It’s a brand-new year with a new set of revenue recognition rules in effect. The new revenue recognition rules, ASC 606, are creating a major shift in how businesses handle accounting. The new standard provides a comprehensive revenue recognition model intended to increase financial statement comparability across companies, and significantly reduce the complexity in today's revenue recognition standards. According to Treasury and Risk, in a recent PwC/Financial Executives Research Foundation (FERF) study, only 13 percent of all companies have begun implementing the new revenue recognition guidance and nearly 65 percent were still assessing the new standard’s impact.
As of December 15th, 2017, public business entities, certain not-for-profit entities, and certain employee benefit plans must follow the new revenue recognition (ASC 606) guidelines. All other entities have an additional year to follow the new revenue recognition standards for annual reporting periods beginning after December 15, 2018. Organizations must recognize revenue correctly or risk audits and the need to re-file earnings.
Goals of ASC 606:
According to a recent interview with TechTarget, Sage Intacct’s Rob Reid said: “The (FASB) Accounting Standards Codification -- ASC -- is about going in and setting up a contract as the master that drives all of your accounting needs. They're trying to get a separation of the different performance obligations that you have in each contract with a customer, and then recognize that revenue as those are performed rather than recognizing it all upfront or all at the end.”
While the transition may seem daunting, the new rules will ultimately:
- Assist in removing inconsistencies and weaknesses in revenue requirements
- Develop a revenue recognition standard based on a single model for all revenue contracts
- Provide a better framework for addressing revenue issues
Overall, it will give investors a more streamlined picture of revenues that is more easily comparable across multiple industries.
ASC 606 5-Step Model
Transitioning to ASC 606 is a significant responsibility, especially if your current accounting system/software lacks built-in readiness. The Financial Accounting Standards Board (FASB) has issued guidelines for what your business must do to adopt the new standard:
Step 1: Identify the contract and thresholds with a customer
Step 2: Manage performance obligations and renewals
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognize revenue as performance obligation is satisfied
ASC 606 impacts your revenue recognition and financial processes from top to bottom. Businesses that are unable to handle complex contracts within their current accounting software will quickly get overwhelmed with spreadsheets. Having the right technology in place will be your saving grace to help your organization maintain efficiency and reduce risk. For more information, please visit our resource library on ASC 606 >
Helpful resources on ASC 606
Blue Hill Research: Sage Intacct Leads the Way in ASC 606 and IFRS 15 Revenue Recognition – A detailed industry report outlining the new ASC 606 guidelines and how Sage Intacct is leading the way for early adoption. Click here to learn more >
Treasury & Risk: What You Need to Know About ASC 606 – This article is filled with relevant statistics on how many organizations aren’t ready for ASC 606 and the consequences that might occur. Click here to learn more >
Revenue Hub: The Five-Step Method – Discusses the new ASC 606 five-step method. Click here to learn more >