ASC 606: Practical Considerations for Early Adoption of New Revenue Recognition Standards
When the Financial Accounting Standards Board (FASB) opted to delay the effective date of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), it permitted early adoption for all public and nonpublic companies with annual reporting periods beginning after Dec. 15, 2016. Many companies delayed making the necessary changes to systems, processes and internal controls. Some simply procrastinated on the complete overhaul, others decided to wait until FASB finished modifying the new standard. Whatever the reason for procrastinating, most companies were relieved when the effective date was delayed for one year.
Those businesses that were working on a plan for implementation now face the choice of waiting for the delayed effective date or adopting early. How should a company decide whether to opt for early adoption? In short, the decision hinges on the how much adoption will disrupt the organization. Consider these factors:
Developing and testing of changes to internal control systems
The new standard gives entities the option of using either a full or modified retrospective transition method. Under the full retrospective method, the entity applies the standard retrospectively to all reporting periods presented in the financial statements.
Under the modified retrospective method, the entity applies the standard in the year of initial adoption. Comparative periods are not restated, but they do recognize the cumulative effect of adopting ASC 606 with an adjustment to beginning retained earnings.
Companies who choose to use the full retrospective transition method may need to track revenue under both the legacy accounting method and the new standard during the retrospective period, due to the potential difficulty of retroactively recalculating revenue once the standard becomes effective.
The new standard will also likely require implementing controls over areas that were not previously tracked. To identify new controls, companies should ask questions such as:
- What process should we implement to identify all goods and services in a contract with a customer?
- How will we estimate the stand-alone selling price in contracts involving various products and services?
- How will we ensure consistency of judgment when identifying performance obligations and progress toward completion?
These may be areas that the company did not previously need to consider, so designing and testing internal controls over new processes will be time consuming.
Organization size and number of geographical locations
Whether adopting the new revenue recognition standard will have a significant impact on the organization’s financial statements, adopting the new standard will likely require a major overhaul processes and controls and affect several departments.
Large organizations with teams spread across geographical locations may have difficulty training preparers, reporting staff, financial planning and analysis teams, and internal audit personnel in time for early adoption. Unless they have been working toward implementation of the new standard in anticipation of the original effective date, it is unlikely that large organizations will be ready early.
Conferring with key stakeholders
Stakeholder concerns played a major role in FASB’s decision to delay the effective date of ASC 606. In most cases, implementing the new standard requires designing and implementing new software solutions and internal controls. If software and IT departments are not ready for early adoption, manual processing will likely be prohibitively expensive, which would concern investors.
Contracts with clients may also need to be modified to conform to the new revenue recognition standard. Organizations need time to assess necessary contractual changes and work out those changes with customers.
Users of financial statements may also be affected. If the organization expects significant differences between revenue recognized under the prior accounting system and revenue under the new standard, the company may be better off using the full retrospective transition method to recognized revenue consistently for all years presented in its financial statements.
Whether a company opts for early adoption or waits until the new standard’s effective date, implementation of the new standard is time sensitive. Any companies not currently working toward implementation should assess the effects of the new revenue recognition standard and develop a system for implementation.