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24.3 Disclosure
Publication date: 29 Nov 2021
us Financial statement presentation guide 24.3
Reporting entities should assess the disclosure requirements of ASC 275 at each reporting date, considering changes to internal operations as well as changes to the industry and broader macroeconomic environment.
ASC 275 does not require disclosures to be segregated in the financial statements or otherwise identified as being provided to comply with ASC 275. The required disclosures may be grouped together in one footnote or included in other footnote disclosures as appropriate. When comparative periods are presented, the disclosure requirements of ASC 275 apply only to the most recent period presented.
24.3.1 Nature of the reporting entity’s operations
A reporting entity should disclose the following within the financial statements related to the nature of its operations:
- Major products or services sold or provided
- Principal markets, including the locations of those markets
- For reporting entities that operate in more than one business, the relative importance (without quantification) of each business and the basis for such determination. For example, a reporting entity may disclose that its two business lines generate equal amounts of revenue or that one business line accounts for substantially all net income.
Typically, SEC registrants combine this information with their segment disclosures. Not-for-profit entities should describe their principal services performed and the revenue sources for those services.
If a reporting entity has not commenced principal operations, it should provide disclosures about the risks and uncertainties related to the activities in which it is currently engaged and discussion of what those activities are being directed towards.
Refer to Examples 1 and 2 within ASC 275-10-55 for examples of disclosures related to the nature of the reporting entity’s operations.
24.3.2 Use of estimates in preparing the financial statements
Accounting estimates represent a reporting entity’s judgment about the outcome of future events. As discussed in ASC 275-10-50-4, a reporting entity should disclose that management’s application of US GAAP requires the pervasive use of estimates. This disclosure is intended to inform users of the inherent uncertainties present in the financial statements of all reporting entities, and that subsequent resolution of some matters could differ significantly from the resolution that is currently expected. Typically this disclosure is included in the basis of presentation footnote, though it is not required to be included there.
Example 3 within ASC 275-10-55 provides an example of this disclosure. While this example provides generic language for this required disclosure, reporting entities will often tailor this disclosure to list specific accounting policies that are subject to estimates (e.g., pension and benefit plans, valuation of goodwill and intangible assets, and allowance for credit losses. Additionally, reporting entities should consider disclosing how estimates are developed (e.g., historical experience or other assumptions believed to be reasonable given the facts and circumstances). In practice, these disclosures are typically included within the relevant financial statement footnotes.
24.3.3 Certain significant estimates
As discussed in ASC 275-10-50-7, a reporting entity should disclose certain significant estimates that affect the carrying amount of assets and liabilities, as well as those that were used in developing the disclosures related to gain or loss contingencies. ASC 275 provides criteria to help determine which estimates must be disclosed.
Excerpt from ASC 275-10-50-8
Disclosure regarding an estimate shall be made when known information available before the financial statements are issued or are available to be issued…indicates that both of the following criteria are met:
- It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events...
- The effect of the change would be material to the financial statements.
A reporting entity should consider all information available before the financial statements are issued or available to be issued as defined in ASC 855, Subsequent Events, in assessing the above criteria. The assessment of the criteria for disclosure under ASC 275 should be performed separately from any assessment under ASC 855. For example, an event subsequent to the balance sheet date may not meet the criteria for disclosure under ASC 855, but disclosure may still be required under ASC 275. As discussed in ASC 275-10-50-9, such a disclosure should include a description of the uncertainty and indicate that it is at least reasonably possible that a change in the estimate will occur in the near term. Refer to FSP 28 for a further discussion of disclosure requirements related to subsequent events.
ASC 275-10-20 indicates that “reasonably possible” should be interpreted to mean that the likelihood of occurrence is more than remote but less than likely. As defined in ASC 275-10-20, “near term” should be interpreted as not exceeding one year from the date of the financial statements.
