More SAB 74 and a Draft for Your Use

SAB 74 Disclosures are going to be important for the new Revenue From Contracts With Customers standards, so here is a starting point for your use.

First, a brief reminder of the requirements from SAB 74 (Topic 11-M in the SAB codification).  For recently issued accounting standards expected to have a material impact you should consider disclosing:

A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

The SAB also reminds registrants of the requirement to disclose in MD&A presently known material changes, trends, and uncertainties that the registrant reasonably expects to have a material impact on future sales, revenues or income from continuing operations. We will address the MD&A discussion in a future post.

You can read the entire SAB at: http://www.sec.gov/interps/account/sabcodet11.htm#M

Here is a draft of footnote disclosure for a registrant that currently does not know the impact the standard will have. Please consider this disclosure only as a starting point, to be edited with your facts and circumstances.

New Accounting Standards

On May 28, 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU establishes a new, contract-based model for recognizing revenue.  The new model replaces virtually all of the existing generally accepted accounting principles for revenue recognition that currently exist in US GAAP.  The new model is based on five steps, (1) identifying contracts with customers, (2) identifying performance obligations within each contract, (3) determining the transaction price, (4) allocating the transaction price to performance obligations and (5) recognizing revenue when or as a performance obligation is satisfied.  The new model significantly changes existing GAAP, requires substantial judgment in its application, and will generally require companies to make more disclosures about revenue.

Public business entities must implement the new Accounting Standards Update for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that year. Earlier application is not permitted.  Thus, we will implement the new standard for the quarter beginning on_________.

The new standard provides for two alternative implementation methods.  The first is to apply the new standard retrospectively to each prior reporting period presented.  This method does allow the use of certain practical expedients.

The second method is to apply the new standard retrospectively in the year of initial adoption and record a cumulative effect adjustment for the impact of adjusting contracts open at the date of adoption.  Under this transition method, we would apply this guidance retrospectively only to contracts that are not completed contracts at the date of initial application (which for us will be January 1, 2017).  We would then recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. This method also requires us to disclose comparative information for the year of adoption.

We have not yet determined which method we will use to implement the new standard.

We have not yet determined the impact the new standard is expected to have on our financial statements or on other matters or aspects of our business.

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