Reporting entities use various descriptions for the categories of revenue presented on the face of the income statement. Such descriptions are based on facts and circumstances of each reporting entity and may include industry considerations. Some examples of these descriptions include:
  • Net revenues
  • Net sales
  • Product revenue
  • Service revenue
  • Software revenue
  • Hardware revenue
  • Subscription revenue
  • Advertising revenue

The revenue standard requires reporting entities to separately present or disclose revenue from contracts with customers from other sources of revenue. Other sources of revenue include, for example, revenue from interest, dividends, leases, etc. Interest income and interest expense recorded when a significant financing component exists (see RR 4.4) must be presented separately from revenue from contracts with customers in the statement of comprehensive income. A reporting entity might present interest income as revenue in circumstances in which interest income arises from a reporting entity’s ordinary activities.

33.2.1 Thresholds for presenting separate revenue categories and related costs

Regulation S-X Rule 5-03(1) requires separate presentation in the income statement for any of the following revenue categories that exceed 10% of total revenues:
  • Net sales of tangible products (gross sales less discounts, returns, and allowances)
  • Service revenues
  • Income from rentals
  • Operating revenues of public utilities
  • Other revenues
  • Amounts earned from transactions with related parties (as required under Regulation S-X Rule 4-08(k))
The cost and expenses related to each revenue category must also be reflected separately in the income statement.
Each category that is not more than 10% of the sum of the items may be combined with another category. If these items are combined, related costs and expenses shall be combined in the same manner. These threshold rules align with the principle described in Regulation S-X Rule 4-02, which indicates that items that are not material do not need to be shown separately.
These threshold requirements do not apply to interim financial statements, though they are often followed in practice. Interim-specific requirements are discussed in FSP 29.
Figure FSP 33-1 illustrates how revenue and cost of sales may be presented in the income statement.
Figure FSP 33-1
Presentation of revenue and related cost categories
Total revenue
Total cost
Gross margin
Promises to provide more than one good or service to a customer might constitute a single performance obligation under ASC 606.
Question FSP 33-1
A single performance obligation may include multiple promised goods or services that are not distinct and are inputs into a combined item. Should a reporting entity present components of a single performance obligation as separate categories of revenue (e.g., product revenue and service revenue) in the statement of comprehensive income?
PwC response
It depends. We expect reporting entities will often conclude that revenue from a single performance obligation relates to a single revenue category. This is because promised goods or services that are inputs into a single performance obligation are often transformed when combined (e.g., a combination of goods and services that form a single service), which is why the reporting entity has concluded the promised goods or services are not distinct. If a reporting entity concludes a single performance obligation includes components that relate to different categories of revenue (e.g., products and services), we believe it is acceptable to present revenue in separate revenue categories in the statement of comprehensive income using a systematic and rational allocation method that is consistently applied. If material to the financial statements, the reporting entity should provide transparent disclosures regarding the methodology and basis for separating the components for presentation purposes. 

33.2.2 Revenues versus gains

Revenue is defined in the revenue standard as:

Definition from ASC 606-10-20

Revenue: Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

The distinction between revenue and other types of income, such as gains, is important as many users of financial statements focus more on revenue than other types of income. Income comprises revenue and gains, and includes all benefits (enhancements of assets or settlements of liabilities) other than contributions from equity participants. Revenue is a subset of income that arises from the sale of goods or rendering of services as part of a reporting entity’s ongoing major or central activities, also described as its ordinary activities. Transactions that do not arise in the course of a reporting entity’s ordinary activities do not result in revenue. For example, gains from the disposal of the reporting entity’s fixed assets are not included in revenue.
The distinction between revenue and other types of income, such as gains, depends on the specific circumstances and may require judgment. Example FSP 33-1, Example FSP 33-2, and Example FSP 33-3 illustrate the assessment of whether a transaction results in the recognition of revenue.
Revenue versus gains - sale of demonstration cars
A car dealership has cars available that can be used by potential customers for test drives (“demonstration cars”). The cars are used for more than one year and then sold as used cars. The dealership sells both new and used cars.
Is the sale of a demonstration car accounted for as revenue or as a gain?
The car dealership is in the business of selling new and used cars. The sale of demonstration cars is therefore revenue since selling used cars is part of the dealership’s ordinary activities.
Revenue versus gains - sale of rental equipment
FSP Corp, an equipment rental entity, purchases equipment to be used to generate rental revenue. The costs to acquire the equipment are capitalized as revenue-generating equipment and depreciated over their useful lives. In 20X1, several pieces of equipment are sold to a third party at the end of their useful lives after being fully depreciated, resulting in an amount being recovered that exceeds the residual value.
Should FSP Corp present the total sale amount or the excess over the residual value as revenue?
Based on the fact pattern, FSP Corp should not recognize any amount as revenue. If FSP Corp’s “ongoing major or central operations” consist of renting equipment, proceeds from the sale of revenue-generating equipment generally should not be characterized as revenue. Rather, the activity constitutes the disposal of an asset for which an operating gain (in this case) should be recorded.
Revenue versus gains - sale of a patent
FSP Corp is a pharmaceutical company that is in the business of licensing and selling patents in its patent portfolio. FSP Corp enters into an agreement with a third party to sell a recently approved patent for cash.
How should FSP Corp present the consideration received for the sale of the patent?
As FSP Corp is in the business of routinely licensing and selling patents in its patent portfolio, it would be appropriate to present the consideration received as revenue.
If FSP Corp was not in the business of routinely licensing and selling its patents, but nonetheless sold one of its patents to a third party, it would be appropriate to present a gain or loss on sale of the patent.

Question FSP 33-2
A reporting entity negotiates directly with third parties to sell the byproducts resulting from its manufacturing process. How should the reporting entity classify the sale of byproducts in its statement of comprehensive income?
PwC response
There is no specific guidance addressing the classification of the proceeds from sales of byproducts. Reporting entities should first consider whether these sales represent a contract with a customer and therefore are in the scope of the revenue standard. This assessment may require judgment. For example, sales of byproducts may represent revenue if these items are an output of the reporting entity’s recurring manufacturing process and the reporting entity negotiates contracts with counterparties to purchase the byproducts as part of its ongoing major or central operations. If a reporting entity concludes sales of byproducts do not meet the definition of revenue, then it may be appropriate to present the proceeds as “other income.”
In other fact patterns, a reporting entity may sell scrap materials to third parties; for example, a reporting entity may take advantage of volume purchasing discounts by intentionally purchasing more raw materials than it needs for its own production and then sells the excess as scrap as a means of managing raw material costs. In that scenario, we believe it may be acceptable to present proceeds from those scrap sales as a reduction of costs of sales.

33.2.3 Income from litigation settlements

See RR 9.7.4 for discussion for the presentation of proceeds received from a patent litigation settlement. See FSP 23.5 for discussion of gain contingencies.

33.2.4 Gross versus net revenue presentation

See RR 10 for discussion of gross versus net revenue presentation under ASC 606, which is based on the assessment of whether a reporting entity is the principal or an agent in a transaction. RR 10 also includes discussion of presentation of shipping and handling fees, out-of-pocket reimbursements, and amounts (e.g., taxes) collected from a customer to be remitted to a third party.

33.2.5 Payments to customers

See RR 4 for discussion of the presentation of payments to customers, including sales incentives.
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