What is ASC 606? Understanding the New Revenue Recognition Standards

Posted by Marc Holliday on September 26, 2017

ASC 606 Revenue Recognition

What is ASC 606?

ASC 606 is the new revenue recognition standard that affects all businesses that enter into contracts with customers to transfer goods or services – public, private and non- profit entities. Publicly held businesses must abide with the requirements in ASC 606 by December 15, 2017. Non-publicly held businesses have until December 15, 2018. 

Developed jointly by the Financial Accounting Standard’s Board (FASB) and International Accounting Standards Board (IASB), ASC 606 provides a framework for businesses to recognize revenue more consistently. The standard’s purpose is to eliminate variations in the way businesses across industries handle accounting for similar transactions. This lack of standardization in financial reporting has made it difficult for investors and other consumers of financial statements to compare results across industries, and even companies within the same industry.

The ASC 606 5 Step Model

In developing ASC 606, FASB and IASB wanted to provide a framework to drive consistency in financial reporting, improve comparative analysis and reporting, and simplify the preparation of financial statements through a 5 Step Model for Revenue Recognition.

ASC 606 breaks the contract process into the following 5 steps:

  1. Identify the contract with a customer

    This step outlines the criteria that must be met when establishing a contract with a customer to supply goods or services.

  2. Identify the performance obligations in the contract

    This step describes how distinct performance obligations in the contract must be handled.

  3. Determine the transaction price

    This step outlines what must be considered when establishing the transaction price, which is the amount the business expects to receive for transferring the goods and services to the customer.

  4. Allocate the transaction price

    This step outlines guidelines for allocating the transaction price across the contract’s separate performance obligations, and is what the customer agrees to pay for the goods and services.

  5. Recognize revenue when or as the entity satisfies a performance obligation

    Revenue can be recognized as the business meets each performance obligation. This step specifies how that should happen.

For more detail about the ASC 606 5 Step Model and how Deltek can help you prepare for the new standard, download this free whitepaper:

How Costpoint Helps Project-Based Businesses Prepare for ASC 606”. Download Now.

ASC 606 – More than Just Accounting and Finance

Implementing ASC 606 has broad ramifications. Meeting the standard will impact not just your accounting and financial departments, but will impact your IT systems, HR policies and more.  It’s these broader implications and unknowns that have many companies concerned.  Here are some of the things you can do:

  • Consult with Experts: Many companies are turning to their IT systems vendors, tax experts and auditors to help them meet the requirements of this new revenue standard. The new standard is complex and in order to prepare properly, you need to quickly determine what changes need to be made to your systems and business processes to become compliant. These experts can help you avoid common pitfalls in ASC 606 implementation.
  • Establish a Cross-Functional Task Force: Since ASC 606 touches many areas of a business, many companies find it beneficial to create a cross functional task force. This cross-functional team will be valuable for helping to identify and work through the finance, legal, IT, HR, and sales issues you’ll face implementing ASC 606. 
  • Use a Compliant IT System: Your business systems needs to be able to collect and analyze information necessary to produce disclosures to meet ASC 606 requirements. Not all systems are able to extract information needed to make revenue recognition decisions.  It’s important to work with a project-based solutions vendor that is proven and has made the investments in their systems to meet ASC 606 and other compliance requirements.

Stay Compliant with Deltek Costpoint

Deltek Costpoint 7 has been enhanced to help companies meet the requirements of ASC 606. New enhancements will help you evaluate contracts according to the new standard, satisfy revenue evaluation and disclosures, and do the comparative analysis and reporting ASC 606 requires for revenue and financial statements.

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