formerly FinancialForce
formerly FinancialForce
ASC 606, or Accounting Standards Codification 606, is a set of accounting rules that governs how companies recognize revenue from contracts with customers. It provides a standardized framework for revenue recognition, ensuring consistency and comparability across industries. Under ASC 606, revenue is recognized when control of goods or services is transferred to the customer, and it requires companies to disclose more detailed information about their revenue streams. This standard aims to improve transparency and provide users of financial statements with more accurate and useful information about a company’s financial performance.
Issued by the Financial Accounting Standards Board (FASB) in May 2014, ASC 606 primarily applies to American companies that follow the U.S. Generally Accepted Accounting Principles (GAAP). However, foreign companies listed in the U.S. or that follow U.S. GAAP must also QA comply with this standard. This ASC accounting standard took effect for public companies for fiscal years starting after December 15, 2017, and for private corporations and non-profit organizations after December 15, 2018.
IFRS 15, or International Financial Reporting Standard 15, is a revenue recognition standard that impacts all businesses entering into contracts with customers to transfer goods or services, including public, private, and non-profit entities. Issued by the International Accounting Standards Board (IASB), this standard became effective for annual reporting periods commencing on or after January 1, 2018—for both publicly and privately held companies alike.
The purpose of the IFRS 15 standard is to eliminate variations in the way businesses across industries—particularly in Europe, Asia, and other regions outside the United States—handle accounting for similar transactions. Prior to its implementation, this lack of standardization in financial reporting made it challenging for investors and other consumers of financial statements to compare results across industries and even companies within the same industry.
ASC 606 and IFRS 15 share numerous similarities, as they both provide a comprehensive framework for recognizing revenue from customer contracts. Both standards emphasize identifying performance obligations within these contracts and base revenue recognition on satisfying these obligations by transferring control of goods or services to the customer.
Furthermore, both ASC 606 and IFRS 15 aim for transparency and consistency in financial statements, ensuring that revenue recognition accurately reflects the transfer of goods or services. This approach provides stakeholders with a clearer understanding of a company’s financial performance.
Both standards also follow the same five steps of revenue recognition—which is covered in more detail below.
However there are several notable differences between the two:
To see the full list of differences, check out FASB’s Comparison of Topic 606 and IFRS 15.
Achieving revenue recognition 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.
In developing the ASC 606 and IFRS 15 standards, the FASB and 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 and IFRS 15 break down the contract process into the following five steps:
The ASC 606 and IFRS 15 Revenue from Contracts with Customers standardize and simplify how companies record revenue in customer contracts. Effective for fiscal years starting after 2017 and 2018 respectively, they address 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 rules 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. However, IFRS 15 and ASC 606 allow the counting of all revenue at once—as long as the customer can use and benefit from the license.
Implementing ASC 606 and IFRS 15 also has broad ramifications. They affect not only accounting and financial departments, but also IT systems, HR policies, and more—raising concerns for many companies.
If you aren’t armed with the proper information, making the best business decision can be difficult.
At some point in the transition process, you’ll need to assess how the new standards will affect your company. This includes an evaluation of primary revenue streams and key contracts to identify the required revenue recognition changes and the business units where these changes may have the greatest impact.
The questions that come up during this phase are weighty. When you apply the new five-step compliance model to a sampling of mission-critical contracts, what happens to your revenue recognition profile? Will you need to change the design of your customer contracts? Can your sales process stay the same, or does it need tweaking? If you aren’t armed with the proper information, making the best business decision becomes difficult.
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: Develop a new rules-based framework for your accounting policies based on an assessment of your contracts. If your contracts are highly variable, will it be burdensome for the transition team to thoroughly evaluate each one and draft new policies accordingly?
Choice of transition method: The full retrospective and modified retrospective methods each have pros and cons, but both require significant implementation efforts. The full retrospective method requires restatement of the prior two comparative years (possibly three), while the modified retrospective method requires dual recordkeeping during the adoption year. Do you have the necessary systems and people in place?
Handling comprehensive disclosures: The new standards’ requirements for quantitative and qualitative disclosures are significantly more expansive than those under the current guidelines. How will you create a method for systematically gathering, reviewing, and disclosing information about remaining performance obligations, including resources consumed, labor hours expended, costs incurred, or machine hours used?
