A new revenue recognition standard that is challenging finance departments and C-level executives everywhere, ASC 606/IFRS 15 is jointly developed by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB). The purpose of establishing this standard is to provide a model for revenue recognition and financial statement comparison across industries and companies that is less complex and difficult than existing models.
A cross-industry revenue recognition standard, the new revenue recognition standard is arguably one of the most significant changes in accounting regulations in the past decade or so. Contracts are at the basis of financial exchanges and sales relationships and the new revenue recognition standard looks set to make their management more gruelling for some of your workforce. And since senior executives at your company can be held personally liable for not complying to the revenue standard, you need to get your act together—and quick, to prepare yourself for ASC 606/IFRS 15.
The Difference Between U.S GAAP and 606
Before you start preparing yourself for the new revenue recognition standard, understand how it is different from U.S GAAP. Following are the major differences between the two:
|Many requirements for recognizing revenue
||Recognize revenue using consistent set of principles
|Barring segment reporting and accounting policies disclosures, limited information about contract revenue recognition
||Connected set of disclosure requirements providing financial statement users with useful information pertaining to the customer contracts of the company
|Even though they may represent separate well-defined obligations to the customer, U.S GAAP does not consider many good or services promised in contract with customers to be distinct revenue transactions
||Each good or service promised to the customer is identified by reporting entries. Additionally, they determine if the good or service signifies a performance obligation and also recognize revenue when (as) each performance obligation is satisfied
|The consideration amount allocated to a delivered element is limited to the amount not dependent on delivering goods or services in the future
||Based on the relative standalone selling price of the underlying goods or services, companies allocate the transaction price to each of the performance obligations.
|There is great difference between variable consideration accounting across industries
||A single model for variable consideration accounting, which includes discounts, bonuses, rebates or a right to return.
The Five-Step ASC 606 Revenue Recognition Model
To comply with the new revenue recognition standard, you need to use a five-step model that includes the following steps:
- Identifying the contract with the customer
- Identifying the performance obligations in the contract
- Determining the transaction price
- Allocating the transaction price to the performance obligations
- Recognize Revenue when an entity satisfies a performance obligation
Steps to Facilitate Transition
Following are some steps company executives can follow to facilitate transition from existing revenue recognition requirements:
- Meeting with the staff members responsible for performing revenue recognition
- Reviewing policies and procedures around revenue recognition
- Completing list of active contracts
- Selecting a contact sample, applying standard, and performing an impact assessment
- Meeting with accountants to discuss documentation, risks and contract types
If you want to avoid some of the hassle involved in the implementation of ASC 606, then contact CallidusCloudtoday.