What is ASC 606?

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.

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.

In this step, it is crucial to define the criteria that determine when a contract with a customer is formed. This involves assessing whether there is an agreement between the parties, the rights and payment terms are identified, and it is probable that the entity will collect the consideration to which it is entitled.

  1. Identify the performance obligations in the contract: Managing distinct performance obligations in the contract.

Once a contract is identified, it is necessary to identify the distinct performance obligations within that contract. Performance obligations are promises to transfer goods or services to the customer, which are considered separately if they are distinct. This step involves analyzing the nature of the promised goods or services and determining whether they are distinct and should be accounted for separately.

  1. Determine the transaction price: Considering factors when establishing the transaction price – the amount expected for transferring goods and services to the customer.

Determining the transaction price involves assessing the consideration that an entity expects to receive in exchange for transferring goods or services to the customer. This step requires considering various factors such as variable consideration, significant financing components, noncash consideration, and any consideration payable to the customer.

  1. Allocate the transaction price: Providing guidelines for allocating the transaction price across separate performance obligations within the contract.

Once the transaction price is determined, it needs to be allocated to each distinct performance obligation within the contract. This step involves allocating the transaction price based on the relative standalone selling prices of each performance obligation. If the standalone selling price is not directly observable, estimation techniques may be used.

  1. Recognize revenue when or as the entity satisfies a performance obligation: Outlining how revenue is recognized as each performance obligation is met.

The final step involves recognizing revenue when or as the entity satisfies each distinct performance obligation. Revenue is recognized when control of the promised goods or services is transferred to the customer. This step requires evaluating the transfer of control criteria, such as the transfer of risks and rewards, customer acceptance, and the entity’s ability to direct the use of the goods or services. Revenue is recognized either at a point in time or over time, depending on the nature of the performance obligation.

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.

Achieving Revenue Recognition Compliance: Scope of work and resource requirements

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

Is your company grappling with the challenges posed by the new ASC 606 revenue recognition guidelines? Preparing for these new standards is no small feat, but maintaining compliance with the updated regulations is imperative. With Certinia solutions, bid farewell to your struggles and concerns.

Certinia facilitates a seamless transition for your company, keeping you effortlessly compliant with ASC 606. Now, you can divert your attention to other essential tasks while Certinia ensures your adherence to the new standards.

Certinia not only assists your business in complying with the updated regulations but also offers the following benefits:

  • Derive revenue forecasts with both recognized and projected values.
  • Provide comprehensive visibility into your revenue.
  • Establish tight links between revenue recognition entries and source data.
  • Efficiently process multi-element arrangements.

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

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.

See how Certinia solutions transform and optimize operations.