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 should be ASC 606 compliant now based on the 2017 and 2018 deadlines.
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Developed jointly by the Financial Accounting Standard’s Board (FASB) and International Accounting Standards Board (IASB), 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.
Meeting the new compliance standards will take time and careful planning but it shouldn’t be a dreaded process. In fact, organizations large and small will find the transition provides an opportunity to transform their businesses for the better.
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In developing ASC 606, FASB and IASB wanted to provide a framework to drive consistency in financial reporting, improve comparative analysis and reporting, and simplify the preparation of financial statements through a 5 Step Model for Revenue Recognition.
ASC 606 breaks the contract process into the following 5 steps:
The rule, “Revenue from Contracts with Customers” standardizes and simplifies how companies record revenue in customer contracts. Effective for fiscal years beginning after Dec. 15, 2017, it covers how businesses report the nature, amount, and timing regarding contracts with customers.
The impact might not be as significant for companies, such as retailers, that sell products and receive revenue at one time. But for companies that sell recurring services like subscriptions or licenses, the rule may improve the results.
Under the previous law, if a company for example, sold a 12-month software product license, it could apply only six months of revenue to its books. It would not be able to count the next six months of revenue until the following year. But under ASC 606 it can count all the revenue at once.
Implementing ASC 606 also has broad ramifications. Meeting the standard will impact not just your accounting and financial departments, but will impact your IT systems, HR policies and more. It’s these broader implications and unknowns that have many companies concerned.
Know the scope of work required so you can assemble the right plan, team, and budget. Several factors will impact your resource allocation and cost calculations: