The new revenue recognition standard, ASC 606, outlines a single, comprehensive model for accounting for revenue from customer contracts. For private companies now tasked with ASC 606 implementation, the model supersedes most legacy guidance and fundamentally changes how entities need to think about revenue recognition. Getting started now is critical.
The new model’s core principle for revenue recognition is 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.” This principle was established by both the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) and is the underpinning of the entire revenue framework. In particular, it identifies and answers the two most fundamental questions related to revenue.
The entity may recognize revenue when it satisfies its obligations under a contract by transferring goods or services to its customer. (That is, when the entity performs, it should recognize revenue.)
The entity may recognize the amount to which it expects to be entitled under the contract. (Estimates may be required because this is an “expected” amount.)
The FASB and IASB intentionally chose the wording “be entitled”—rather than “receive” or “collect”—in order to distinguish collectability risk from other uncertainties that may occur under the contract.
Private companies face significant changes from ASC 606 or IFRS 15, from the accounting implications to internal controls and budgeting, to disclosures and governance. But fortunately, a blueprint has been set.
Public companies, which implemented a year earlier, have diagnosed many implementation issues. If there’s an overarching conclusion to be drawn from these lessons learned from public implementation, it’s that no one gets a free pass. Assemble the resources you need to carry out the new standard. Engage outside help, as needed, to supplement your efforts. And don’t underestimate the amount of work that’s involved.
Private companies know that the new revenue recognition standard is coming. But there’s work to do to learn from the public companies’ lessons and understand the standard’s implications.
In order to achieve the core principle and determine when to recognize revenue—and how much revenue to recognize—the FASB and IASB established a five-step framework.
The five steps provide entities with a model to identify the contract to be evaluated under the new revenue standard, evaluate the performance obligations (or units of account to which the recognition principles apply), and determine the amount of consideration to be recognized as revenue for each performance obligation.
The new revenue recognition ASC 606 standard affects other accounting topics as well, including, but not limited to, contract modifications, licensing, contract costs, and presentation. It also creates additional quantitative and qualitative disclosure requirements.
The move from legacy US GAAP’s risk- and reward-based revenue recognition model to the new revenue standard’s control-based model is a fundamental change in how entities are required to think about revenue recognition.
The new revenue standard also eliminates many of the revenue recognition rules prescribed under legacy US GAAP, replacing them with a principles-based framework outlined in the five-step model.
In some cases, applying the five-step model and recognizing revenue under the new standard will be straightforward. In other cases, however, applying the new guidance will require significant judgment, increasing the complexity of compliance.
The 2019 edition of Deloitte’s "A Roadmap to Applying the New Revenue Recognition Standard" highlights some of the more challenging aspects of the new revenue standard and how it might require a different way of thinking about revenue recognition.