Emily Clarke

Understanding Revenue Recognition Compliance

ASC 606 is a standard of revenue recognition that affects non-profit, private and public businesses that transfer goods and services. Both private and public entities should comply with it. It was developed by the International Accounting Standards Board and Financial Accounting Standards Board as a revenue recognition standard.

ASC 606 Step Models

To make ASC 606 framework play a role in simple preparation of financial statements, better comparative reporting and analysis and financial reporting, the revenue recognition model has these four steps:

1. Identify the contract with the client

This outlines the rules to be observed when making a contract with the client to deliver goods or services.

2. Identify contract performance obligations

This describes how the contract performance obligations must be handled.

3. Determine the transaction price

This step outlines what to consider when setting a transaction price, the amount paid to deliver goods or services to the client.

4. Allocate the transaction price

This step gives ways in which to establish a transaction price in the performance obligations of the contract. It should be in accord with what the client is willing to pay for the goods or services.

If a business follows the performance obligations, then the revenue can be recognized.

Effects of ASC 606

This framework will not only impact your financial and accounting departments but also your HR policies and IT systems.

The following are factors that will affect your cost calculations and resource allocation:

1. Contract evaluation requirements

You will need to create a framework based on contract assessment for your accounting policies. It will be burdensome to evaluate each contact and policy if they are highly variable.

2. Choice of transitional method

Any modified and retrospective methods have advantages and disadvantages, but they will often require significant effort.

3. Handling comprehensive disclosures

For a quality and quantity disclosure, you need to expand them more compared to those complying with the current guidelines.

4. Changing revenue recognition plans

This shows how to monitor performance obligations and apply the rules based on the revenue calculation. It shows the quantity of effort needed to manage contract modification, revenue streams and complex revenue scenarios.

Author Resource:-

Emily Clarke writes about business software and services like commission tracking platforms, softwares etc. You can find her thoughts at sales commission blog.