SAB 74 – Enhanced Disclosure Requirements for Recently Issued Revenue Recognition Standards
By Jason Leo, Supervisor, Assurance Services
With the issuance of ASU 2014-09, Revenue from Contracts with Customers, SEC guidance requires both quantitative and qualitative disclosures of the expected impact of adopting the new revenue recognition standard. SEC staff has continued to emphasize Staff Accounting Bulletin No. 74 (“SAB 74”) disclosures and the expectation that disclosures will continue to evolve as the adoption date approaches. Below are highlights of the points of emphasis that companies need to disclose as the implementation date nears, as well as the potential internal control impacts.
SEC staff is expecting a qualitative description of the effect of the new accounting policies and a comparison to the company’s current accounting. Additionally, regulators have advised that the status of the implementation process should be disclosed. This should include disclosures that relate to significant implementation matters yet to be addressed and whether the implementation process is on target. If the company can reasonably estimate the quantitative impact of the new revenue recognition standard, it should disclose those amounts as well.
If the impact of the new revenue recognition standard cannot be reasonably estimated, the company should disclose this fact. The company should not remain silent on this disclosure, as the user of the financial statement could incorrectly assume that there is no material financial statement impact if such is not stated. Finally, if the expected financial statement impact is not known by the company, a qualitative description of the effect of the new accounting standard on the company’s accounting policies should be disclosed. An understanding of the company’s qualitative assessment could help financial statement users better understand the potential impact, even if it cannot yet be quantified.
In addition to the disclosures noted above, companies also need to consider whether appropriate internal controls are in place. These controls are important, as management needs to address any risk that SAB 74 disclosures are inaccurate or incomplete. The company’s auditors will have a responsibility to obtain sufficient understanding of the components of the internal control over financial reporting and respond to identified risks related to those controls over these disclosures. Company management will need to assess the design effectiveness and test the operating effectiveness of the relevant controls, including controls over the SAB 74 disclosures. Management will need to include any applicable transition disclosures in the notes to the financial statements and related transition adjustments. Company management and audit committees should consult with their auditors to obtain feedback on the company’s processes, accounting policies, and internal controls.
The transition provisions of the new revenue standard require that a public business entity and certain other specified entities adopt the new standard for annual reporting periods beginning on or after December 15, 2017, and interim periods therein. All other entities are required to adopt the new standard for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Companies must use either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period, with the option to elect certain practical expedients, or (ii) a retrospective approach, with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).