Reporting entities should consider risk-reduction activities when assessing whether the above criteria have been met. Disclosure is not required if a reporting entity concludes that the impact of a change in estimate would not be material as a result of risk-reduction activities. For example, a reporting entity may conclude that a change in the allowance for credit losses estimate would not have a material impact on the financial statements because of a requirement that customers prepay for orders if they do not pass a credit check. A reporting entity should assess materiality based on the magnitude of the potential change in the recorded amount and not the amount currently recorded (which could be zero).
Additionally, ASC 275-10-50-15A clarifies how to assess materiality when considering the change in useful life of an intangible asset. The criterion would be met if a change in useful life of an intangible asset or a change in expected likelihood of renewal or extension of an intangible asset would be material either individually or in the aggregate by major intangible asset class.
ASC 275 includes a list of areas where these types of disclosures may be more common, though the list is not intended to be comprehensive.
Excerpt from ASC 275-10-50-15
The following are examples of assets and liabilities and related revenues and expenses, and of disclosure of gain or loss contingencies included in financial statements that, based on facts and circumstances existing at the date of the financial statements, may be based on estimates that are particularly sensitive to change in the near term:
- Inventory subject to rapid technological obsolescence
- Specialized equipment subject to technological obsolescence
- Valuation allowances for deferred tax assets based on future taxable income
- Capitalized motion picture film production costs
- Capitalized computer software costs
- Deferred policy acquisition costs of insurance entities
- Valuation allowances for commercial and real estate loans
- Environmental remediation-related obligations
- Litigation-related obligations
- Contingent liabilities for obligations of other entities
- Amounts reported for long-term obligations, such as amounts reported for pensions and postemployment benefits
- Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets
- Amounts reported for long-term contracts.
Part of the challenge in determining the need for disclosure is assessing whether an estimate is subject to change in the near term. Example 24-1 illustrates the evaluation of whether a risk is subject to disclosure under ASC 275.
EXAMPLE FSP 24-1
Disclosure of percentage-of-completion contract estimates
Disclosure of percentage-of-completion contract estimates
FSP Corp enters into a material long-term construction contract with a customer that is accounted for under the percentage-of-completion (POC) method in accordance with ASC 605-35, Construction-Type and Production-Type Contracts. Prior to year end, FSP Corp identifies an issue with the building site that may require additional construction costs of up to 50% of the original budget. Further survey of the land is required to determine the extent of additional construction and should be completed within six months. FSP Corp considers it reasonably possible that the additional costs will be incurred. The additional costs, if required, would represent a material increase in the budgeted amount.
Is disclosure required under ASC 275?
Analysis
Yes. This estimate would meet the criteria for disclosure under ASC 275-10-50-8. FSP Corp considers the likelihood of incurring the additional costs as reasonably possible and the confirming event (the land survey) will occur in the near term. Additionally, the additional costs would be material. FSP Corp should disclose that it is at least reasonably possible that completion costs for the contract will materially increase in the near-term.
Based on the above facts, this change in estimate does not represent an error as contemplated by ASC 250, Accounting Changes and Error Corrections. Refer to FSP 30 for disclosure requirements related to errors in previously issued financial statements.
The SEC staff has frequently commented on significant estimates related to:
- Business combinations (estimates used in the valuation of acquired intangible assets and contingent consideration)
- Goodwill and asset impairments (estimates driving fair value in goodwill and asset impairment analysis)
- Contingencies (estimates of reasonably possible loss/range of reasonably possible losses or an explanation of why the reporting entity is unable to make such an estimate)
- Income taxes (valuation allowances and permanent reinvestment of foreign undistributed earnings assertion)
For more information on disclosure considerations related to business combinations, goodwill and asset impairments, contingencies, and income taxes, see FSP 17, FSP 8, FSP 23, and FSP 16, respectively.
Also refer to ASC 275-10-60 for references to additional examples of disclosures.
