One of the changes affecting private businesses in 2019 is ASC 606, Revenue Recognition.
Danielle Moga provided the insights below about what ASC really means to you. She is an associate of Barker Associates with a wide variety of accounting and finance experience with non-profit and public companies.
ASC 606 What it Means to Private Business
Contributed by Danielle Moga
Public companies had to adopt the standard in 2018 and what we’ve learned is that the process to implement was not a straightforward exercise. Many companies underestimated the complexity of the change and did not have the appropriate time, resources or processes in place to implement seamlessly.
The new standard changes the way companies need to record and recognize revenue from their contracts. The goal of the new standard is to enable users to understand better and consistently analyze revenues across industries, transactions, and geographies but the disclosure requirements are comprehensive, and the changes to the nature and timing of revenue recognition can be significant.
The good news is that you don’t have to be an industry-specific guru to implement the changes, as FASB opted for a more principles-based approach. The challenge is, those preparing financial statements and disclosures will require more judgement.
ASC 606 breaks down the analysis of contracts into a 5-step process that is intended to help preparers wrangle the chaos of details but the task to determine revenue recognition can be daunting depending on the volume and types of contracts that exist.
- Identify the contract(s) with a customer
The contract must be fully executed, clearly identify the good/services to be transferred and specifically outline the payment terms.
- Determine the performance obligations in the contract
All distinct transfers of goods or services must be identified. A good or service is distinct if 1) the customer can benefit from it on their own, or with resources they already have, and 2) can be transferred independent of other performance obligations.
- Determine the transaction price
The amount of consideration the company expects to be entitled to in exchange for transferring the promised good or service.
- Allocate the transaction price to the performance obligations in the contract
Performance obligations in the contract need to be separately identified priced or estimated.
- Recognize revenue when (or as) the entity satisfies a performance obligation
The timing of recognition of revenue is dependent upon the time frame in which satisfaction of the obligation occurs. Point in time vs. variable over time.
The five steps are handy but don’t realistically help to manage the complexity of the project or the time it will take to meet the looming deadline.
We recommend a 3-phase approach:
- Analyze contracts and systems
- Ensure you have the right resources on hand with the skills and time necessary to lead and organize the project; or hire those resources externally for support.
- Outline all components of the contract(s), as denoted in the 5-step process.
- Decide if the retrospective or cumulative method will be utilized.
- Document the existing methods and systems used to report revenue streams.
- Determine the necessary changes to process and systems to implement and control the new recognition methods.
- Document judgements made where clarity is needed.
- Outline historical journal entries and the new ones necessary for compliance.
- Determine differences and the impact on revenue, KPI’s and other material items.
- Begin the conversion process and maintain parallel systems to ensure accuracy.
- Schedule internal assessments of reporting and systems to ensure ongoing compliance.
- Assess the skills and time of the internal team designated to safeguard this process to establish if additional support is needed.
Even with steps and a process, companies must set aside the time necessary to transition. Companies with minimal impact may only need a few months to go through the process of outlining and documenting. Companies with complex revenue streams and required system changes could take six months or more to transition and implement.
Don’t get caught in the 11th hour, start now! If your internal team is seasoned enough to handle this change then there are many resources available to educate and plan. Alternatively, leverage outside talent to minimize the chaos and challenges that come with significant change.