Describe Revenue Rule’s Impact on Statement Footnotes: SEC Staff

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By Denise Lugo

Companies providing transition disclosures in their 10-K and 10-Q filings to indicate the impact of new revenue recognition rules should also consider describing the impacts on the statements’ footnote disclosures.

Although the forthcoming standard mightn’t affect the balance sheet or income statement, it can have a material impact on the related footnote disclosures, Sylvia Alicea, professional accounting fellow in the Security and Exchange Commission’s office of the chief accountant, said at a May 8 conference by Deloitte and Bloomberg BNA.

Under requirements of SEC Staff Accounting Bulletin No. 74, companies must disclose in their filings whether they expect the impact of the new rules, Revenue from Contracts with Customers, to be material. The standard, ASC 606, takes effect in January for public companies, but can be adopted this year.

The new standard addresses not only the amount and timing of revenue, but also new comprehensive disclosures about contracts with customers—including the significant reasonable judgments the registrant has made when applying the guidance.

“Some have suggested that when SAB 74 refers to financial statements, it is concerned only with the effects on the primary financial statements and not how disclosures in the notes to the financial statements may also be affected,” said Alicea. “However, I believe that such a view misses the definition of financial statements which includes the accompanying notes,” she said.

Accordingly, the basis of the financial statement that says the impact of the new standard is immaterial should reflect consideration of the full scope of the new standard, which covers recognition, measurement, presentation and footnote disclosures, Alicea said.

A number companies, including many that have adopted the new revenue rules early, have said in their 10-Ks they don’t expect the standard to have material impact on their consolidated financial statements.

Describe Impact of New Standards

The SEC staff has encouraged companies over the last several months to provide transition disclosures to investors about the anticipated effects of adoption of the new revenue, leases and credit impairment standards. All three standards are historic accounting changes.

However, when a company doesn’t know or can’t reasonably estimate the expected financial statement impact, that fact should be disclosed.

“In these situations the SEC staff expects a qualitative description of the effects of the new accounting policies and a comparison to the company’s current accounting to aid investors understanding of the anticipated impact,” Alicea said. “It should also disclose the status of its implementation process and the significant implementation matters yet to be addressed,” she said.

Subject to Internal Controls

These disclosures, Alicea said, should be subject to effective internal control over financial reporting as management completes its implementation plan for a new generally accepted accounting principles (GAAP) standard and develops an assessment of the anticipated impact of the standard.

“Effective internal controls should be in place to timely identify disclosures and to provide for appropriately informative disclosure to investors based on the information that is known at the time,” Alicea said.

In designing such controls and considering their necessary level of precision, management should consider the nature of the transition disclosures in light of company’s implementation status and the objective of these disclosures, Alicea said.

In general, disclosures required under the revenue standard are designed to allow an investor to understand the nature, amount, timing and uncertainty of revenue and cash flows arriving from contracts with customers.

Companies must disclose any pertinent facts and related reasonable judgments related to their contracts with customers, including the significant judgments made in applying the principles of the new revenue standard.

To contact the reporter on this story: Denise Lugo in New York at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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