How often do you think of disaggregation in your financial statements? Generally, companies don’t present a lot of line-item details in their financial statements. Recently this issue has come up for us in two separate places.
If you have attended one of our large Midyear or Annual Forums you have had the fun of listening to Carol do an in-depth analysis of the comment letter process. She usually picks an interesting letter for a specific company and reviews both the overall process as well as the specific comments in the company’s letter.
In this year’s May and June Midyear Forms, Carol’s example letter included this interesting and “deep in the weeds” comment:
Consolidated Balance Sheets, page 33
- Please tell us how you have complied with Rule 5-02.20 of Regulation S-X. In this regard, we note your quantified disclosure of insurance liabilities and construction accruals. Please tell us whether there are any additional items included in other current liabilities that exceed five percent of total current liabilities.
The big theme here is of course disaggregation. Regulation S-X Article 5 has requirements about disaggregation for areas such as other current assets, other assets, other current liabilities and other liabilities. Generally, the requirements are that any individual account over 5% of the relevant total must be separately disclosed. Here is one example:
- 210.5-02 Balance sheets.
- Other current assets. State separately, in the balance sheet or in a note thereto, any amounts in excess of five percent of total current assets.
There is also a similar requirement for components of revenue over 10% of total revenues:
- 210.5-03 Income statements.
…………
(b) If income is derived from more than one of the subcaptions described under §210.5-03.1, each class which is not more than 10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under §210.5-03.2 shall be combined in the same manner.
As you can see, the consistent theme is to provide appropriate detail so readers can understand appropriate issues in the F/S.
This theme of disaggregation is a topic of discussion in the FASB’s financial statement presentation project and also is an important issue in the disclosure requirements in the new revenue recognition standard:
Disaggregation of Revenue
ASC 606-10-50-5
An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue.
This new revenue recognition disclosure requirement will require substantial judgment to determine how much detail a reader will need to understand how the “nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors”. This is really the opposite of the S-X disclosure requirements above based on mechanical, quantitative 5% and 10% thresholds. The overall theme is the same though, be sure to consider how much detail readers really need to understand your financial condition, results of operations and cash flows.
As always, your thoughts and comments are welcome!