Last year, the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) made a move to internationally align and standardize how companies recognize revenue from client contracts.
If contracts impact your company’s revenue, if your business handles contracts in any way, or if you are responsible for finding/acquiring customers, these new rules may impact you.
Known as ASC 606: Revenue from Contracts with Customers, these accounting standards lay out guidelines for revenue processes, including contracts, pricing, quotes, orders, and revenue recognition. This results in many companies needing to re-evaluate when and how they account their revenue and whether sales need to be booked differently.
The Financial Accounting Standards Board (FASB) – which is known for maintaining U.S. accounting standards for public companies (known as Generally Accepted Accounting Principles [GAAP]) – also created the ASC 606 regulations.
As you know, many things impact a company’s revenue: subscription models (RMR fees), solutions and services bundling, product rebates, shipping fees, etc. For these reasons, ASC 606 rules may impact the following processes and practices:
- Contract costs
- Multiple-element arrangements
- Transfer of control model
- Variable consideration
Beginning after Dec. 15, 2017, public entities were expected to apply this new revenue standard for annual reporting periods. Non-public entities that report under GAAP principles are required to apply the revenue standard for annual reporting periods beginning after Dec. 15, 2018. Entities that report under IFRS (International Financial Reporting Standards) were required to apply the revenue standard for annual reporting periods beginning on or after Jan. 1, 2018. (If you’re not sure which you report under, check with your accountant or accounting firm.)
Integrator compliance with ASC 606 is important for many reasons. Your clients may start to ask for documentation on things like:
- Evaluating collectibility and price concessions
- Accounting for contract modifications
- Accounting for variable consideration
- Accounting for a significant financing component
- Identifying the units of account:
- Elements or promised goods or services in the contract
- Determining whether the elements or promised goods or services should be treated as one or more unit(s) of account
- Additional considerations when accounting for software as a service or hosted software
- Additional considerations when accounting for options for additional goods or services (like renewal options)
- Allocating the arrangement consideration or transaction price to the units of account:
- Using vendor-specific objective evidence of fair value vs. standalone selling prices
- Using a residual method
- Limiting revenue to the amount not contingent upon delivery of any undelivered elements
- Determining whether revenue should be recognized over time or at a point in time
- Accounting for licenses and rights to use intellectual property:
- Identifying the performance obligations in a contract that includes an IP license
- Determining when a performance obligation that includes an IP license is satisfied
- Accounting for nonrefundable upfront fees
- Accounting for customer acquisition and setup costs
By now, ASC 606 probably seems overwhelming. These new revenue recognition standards may have a significant impact on your business. But there’s good news here: NSCA has resources that can help. NSCA Business Accelerator Solutions360 can teach you the most pertinent questions to ask, as well as the terms you need to communicate to your accounting firm.
Have a specific question or comment about ASC 606? Let us know!