What is ASC 606?

ASC 606 and IFRS 15 Compliance

ASC 606 represents the new revenue recognition standard that impacts all businesses engaging in contracts with customers for the transfer of goods or services–whether they are public, private, or non-profit entities. As of the 2017 and 2018 deadlines, both publicly traded and privately held companies are expected to be ASC 606 compliant.

Revenue recognition continues to be a top company struggle.

Follow this revenue recognition checklist to make your compliance a fluid, turn-key process.

Achieving compliance with these new standards requires time and careful planning, but it need not be a daunting process. In fact, organizations of all sizes can view this transition as an opportunity to positively transform their businesses.

Centralize your revenue streams through a comprehensive revenue recognition solution. Achieve compliance with the new ASC 606 and IFRS 15 standards. Automate calculations, streamline your period-end close, and gain a holistic view of your organization’s revenue–both recognized and deferred.

The ASC 606 5 Step Model

In developing ASC 606, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) aimed to establish a framework that ensures consistency in financial reporting, enhances comparative analysis and reporting, and simplifies the preparation of financial statements through a 5 Step Model for Revenue Recognition.

ASC 606 breaks down the contract process into the following 5 steps:

  1. Identify the contract with a customer: Establishing criteria for entering a contract with a customer to supply goods or services.
  2. Identify the performance obligations in the contract: Managing distinct performance obligations in the contract.
  3. Determine the transaction price: Considering factors when establishing the transaction price – the amount expected for transferring goods and services to the customer.
  4. Allocate the transaction price: Providing guidelines for allocating the transaction price across separate performance obligations within the contract.
  5. Recognize revenue when or as the entity satisfies a performance obligation: Outlining how revenue is recognized as each performance obligation is met.

What is the Impact of ASC 606?

The “Revenue from Contracts with Customers” standardizes and simplifies how companies record revenue in customer contracts. Effective for fiscal years starting after December 15, 2017, it addresses how businesses report the nature, amount, and timing of contracts with customers.

While the impact may be less significant for companies like retailers that sell products and receive revenue at once, for those selling recurring services like subscriptions or licenses, the rule can lead to improved results.

Under the previous law, for instance, a company selling a 12-month software product license could only apply six months of revenue to its books. ASC 606 allows counting all the revenue at once.

Implementing ASC 606 also has broad ramifications. It affects not only accounting and financial departments but also IT systems, HR policies, and more, raising concerns for many companies.

Evaluating Effort

Understanding the scope of work is crucial for assembling the right plan, team, and budget. Key factors impacting resource allocation and cost calculations include:

  • Contract evaluation requirements
  • Choice of transition method
  • Handling comprehensive disclosures
  • Post-transition revenue recognition plans

What to Look for in a Revenue Recognition Cloud Application?

When selecting a revenue recognition cloud application, consider the following:

  • Powerful, flexible data models
  • Seamless integration with other applications
  • Configurable templates and rules
  • Forecasting capabilities

In conclusion, ASC 606 marks a significant shift in revenue recognition standards, impacting businesses across sectors. Compliance is crucial, and organizations can view this transition as an opportunity for positive transformation. The ASC 606 5 Step Model provides a structured approach, emphasizing the identification of contracts, performance obligations, transaction pricing, allocation, and timely revenue recognition. The standard, effective since December 15, 2017, simplifies reporting for some businesses and significantly enhances it for others. Evaluating effort and selecting the right revenue recognition cloud application are key considerations for a seamless transition, ensuring not just compliance but also improved business processes.

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