Revenue Recognition

Understanding FASB ASC 606 - Revenue Recognition Standard

The Old Model

Recognizes revenue when a company “earns” it.

The old model has lead to similar companies arriving at different revenue recognition for similar services or goods, making it difficult to compare companies or compare certain goods and services.

In addition, US GAAP currently has over 200 pronouncements about how to recognize revenue, leading to inconsistencies, even within companies and industries.

The New Model

Recognizes revenue as companies fulfill their promises to provide goods or service to their customers.

In addition to being required for entities that report under US GAAP, the new revenue recognition standards will provide many benefits to owners/management team and investors.

  • Clearer picture of the business with better insight into which parts of a contract are most profitable.
  • Consistency across industries and companies, making it easier to compare goods and company performance.
  • Revenue will be based on the same conceptual framework for all companies – making comparison and consideration more accurate for investors and interested parties.

ASC 606 5-Step Process

Step 1
Identify customer contracts
A contract is defined as an agreement between two or more parties that creates enforceable rights and obligations – this can be written, verbal or implied.

Step 2
Identify performance obligations
A promise to transfer distinct goods or services to a customer.

Step 3
Determine the transaction price
The transaction price is based on the amount of consideration to which an entity expects to be entitled in exchange for satisfying its performance obligations under the contract.

Step 4
Allocate the transaction price
The transaction price of each performance obligation is determined by the relative stand-alone selling price of each product or service provided under the contract.

Step 5
Recognize revenue when the obligation is met
Performance obligations are satisfied by transferring the promised good or service to a customer. The good or service is considered transferred when the customer obtains control. This may be satisfied over time or at a point in time.

Tax Reporting Implications

The impact of these financial reporting changes on the company’s tax reporting also needs to be evaluated. In most cases, companies will be required to file an Application for Change in Accounting Method (IRS Form 3115) to reflect the changes in recognizing revenue on its income tax filings, starting with the 2019 tax year.

We are here to help!

As we prepare for the 2019 year-end, our team will provide guidance and support as you update your contracts and accounting processes to assist all clients with preparation and compliance.

If you have any questions, give our assurance team members a call, and we will help you navigate the revenue recognition changes as they relate to your company and individual transactions.