In 2014, FASB and IASB issued converged standards for revenue recognition with ASC 606, which impacts revenue accounting from contracts and customers. Public, private, and not-for-profit organizations must apply the new revenue standards; public entities must apply the new standards for annual reporting periods starting after December 15, 2017 and all other entities beginning with annual reporting periods starting after December 15, 2018. With less than a year to go, now is the time to actively develop new processes and begin implementing system changes.
To achieve the principles of ASC 606, entities should take the following actions:
The implication of the principles based standard and the steps above are that companies may be required to make more judgments and estimates to better reflect the economics of their arrangements.
Two-Phase Assessment & Implementation
The road to timely compliance with ASC 606 is a two-phase initiative: assessment and implementation. Both phases require significant planning and coordination. As this timeline shows, companies should aim to have defined processes and system requirements in place by the end of the year. Starting in January, companies should begin developing the new processes and implementing necessary system changes.
Recently, companies concerned with ASC 606 revenue recognition compliance have begun considering flexible staffing options to better meet their implementation needs. Hiring specialized contract talent from a staffing firm can bridge the gap in institutional knowledge and streamline the implementation process.
Keep the following considerations in mind as your company works towards ASC 606 compliance:
- Impact extends beyond accounting.
ASC 606 may impact customer contract management, sales and marketing activities, shipping and handling, supply chain strategies and compensation programs. Companies that fail to conduct a comprehensive audit of all processes and systems may overlook potential compliance issues.
- ASC 606 is still changing.
Earlier this year, FASB and IASB issued several amendments and clarifications to the new revenue standard. These clarifications were in response to issues raised by stakeholders and discussed by the Transition Resource Group. Amendments include new guidance for classifying the principal versus agent assessment, identifying performance obligations, and accounting for intellectual property licenses. Staying up to date on the latest amendments is critical for compliance.
- Seek guidance to clarify performance obligations.
Identifying performance obligations is an essential step for successful ASC 606 implementation. To do so, your company must determine whether the goods or services provided are “individual promises to perform” or if they should be grouped together. This classification is critical since it impacts when and how revenue is recognized.A good or service is capable of being distinct if a customer can benefit from that good or service either on its own or together with other, readily available resources. Secondly, a good or service must also be separately identifiable from other promises within a contract (“distinct in the context of the contract.” Since this criterion requires more judgment, companies may benefit from outside consulting or expert contractors when identifying performance obligations.
Whether your company is unsure about performance obligations or how to begin developing new processes to ensure ASC 606 compliance, now is the time to seek the necessary expert guidance.
Given the complexity of the new Revenue Recognition standards, many companies are finding it beneficial to bring in consultants and/or full-time staff who are subject matter experts within technical accounting and revenue recognition. These experts can analyze existing policies and procedures and devise a strategy for implementation.
Even if your company already employs a subject-matter expert, bringing on additional resources can help that person or team implement the new standard. Either way, it is essential that changes be implemented completely and correctly to avoid reporting delays and costly fees associated with non-compliance and audit issues.
Your local Lucas Group recruiting professional is available to speak further and discuss what options may be the best fit for your business.