Nearly all organizations on U.S. generally accepted accounting principles (US GAAP) that enter into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts).
The accounting for revenue as we know it today (i.e., ASC 605) is being replaced by ASC 606. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this principle, an entity will need to apply the following five steps:
FASB's ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606) is effective for public entities annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, it is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019.
Education on this new standard is the obvious starting point. This is an important accounting change for nearly all organizations compiling their financial statements in accordance with U.S. GAAP. Financial and accounting management, staff, audit committee members, and auditors can all benefit in learning the latest developments and guidance to help pave the way towards a smooth transition.
Treat implementation to this standard as an important ‘project’ that has a definitive deadline. While there are many preparations steps, here are some logical ones:
More judgements! There are many key judgement points in implementing this new standard, including contract modifications, significant financing components, noncash consideration, estimating relative standalone selling price, etc. This will trigger the need for the involvement of higher-level accountants and ample review controls over these judgements.
A second CPA firm, such as us, can provide the education, advice and support for successful implementation. Your external audit firm should be kept in the loop in terms of implementation status, but they are generally prohibited from conducting much of the necessary services due to independence concerns. We provide additional information through Changes to Revenue Recognition: ASC 606 and learn how we can help through this brochure.