A 101 on ASC 606

ASC 606 went into effect in the fiscal year 2018 for public companies and in the fiscal year 2019 for nonpublic entities reporting under the US GAAP (Generally Accepted Accounting Principles). This set of rules from FASB (Financial Accounting Standards Board), is aimed at standardizing the methodology of revenue recognition for revenue from customer contracts and brings US GAAP in line with the IFRS (International Financial Reporting Standards) 15 standard.

These new standards offer more flexibility for companies to tailor revenue recognition to their specific company’s needs, but implementation can be a challenge, and it’s raised plenty of questions. So, let’s take a look at what ASC 606 entails and how it impacts your organization.

What Is ASC 606?

With so many factors in play — from pricing models and bundles to rebates and warranties to termination policies and more — revenue recognition can be a fairly chaotic process. No wonder results of what it actually means has varied across all sorts of companies and industries.

Since revenue recognition requirements have traditionally been so varied and inflexible, revenue reported correctly under the previous GAAP revenue recognition rules has often fallen short of fully representing a company’s financial activity. With this new set of rules, there is now a standardized model of how companies across industries recognize revenue while allowing them flexibility to work with their auditors to support market pricing models. These guidelines and processes are organized into five steps:

The primary driving principle here is that companies must recognize a contract’s entire transaction price as obligations are fulfilled to the customer, in an amount per obligation that is proportionate to the relative market value of the goods and services that comprise those obligations. That’s all easy enough for a company selling widgets, but when we start getting into more complicated agreements for services offerings, subscriptions and consumption-based models — not to mention future contract rights, contract modifications, and financial statement disclosure requirements— that’s when things get tricky.

What Does ASC 606 Mean for Your Organization?

Finance, legal, and sales all have to work together to define optimal order-to-cash processes that enable growth without compromising compliance. It is the finance team’s job to know ASC 606 inside and out, strategizing with the audit and legal teams on contracts and helping sales understand how the new rules might affect service offerings and/or compensation plans. Legal and finance teams need to work together on contract language and content to consider and clarify performance obligations and other areas that might ease the accounting and reporting requirements of the new regulations.

In addition, many companies need to reevaluate the billing technology already in place. Do your current systems include native revenue recognition that allow efficient, accurate reporting under these new guidelines? Are they flexible enough to manage a variety of offerings for on-off transactions, subscriptions and usage-based models? Are they also adaptable enough to empower growth?

There are plenty of companies out there offering out-of-the-box software solutions that claim to be ASC 606 compliant, but as we mentioned in an earlier blog, it’s not as easy as a one-size-fits-all approach. The real question in evaluating a revenue recognition solution is, “How flexible is the software solution, and can it be tailored to align with my company’s specific revenue recognition criteria so that we can perform at scale?”

ASC 606 brings challenges and big changes to the way organizations manage billing and revenue.

To find out how Gotransverse is ready to assist organizations in meeting compliance for the latest revenue standards, learn more about our ASC 606 functionality here or schedule a demo here to see it today!