ASC 606: Guess What! The Way You Manage Multi-Year Contracts Is Wrong!
You may have heard about ASC 606 compliance. If so, you know the way you manage revenue from contracts with customers is changing.
If you haven’t heard of this new Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU), Revenue from Contracts with Customers (Topic 606) or, for that matter, the International Accounting Standards Board (IASB) International Reporting Standards (IFRS) 15, Revenue from Contracts with Customer.
We’ll give you a moment to process the reality of which you are faced.
When FASB originally issued ASC 606, it was supposed to be effective in 2017. However, due to the magnitude of the change, the effective date has since been delayed until the start of 2018 for public companies, and the start of 2019 for private companies.
Although you may think you have plenty of time, the reality is the contracts you are writing today that extend into the 2018/2019 adoption date must be accounted for under ASC 606. Therefore, it’s essential to ensure revenue recognition processes are running smoothly, well in advance of the deadline.
The revenue recognition standard prescribes accounting for an individual contract with a customer, but allows for application of the guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio.
Don’t fall into the trap of underestimating the time required to implement changes to your financial systems and processes.
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Under ASC 606, your accounting system now needs to be contract aware, ideally with contract management capabilities built into it. You’ll need to be able to look at the group of contracts pertinent to a customer and have clear transparency when the need arises.
Under ASC 606, subscription-based companies will recognize revenue over time as the performance obligation is delivered to the customer. The new standard specifies that an entity transferring control of its service over time must recognize revenue when one of the following criteria is met, according to FASB:
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset – for example, work in process – that the customer controls as the asset is created or enhanced.
- The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
According to Intacct, for organizations operating under complex billing arrangements, like usage-based billing, it’s incredibly important that billing and revenue recognition systems work in concert, so that when the customer consumes the benefits of the performance obligations, an organization can recognize it.
The time to implement ASC 606 compliance into your revenue recognition for multi-year contracts is right now.
Learn how Intacct can help here: https://us.intacct.com/revenue-management-software.
This content was originally posted here.
In business since 1971, CompuData is an award-winning business technology solution provider. Headquartered in Philadelphia, PA, CompuData has helped thousands of small to midsize clients nationally and in the Philadelphia metro region (PA, NJ, DE, NY) optimize their business with technology.