24.3.4 Current vulnerability related to certain concentrations
Vulnerabilities from concentrations arise when a reporting entity is exposed to a greater risk of loss than if it had mitigated that risk through diversification. As discussed in ASC 275-10-50-16, a reporting entity should disclose such concentrations when all of the following criteria are met:
- Concentration exists at the financial statement date
- Concentration results in vulnerability to a near-term severe impact
- It is at least reasonably possible that the events that could result in the severe impact will occur in the near team
Concentrations meeting these criteria should be disclosed in sufficient detail to inform users of the general nature of the associated risk.
As defined in ASC 275-10-20, “severe impact” in this context means a significant financially disruptive effect on a reporting entity’s normal functioning. Severe impact is a higher threshold than material. Matters may be material in that they impact the decisions of a financial statement user but do not disrupt the operations of a reporting entity. For example, the loss of business from a large customer may materially impact a reporting entity’s results but not disrupt the entity’s operations. The concept of severe impact, however, would include matters that are less than catastrophic. “Reasonably possible” and “near term” should be interpreted consistent with the discussion in FSP 24.3.3.
ASC 275-10-50-18 requires disclosure of the following defined concentrations (as opposed to a broader set of potential concentrations about which management may be aware) if they meet the criteria listed in the first set of bullets above in this section:
- Volume of business transacted with a specific customer, supplier, or lender (disclosure is required for public entities (as defined in ASC 280) when revenue from a specific customer equals 10% or more of total revenue; however, a reporting entity should still consider disclosure in cases where the threshold has not been met)
- Revenue from particular products or services for which a severe impact may result due to volume or price changes or the loss of patent protection
- Available sources of supply for materials, labor, or services
- Market or geographic area in which a reporting entity conducts its operations
ASC 275-10-50-18 states that it is always considered at least reasonably possible that any customer, grantor, or contributor will be lost in the near term and that operations located outside the reporting entity’s home country may be disrupted in the near term.
ASC 275 includes additional disclosure requirements for concentrations of labor subject to collective bargaining agreements and concentrations of operations outside of a reporting entity’s home country if the criteria for disclosure of concentrations are met.
Excerpt from ASC 275-10-50-20
For those concentrations of labor…subject to collective bargaining agreements and concentrations of operations located outside of the entity’s home country…the following specific disclosures are required:
- For labor subject to collective bargaining agreements, disclosure shall include both the percentage of the labor force covered by a collective bargaining agreement and the percentage of the labor force covered by a collective bargaining agreement that will expire within one year.
- For operations located outside the entity’s home country, disclosure shall include the carrying amounts of net assets and the geographic areas in which they are located.
Sufficient disclosure of concentrations is a challenge for many reporting entities. As a result, the SEC staff has commented on certain risks related to concentrations. Frequent areas of comment include:
- Concentration of significant customers or class of customers, including identifying the magnitude of receivables by foreign governments
- Concentration of cash or operations in specific countries or regions, and whether there are government regulations in those countries protecting the balances (similar to Federal Deposit Insurance Corporation (FDIC) insurance)
- Existence of concentrations of credit risk including specific counterparties or groups of counterparties that are similarly impacted by macroeconomic factors
Refer to Examples 2 and 4 through 8 in ASC 275-10-55 for examples of disclosures related to concentrations.
24.3.5 Assessment of disclosure criteria
Significant judgment is required to determine whether a material change in estimate or near-term severe impact from a concentration is reasonably possible. The outcome of future events alone should not be used to determine whether the reporting entity’s inclusion or exclusion of a particular disclosure was an error. For example, if the reporting entity discloses a significant estimate, but that estimate is not followed by a material change, it does not imply that the disclosure should not have been made. Likewise, if the reporting entity experiences a severe impact related to a concentration that was not previously disclosed, it would not suggest that the reporting entity failed to comply with the disclosure requirements if an appropriate judgment had been made that the concentration did not meet the requirements for disclosure.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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