ASC 606 Disclosure Requirements Explained

Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, represents the authoritative guidance for how entities recognize revenue. Its core principle is that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that the entity expects to receive in exchange. This article focuses on the detailed disclosure requirements mandated by ASC 606, which are the explanatory notes that accompany the main financial statements. These disclosures aim to provide sufficient information for users to understand the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts.

Disclosures on Contracts with Customers

A requirement of ASC 606 is the disaggregation of revenue. An entity must break down its revenue into categories that show how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows. This provides a clearer picture than a single revenue number. Examples of these categories include revenue by product lines, geographical regions, type of customer, or by contract type, such as fixed-price or time-and-materials contracts.

The standard also mandates disclosures about contract-related balances on the balance sheet, distinguishing between contract assets, contract liabilities, and accounts receivable. A receivable is an unconditional right to payment. A contract asset is a right to payment that is conditioned on something other than the passage of time, such as completing another service. A contract liability arises when a customer pays an entity before the entity transfers the related good or service.

For these balances, entities must disclose the opening and closing amounts of receivables, contract assets, and contract liabilities. A disclosure is required for the amount of revenue recognized during the reporting period that was included in the contract liability balance at the beginning of the period. This shows how much of the current period’s revenue was related to cash received in prior periods. Entities must also explain the significant changes in their contract asset and contract liability balances during the period.

A disclosure also relates to remaining performance obligations. This represents the total transaction price allocated to performance obligations that are not yet satisfied at the end of the reporting period. This is a measure of the revenue “backlog” from existing contracts. The disclosure must include this aggregate amount and an explanation of when the company expects to recognize this revenue, which can be presented quantitatively in time bands or through a qualitative description.

Disclosures on Significant Judgments

ASC 606 is a principles-based standard, which means companies must use judgment in its application. To provide transparency, the standard requires the disclosure of significant judgments, and any changes to those judgments, that affect the amount and timing of revenue recognition.

One area requiring judgment is determining when performance obligations are satisfied. Companies must disclose whether they satisfy performance obligations “over time” or at a “point in time.” For obligations satisfied over time, the entity must disclose the methods used to measure its progress, such as input methods or output methods. For obligations satisfied at a point in time, the disclosure should explain the judgments made in evaluating when the customer obtains control of the goods or services.

Determining the transaction price is another area where judgment is applied. Disclosures must detail the methods, inputs, and assumptions used. This includes how the company estimates variable consideration, such as rebates or performance bonuses, and whether those estimates are constrained. It also involves disclosing judgments related to a significant financing component in the contract, which would require adjusting the transaction price for the time value of money.

Companies must disclose the methods used to allocate the transaction price to the different performance obligations within a contract, which is important when a contract includes multiple goods or services. The disclosure should explain how the entity determines the standalone selling price for each performance obligation. This is the price at which the entity would sell a promised good or service separately to a customer. Common estimation methods include the adjusted market assessment approach or the expected cost plus a margin approach.

Disclosures on Assets from Contract Costs

ASC 606 allows companies to recognize an asset for the incremental costs of obtaining a contract and for certain costs to fulfill a contract. These are costs that an entity would not have incurred if the contract had not been obtained, such as sales commissions. Related guidance in ASC 340-40 requires specific disclosures for these capitalized costs to provide clarity on their accounting treatment.

The disclosures must describe the judgments made in determining the amount of costs to be capitalized, including which costs qualify. The entity must also disclose the method used to amortize these capitalized costs to expense. The amortization should be on a systematic basis that is consistent with the transfer of the goods or services to which the asset relates.

The disclosures must include the closing balances of assets recognized from the costs to obtain or fulfill a contract. The company must also disclose the amount of amortization recognized in the period for these assets. Any impairment losses recognized on these capitalized costs during the reporting period must also be disclosed.

Public vs. Nonpublic Entity Requirements

ASC 606 provides certain disclosure reliefs for nonpublic entities, reducing the disclosure burden for private companies compared to their public counterparts. This is because the costs of full compliance may outweigh the benefits for these entities. The core recognition and measurement principles for revenue recognition remain the same for both public and nonpublic entities.

A significant exemption for nonpublic entities is the option to not disclose information about remaining performance obligations. This means private companies are not required to provide the “backlog” disclosure that details the transaction price allocated to unsatisfied performance obligations and when that revenue is expected to be recognized.

Nonpublic entities are also granted relief from some of the more detailed quantitative disaggregation of revenue requirements. While public companies must provide a detailed breakdown, nonpublic entities can elect a more streamlined version. At a minimum, a nonpublic company must disclose revenue disaggregated by the timing of transfer of goods and services and provide qualitative information about how economic factors affect revenue.

Other exemptions for nonpublic entities include not having to disclose the amount of revenue recognized from the opening contract liability balance. They also do not need to provide a quantitative explanation of the significant changes in contract asset and liability balances. Private companies may also elect not to provide certain qualitative disclosures about their performance obligations, such as explaining why a chosen method provides a faithful depiction of the transfer of goods or services.