Ready or not, the implementation period for the new revenue recognition standard (ASC 606) is here. The standard takes effect for private companies for annual reporting periods beginning after December 15, 2018 (or fiscal years beginning 1/1/2019).
Many private companies are still not focused on the standard and how it will affect them, despite the impending effective date. ASC 606 applies to all types of businesses and all types of customer contracts. For many businesses, such as retailers, there will be little difference other than additional disclosures in their financials, but for others this could be a major change. Some of the industries significantly impacted include construction contractors, contract manufacturers, healthcare, not-for-profit, and software.
At its core, ASC 606 breaks down the revenue recognition standards for contracts with customers into a five-step model that must be taken into consideration when accounting for each and every contract. Each step in the model has its own challenges and intricacies that can affect the way that revenue is recognized on those contracts.
The five steps are as follows:
1) Identify the contract with the customer
2) Identify the performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations in the contract
5) Recognize revenue when (or as) the entity satisfies the performance obligation(s)
Your implementation plan for ASC 606 should include the following:
- Become intimately familiar with the standard
- Assign staff to become subject matter experts
- Establish a realistic timeline
- Consider discussing issues with peer organizations in your industry
- Consider all your business’ revenue streams and the associated contracts
- Evaluate the impact on contract accounting
- Determine the impact of adoption on financial results and different adoption methods
- Discuss with and educate key stakeholders
- Evaluate changes to IT systems that may be necessary
- Update your revenue recognition policies and procedures
Digging into the Revenue from Contracts with Customers standards can be a daunting, but necessary, task. Hertzbach is here to assist you with the implementation process in its entirety.