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FASB ASC 606 permits, as a practical expedient, the application of a portfolio approach for contracts with customers having similar characteristics, provided that the effects on the entity’s financial statements would not differ materially had FASB ASC 606 been applied to each individual contract within that portfolio.

How should an entity assess whether the results of a portfolio approach would differ materially from the application of FASB ASC 606 on a contract-by-contract basis? FASB indicates in the Basis of Conclusions (BC) paragraph, paragraph 69, of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), that it did not intend for an entity to quantitatively evaluate each outcome and, instead, the entity should be able to take a reasonable approach to determine the portfolios that would be appropriate for its types of contracts.

When determining whether to apply step one to each individual contract with a customer or to elect the portfolio approach practical expedient, an entity will need to assess the cost versus benefits. Some entities may determine that the portfolio approach is best applied in step one, and perhaps even step 3 in the application of FASB ASC 606, but this is based on varying facts and circumstances.

Although not all inclusive, the following are some entities that may benefit from the application of the portfolio approach:

 A health care entity might want to consider the application of the portfolio approach. For example, it may evaluate whether to establish separate portfolios for uninsured self-pay patients, insured patients with co-payments, insured patients with deductibles, emergency room uninsured self-pay, elective surgery that is not medically necessary or covered by insurance, and so on.

 An educational institution may consider applying the portfolio approach when assessing collectibility of tuition and housing.