ASC 606: New Revenue Recognition Standard Deferred, but not Forgotten
Most accounting and finance professionals breathed a sigh of relief in April 2015 when the Financial Accounting Standards Board (FASB) deferred the effective date of the new revenue recognition standard, ASC 606, for all entities under U.S. GAAP.
What Is ASC 606?
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) began as a convergence project between the FASB and the International Accounting Standards Board (IASB) in 2002. The project aimed at creating a single revenue recognition standard that would apply to all businesses, replacing the myriad of industry-specific standards currently in place. The new standard specifies how and when companies recognize revenue arising from contracts with customers, and requires those companies to provide users of financial statements with more informative, relevant disclosures. The new guidance applies to all entities and all contracts, except for a limited number of exceptions outlined in ASC 606-10.
Essentially, ASC 606 requires that an entity recognizes revenue from the transfer of promised goods or services to customers proportionate to the rate at which the entity expects payment for those goods and services. To help entities apply the new standard, ASC 606 outlines five steps for deciding when to recognize revenue:
- Identify contracts with customers.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
ASC 606 also provides a set of disclosure requirements to provide users of financial statements with better information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Originally, the new standards were to take effect for annual reporting periods beginning after Dec. 15, 2016, for public companies, certain non-profit organizations and certain employee benefit plans. For all other entities, the standards were to take effect for annual reporting periods beginning after Dec. 15, 2017.
Why the Delay?
After many complaints and frustrations, the FASB issued an Accounting Standards Update deferring the effective date of ACS 606 for public and nonpublic entities reporting under U.S. GAAP for one year, with early adoption permitted as of the original effective date. The additional year was provided to allow for more successful implementation of the requirements as entities work through the issues associated with IT solutions and adoption of new processes and controls.
On its surface, the new standards seem straightforward. According to FASB, ASC 606 removes inconsistencies and weaknesses in existing revenue reporting requirements, provides clearer guidelines for exercising judgment when addressing revenue issues, improves comparability of revenue recognition practices and outlines enhanced disclosure requirements that will provide more useful information to users of financial statements.
However, the new standards go far beyond a simple tweaking of revenue recognition practices and disclosures. They are widely regarded to be the biggest accounting change in a decade and compliance demands a complete overhaul to systems, processes and internal controls for sales, IT, finance, operations and services. Management will also be tasked with exercising significant judgment to determine expected revenue from contracts.
Many companies affected by the new standards have made little to no progress toward preparing for implementation; FASB has continued to issue amendments to the standard, the most recent in September 2016. Even though these changes are now a little further away, continuing to procrastinate would be a mistake. The new standards will require updating internal systems, procedures and controls. They may also require modifying existing contracts with customers. Don’t delay implementing changes to comply with the new standard.