Tags: ASC 606

In 2014, the FASB and IASB issued a comprehensive new global, industry-agnostic revenue recognition standard (ASC 606 and IFRS 15) with the intention of improving the comparability of this top line financial statement item across companies, industries, and jurisdictions. Issuance of this new standard was a long time coming, taking nearly 15 years for these two bodies, representative stakeholders and other regulatory agencies to ultimately finalize the guidance.  

US public companies will need to comply with ASC 606 starting with annual reporting periods beginning after December 15, 2017, and early adoption is permitted for annual reporting periods after December 15, 2016.

Simply stated, the core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers for an amount that reflects the amount of consideration that the entity expects to receive in exchange for those goods or services. The guidance requires additional financial disclosure information and introduces a five-step approach to assist entities in applying the standard.

Revenue Recognition: 5-Step Model

From the above, you can see this 5-step framework introduces new decision points into the revenue recognition process and requires more detailed contractual and transactional information to be analyzed to recognize revenue.

The new standard will fundamentally change your business. For example:

  • Depending on your particular business model, the new standard may affect the timing and amount of revenue recognized, which could subsequently impact compensation and debt contracts that rely on revenue and other key performance indicators that are impacted by revenue (like earnings, or earnings per share).  
  • Whilst the verdict is still out based on the limited sample of early adopters, the new standard may impact how investors analyze your company’s financial information.
  • There are increased disclosure requirements. For instance, the new standard requires companies to provide a disaggregation of revenues from contracts with customers which include information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligation). 
  • Companies will have to track the costs to obtain or fulfill a contract and record these costs as an asset.
  • The standard requires significant judgments and changes in judgments at critical junctures in satisfying the performance obligations (are you satisfying your obligation at a point in time or over time?) to be made. What is your basis for determining the transaction price and the amount that you are allocating to the performance obligation?

What are the implications for you?

So, how will the new standard impact your current processes? Short answer:  In countless ways.  Many companies are finding that adoption of the standard is no small project and can be far-reaching within the organization.  Sufficient planning and discussions with key business leaders and process managers, both in and outside of the finance department, are mission critical with many factors to consider.  

Below is just a sample of exercises that companies can perform as part of their planning process for adopting the new standard:  

  • revisit your information technology systems,
  • review current internal processes and controls to identify necessary changes
  • revise budgeting and forecasting processes and models to reflect potential revisions to timing and amount of revenue to be recognized each reporting period,
  • review existing contract templates, perform various business analysis and engage in discussions with relevant stakeholders and business process owners that will be impacted by changes in process,
  • review breadth and depth of skillsets of finance  personnel to determine potential need for additional resources;

....just to name a few.  This means that the new standard  doesn’t just impact the external reporting folks, but potentially the FP&A group, IT, contracts and IR departments as well.   And let’s not forget the documentation that needs to go along with all of this...for the auditors when they come in to see if your company is complying with this new standard.  Also, the new guidance will have more of an impact on companies in industries with specific revenue recognition guidance since previously issued industry-specific guidance will be superseded - like the healthcare, technology, extractive, entertainment, airlines, and construction industries, for example.

We would surmise that coordinating all of the different groups of people within the company to execute Steps 1-5 of the new standard will take a mammoth company-wide effort. There are plenty of resources available for your reference. If you haven’t already started to assess the impact of this standard, you have less than six months before this standard becomes effective.

Doing some initial research on which companies that have early adopted the new standard, especially those in your peer group, and how they have disclosed this information would give you a great start. Platforms that were designed to improve the efficiency of disclosure research, like idaciti, can help you do this research within seconds. Not only can you quickly pull up which companies have early adopted the new revenue recognition standard, but you can also see how adopting the new standard has impacted their processes and top line revenue.

Our Co-Founder and Chief Research Officer Christine Tan, Ph.D. has published an eBook titled "Revenue Recognition (ASC 606): Lessons Learned from the Early Adopters". With years of experience working at the FASB and SEC, Christine believes that doing some research to identify ‘early adopters’ of the new standard, especially those in your peer group, can be used as references for your own implementation of the standard and give you a great start. Download eBook Revenue Recognition Lessons Learned from Early Adopters

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