First of all, a bit of history if you’re unfamiliar with the notion itself. Back in 2014, the Federal Accounting Standards Board (aka FASB) in partnership with the International Accounting Standards Board (or IASB) came up with new rules on regulating revenues from contracts known as ASC 606. Initially, it affected only public organizations: they had to follow the standards for annual reporting starting from December 15, 2017. As for now, more than four years later, all businesses reporting under US GAAP will have to report revenue under ASC 606 for fiscal years from December 15, 2018, and on.
The emergence of this new standard has a number of major reasons behind. Historically, there’s always been a drastic difference between GAAP and IFRS in regards to how they judge revenue recognition and disclosure requirements. Thus, ASC 606 principles were crafted to simplify and unify revenue recognition practices across industries as requirements for reporting revenue vary within various jurisdictions and markets. However, revenue recognition is a critical benchmark if we talk about evaluating the financial performance of a business. In a nutshell, the newly-made standards serve one common principle: companies must identify revenues when transferring their merchandise or services to its clients, matching the amount of consideration expected in exchange for corresponding commodities and services. Five step guidelines have been designed for both individual and group contracts to keep them in conformity with ASC 606 principles.
- Identify the contract with a customer;
- Identify the performance obligations in the contract;
- Determine the transaction price;
- Allocate the transaction price to the performance obligations in the contract;
- Recognize revenue when or as the entity satisfies a performance obligation;
While the steps above may seem pretty straightforward, the devil is in the details as they say. Industry professionals claim that the adoption of ASC 606 standards represents a principally difficult task for subscription-based companies at every step of the model. Let’s find out what lies ahead for them.