ASC 606: Benefits of Early Adoption of the New Revenue Recognition Standard
Last year, the Financial Accounting Standards Board delayed the effective date of the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). This delay allowed public entities, certain nonprofits and employee benefit plans to postpone implementation to annual reporting periods beginning after Dec. 31, 2017. For all other entities, the effective date has been postponed until Dec. 31, 2018. However, early adoption is allowed for all public and non-public entities as of Dec. 31, 2016.
Are there any advantages to early adoption? Yes, if you are prepared to implement the new IT solutions, processes and controls.
Companies adopting ASC 606 have two options: the full retrospective method or the modified retrospective method. Under the full retrospective method, entities may elect to apply the new revenue recognition guidance retrospectively to each prior reporting period presented in the financial statements. Obviously, the preferred transition method for users of financial statements is a full retrospective application because it provides useable trend information, consistency and comparability.
However, applying the full retrospective method could unduly burden companies with long-term contracts. In those cases, companies may use the modified retrospective method in which the company applies the standard in the year of initial application. The company does not restate comparative periods; instead, it recognizes the cumulative effect of adopting ASC 606 with an adjustment to beginning retained earnings.
Benefits of Early Adoption
ASC 606 requires either full or modified retrospective adoption. At a minimum, organizations will need to review the impact of the standard on the prior fiscal year. Public companies who present three years of data will have to evaluate the impact on two prior years. Entities will also need to review contracts that commenced several years before the new standard’s effective date, and may have to perform dual tracking of revenues for the retrospective period; retroactively recalculating revenue once the new standard becomes effective will be an onerous task.
Companies that expect major differences between their current revenue accounting and revenue accounted for under the new standard may want to opt for the full retrospective transition method. Under the full method, revenue will be reflected consistently for all years presented in the financial statements rather than just the most recent year presented.
Compliance with the new standard will likely involve a complete overhaul of systems, processes and controls across many departments. While that may sound like an argument for opting out of early adoption, companies that choose to delay implementation will likely end up accounting for revenues under two methods, essentially doing twice the work in order to be able to conform to the full or modified retrospective adoption method.
Benefits to Contracts
Many companies are now preparing and negotiating contracts that will extend into the effective date of the new standard. Modifying those contracts to comply with the new standard now will likely save time spent reviewing those contracts for adaptation.
Benefits for IPOs or Acquisitions
Privately held companies working toward an IPO or ones who hope to be acquired by a public company will need systems, processes and controls that are capable of adopting the new standard.
With so many aspects of business affected and so much at stake, the sooner a company can adapt to the new standard, the sooner it can return its resources and attention back to business. It will take time to gain a clear understanding of the impact of ASC 606, but proactive companies will begin conversations with auditors and shareholders now to understand the specific impact on revenue recognition for their organization.