The Financial Accounting Standards Board issued Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, a principles-based approach to accounting for revenue. ASC 606 has broad implications and is likely to affect many parts of your organization: financial statements, business processes and IT systems, income taxes, and internal controls over financial reporting. ASC 606 requires the collaborative efforts of multiple departments within a company, including financial reporting, IT, sales and marketing, tax, and others.
The core principle of ASC 606 is that revenue recognition should occur when control of the goods or services transfers to a customer and in an amount that reflects the consideration to which you expect to be entitled in exchange for those goods or services. This is a very different approach that what US GAAP has required in the past. ASC 606 provides the following five-step process of assessment for each revenue stream of a company:
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price among the performance obligations
- Recognize revenue when or as performance obligations are satisfied.
ASC 606 applies to all companies. Depending on your existing business practices, ASC 606 will have a significant impact on the amount and timing of revenue recognition, which in turn could affect key performance measures and ratios, and thereby ultimately affect contract negotiations, debt compliance, business activities, and budgets.
With these dramatic changes in revenue recognition principles, also comes key associated challenges, such as deferral and amortization of incremental costs of obtaining revenue contracts.
ASC 606 is applicable to private companies starting on January 1, 2019, but prior year (2018) financial statements must be presented on a comparable basis, or at a minimum 2018 information must be presented in the notes to the financial statements. ASC is applicable to public companies starting on January 1, 2018 and prior years’ information is required to be comparable. To assure the proper transition for these wide-ranging changes, the Company should be immediately considering the implications of ASC 606 and developing processes, narratives, and supporting memoranda, specific to the Company’s facts and circumstances, including the significant increase in required disclosures in the notes to the financial statements.
For more information on how Tanner can help your company understand ASC 606 requirements, please contact:
Klint Lewis, Partner