The ASC 606 revenue recognition standard represents the most widespread change to revenue recognition rules in recent years. Effective Dec. 15th 2017 (nonpublic companies have an additional year), the new regulation was created to replace the industry-specific guidelines with a single standard across all industries. The implementation of new comprehensive revenue recognition guidance brings monumental change to how companies account for revenue and disclose revenue related information.
The core principle underlying the guidance in ASC 606, included in ASC 606-10-10-2, states “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.”
Below are the 5 steps of contract creation within the guidelines (with certain exceptions) of ASC 606.
1. Identify the contract(s) with a customer.
A contract in the ASC 606 guidelines applies to an agreement that meets specified criteria of the customer.
2. Identify the contract performance obligations.
A contract includes promises to transfer goods or services to a customer. At times, the good and services are distinct where the performance obligations are then accounted for separately.
3. Determine transaction price.
The transaction price is the amount to which an organization expects to be entitled in exchange for promised goods or services to a customer.
4. Allocate transactions price to performance obligations.
The transaction price is allocated to all the separate performance obligations in an arrangement. Typically a transaction is allocated to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service agreed in the contract.
5. Recognize revenue when the performance obligation is satisfied.
Revenue is recognized when each performance obligation is satisfied by the entity, which is when control of the underlying goods or services are transferred to the customer.
With the complexity of ASC 606, companies need to consider transitioning to an automated solution. FMT offers a cloud-based platform and years of business systems and accounting expertise to help. Our integrated NetSuite solution ensures your advanced revenue management needs are taken care of and tackles the complexity and compliance that come with ASC 606. If you have any additional questions about ASC 606 or NetSuite, please let us know by filling out the contact form below.