What is ASC 606?
ASC 606 is the new revenue recognition standard that affects all businesses that enter into contracts with customers to transfer goods or services – public, private and non-profit entities. Both public and privately held companies need to be ASC 606 compliant now based on the 2017 and 2018 deadlines. Companies not only have to modify how they recognize revenue; they must now include certain costs related to capturing that recognized revenue. For many businesses, those costs include sales commissions.
-Companies selling ongoing services, subscriptions, and licenses will be more affected by ASC 606 standards and may even see company improvements as a result.
-Under the previous law, if a company sold a 12-month product license, it could apply only six months of revenue to its books and not apply the next six months until the following year. ASC 606 will now allow the revenue to be counted all at once.
THE GOAL OF ASC 606:
The goal of ASC 606 is to simplify and coordinate revenue recognition practices. ASC 606 can make it easier for companies to get on the same page with their accounting. The guidelines help establish a clear outline to determine revenue calculations for tax purposes.
When may an entity recognize revenue?
The entity may recognize revenue when it satisfies its obligations under a contract by transferring goods or services to its customer. In other words, when the entity performs, it should recognize revenue.
It is important to amortize these costs over time to match the timing of the revenue recognized. For some companies (like SaaS companies), the accounting changes for sales commissions are a bigger impact than the actual changes for revenue.
ASC 606 provides a framework for businesses to recognize revenue more consistently. The standard’s purpose is to eliminate variations in the way businesses across industries handle accounting for similar transactions. This lack of standardization in financial reporting has made it difficult for investors and other consumers of financial statements to compare results across industries, and even companies within the same industry.
25% of U.S Firms may have to change financial statements as a result of ASC 606.
Important dates and what is changing:
- Removes inconsistencies and weaknesses in existing revenue requirements
- Provides a more robust framework for addressing revenue issues
- Improves comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
- Provides more useful information to users of financial statements through improved disclosure requirements
- Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer.
* US Public Companies must adopt these rules for fiscal years starting after 12/16/2017
* US private companies for fiscal years starting after 12/15/2021
How is ASC 606 Implemented? The 5 Step Model
When developing ASC 606, FASB and IASB wanted to provide a framework to drive consistency in financial reporting, improve comparative.
- Identify the Contract with a Customer
- Identify the Performance Obligations in the Contract
- Determine the Transaction Price
- Allocate the Transaction price
- Recognize Revenue when a Performance Obligation is Satisfied
HOW NOW CFO CAN HELP:
Meeting the new compliance standards will take time and careful, strategic planning, but it shouldn’t be a dreaded process. Organizations large and small will find the transition provides an opportunity to transform their business for the better and NOW CFO can help guide you through this process. In preparation for the impending 2019 changes, many subscription billing vendors have launched basic revenue recognition reporting, with emphasis on the word basic, that still require time-intensive, headache inducing spreadsheets.
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