Post-transition revenue recognition plans: How will you track performance obligations and apply your new revenue calculation rules? How much manpower will be required to handle complex revenue scenarios, multiple revenue streams, and contract modification? How will you institute controls along the way?
Deliver the right reports to internal and external stakeholders.
About 50% of spreadsheet models used operationally in large businesses have material defects. You’ll need to deliver the right reports internally and externally to pass an audit—the crux of this entire endeavor. If your process is based on spreadsheets, this will be painful. Inefficient and error-prone, spreadsheets are notoriously difficult to audit. Furthermore, multiple user access easily leads to version-control problems, degrading data quality.
It’s not just anecdotal: the European Spreadsheet Risks Interest Group cites research stating that 50% of spreadsheet models used operationally in large businesses have material defects.
A robust technology solution, such as a revenue recognition cloud software, can offer two key ways to reduce the amount of required manual effort: automation and flexibility across your revenue recognition processes. First and foremost, the right solution helps you track various revenue streams, automate allocations and calculations, and configure different rules and templates for different calculations—all while eliminating your reliance on overly complex spreadsheets.
Additionally, an agile technology solution also eases the pain of implementing a transition method. Your choice of method should be driven by what’s best for investors, auditors, and financial statement readers, not by the capabilities of your IT systems (or lack thereof). With the right technology solution, you can recognize revenue under the current standards up to the transition date, then seamlessly deploy retrospective or parallel recognition processes. Let your systems empower you to make the best choice for your stakeholders.
With the right system in place, you can produce clear audit trails and attach supporting documents and evidence directly to transactions. A robust tool also provides user-friendly reporting options, allowing you to slice, dice, and customize your data on a summary level or on an item-by-item basis. With better reports, your business teams will make better decisions.
When selecting a revenue recognition cloud application, consider the following:
Powerful, flexible data models: Revenue models continue to multiply, from product-based to Software as a Service (SaaS) to bundled and usage-based contracts. The right tool recognizes revenue from multiple sources, including directly from opportunities, orders, contracts, projects, and invoices. The data model should also handle complex use cases, including multi-element arrangements.
Seamless integration with other applications: The best cloud applications harness the power of your existing platforms (e.g. Salesforce) and integrate directly with your other applications, including customer relationship management (CRM) and professional services automation (PSA).
Configurable templates and rules: The right tool enables you to adapt to whatever comes next. Create different rules based on your needs and how you want to recognize revenue. Find a tool that adapts to what’s best for your business—not the other way around.
Forecasting capabilities: The ideal revenue recognition cloud application offers comprehensive forecasting features that adapt to your specific business model. It should provide flexible forecasting options for revenue, billings, and backlog. Look for a solution that offers configurable reporting and customizable business rules, allowing you to generate accurate forecasts that align with your unique revenue recognition needs and help inform strategic decision-making.
In conclusion, ASC 606 and IFRS 15 mark 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 and IFRS 15 5-Step Model provides a structured approach, emphasizing the identification of contracts, performance obligations, transaction pricing, allocation, and timely revenue recognition. Both standards, effective since 2017 and 2018 respectively, simplify reporting for some businesses and significantly enhance 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.
As the landscape of revenue recognition evolves with ASC 606 and IFRS 15, businesses face new challenges in maintaining compliance while efficiently managing their financial processes. The key to navigating these changes lies in adopting a comprehensive, adaptable solution that aligns with the latest standards.
A leading revenue recognition software can transform these challenges into opportunities, offering benefits such as accurate revenue forecasting with both recognized and projected values, enhanced visibility into revenue streams, and efficient processing of multi-element arrangements. By centralizing revenue management, companies can not only achieve compliance but also streamline their operations, automate calculations, and gain a holistic view of both recognized and deferred revenue.
As you consider the impact of ASC 606 and IFRS 15 on your business, exploring advanced revenue recognition tools could be the next step toward ensuring compliance, improving financial clarity, and driving strategic decision-making. With the right PSA solution, you can turn regulatory requirements into a catalyst for financial excellence and growth. Contact us to learn more.