, goods that customers purchase from the Company may be returned within 30 days of delivery. Any consideration paid for those goods, whether before or after delivery, is refundable in full to customers until the return period expires. At the time revenue is recognized, the Company estimates expected returns and adjusts revenue downward in accordance with the estimate. In estimating expected returns, the Company uses its historical return experience from selling similar goods in similar circumstances to similar customers. The Company also maintains appropriate accounts to reflect the effects of expected returns on the Company s financial position and periodically adjusts those accounts to reflect its actual return experience. In most cases, consideration paid for services that customers purchase from the Company is nonrefundable. Therefore, at the time revenue is recognized, the Company does not estimate expected refunds for services nor does the Company adjust revenue downward.