In May 2014, FASB and IASB converged to issue to a new standard on revenue recognition: ASC 606 and IFRS 15. A comprehensive, industry neutral revenue recognition standard, ASC 606/IFRS 15 aims to increase financial statement comparability across companies and industries to simplify today’s complex revenue recognition guidance. So, what is ASC 606 and how will it affect your business? Let’s find out.
What is ASC 606?
The new revenue recognition standard went into effect for publicly held businesses on January 1, 2018 and will be effective for non-publicly held businesses beginning January 1, 2019. The standard will affect all businesses—public, private and non-profit entities, that enter into contracts with customers to transfer goods or services. All such businesses will be required to abide with the requirements.
Jointly issued by the FASB and IASB, ASC 606/IFRS 15 provides businesses with a framework to recognize revenue more consistently. The purpose of the new revenue recognition standard is to eliminate inconsistencies in the way business across industries perform accounting for similar transactions. The lack of standardization in financial reporting made it difficult for investors and other consumers of financial statements to compare results across industries and even companies within the same industry.
ASC 606 and IFRS 15 aims to simplify the preparation of financial statements, improve comparative analysis and reporting, and provide a framework to make financial reporting more consistent through a 5-step revenue recognition model that includes:
Identifying the contract with the customer: Outlines the criteria to meet when entering into a contract with a customer for transfer of goods or services.
Identifying the performance obligations in the contract: Describing how distinct performance obligations in the contract must be handled.
Determining the transaction price: Outlining the considerations for establishing the transaction price, which is the amount the business expects to receive in exchange for the goods or services provided.
Allocating the transaction price to performance obligation: Outlining the guidelines for allocating the transaction price across the separate performance obligations of the contract.
Recognizing revenue when (or as) the entity satisfies a performance obligation: Revenue can be recognized as the business meets each performance obligation. This step outlines how that should happen.
Implementing ASC 606 and IFRS 15
The new revenue recognition standard will impact not just your accounting and financial function, but also your HR policies, IT systems and more. These broad ramifications of ASC 606 and IFRS 15 have companies worried.
More and more companies today are looking for solutions that can help to align their revenue reporting and recognition methods to this new standard. Additionally, they have started to make changes to their processes and policies. With the RevSym by CallidusCloud, you can automate revenue recognition and ensure compliance with ASC 606 and IFRS 15 easily. Contact us today for more information.