The Decision-Usefulness of ASC 606 Revenue Disaggregation

Abstract

The disclosure requirements of ASC 606 fundamentally altered the volume and granularity of revenue information. However, because of the significant judgment associated with the principles-based standard, it is unclear whether the new disclosures increased the decision-usefulness of financial reports. To shed light on this question, we investigate the revenue disaggregation requirements of ASC 606. These requirements had significant disclosure consequences, illustrated by an over two-fold increase in the median number of revenue items in disaggregating firms’ reports. Consistent with enhanced decision-usefulness, we find higher (lower) analyst sales forecast accuracy (dispersion) for disaggregating firms. These benefits are primarily present when disaggregation is accompanied by detailed qualitative disclosures, when disaggregated revenues are comparable, and when the granularity of segment information is low. Our study provides novel insights into the merits of principles-based disaggregation and should interest standard setters currently considering broader disaggregation under the financial performance reporting project.

Keywords: ASC 606; FASB; Revenue disaggregation.

JEL Classification: G24; G30; G34.