A company's financial reporting team is deciding how to disaggregate revenue from contracts with customers in the notes to its financial statements. Under ASC 606-10-50-5, what disclosure objective should drive the team's choice of categories for disaggregating that revenue?
- Disaggregate revenue using only the same product-line categories the entity uses internally for cost accounting, regardless of how revenue is discussed elsewhere
- Disaggregate revenue strictly by legal entity within a consolidated group, since that is the only category the standard permits
- Disaggregate revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, considering how the entity's revenue is presented elsewhere, such as in earnings releases or investor presentations
- Disaggregate revenue only into a single split between domestic and foreign revenue, since geography is the only category regulators accept
Why C? And why not the others?
Correct answer: C. Disaggregate revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, considering how the entity's revenue is presented elsewhere, such as in earnings releases or investor presentations
ASC 606-10-50-5 establishes a disclosure objective, not a fixed list of mandatory categories: an entity must disaggregate revenue into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors, and in selecting those categories the entity should consider how its revenue has been presented for other purposes, including outside the financial statements in places such as earnings releases, investor presentations, and other communications. Restricting disaggregation to the same categories used for internal cost accounting ignores that the standard's objective is about depicting revenue's exposure to economic factors for financial-statement users, not about mirroring internal management-reporting cost structures, and an entity may need a different or additional category to meet that objective. Requiring disaggregation strictly by legal entity has no basis in the guidance, which is concerned with categories like type of good or service, geographic region, market, or contract duration, not with the entity's internal legal structure. Limiting disaggregation to a single domestic-versus-foreign split also misstates the guidance, since geography is only one example of a possible category among several the standard lists, and an entity may need to use more than one type of category, or a different one entirely, to meet the underlying disclosure objective.
Source: FASB Accounting Standards Codification: ASC 606-10-50-5, Revenue from Contracts with Customers — Disaggregation of Revenue