Revenue Recognition Criteria: How to Manage ASC 606 Compliance
Are you in compliance with the quickly approaching revenue recognition criteria changes? They are the most sweeping changes to come to accounting in a decade, and many companies are woefully unprepared. ASC 606 revenue recognition criteria goes into effect for public companies on December 15, 2017, and December 15, 2018 for private companies. This new revenue recognition criteria standard has the potential to reshape an organization’s revenues and valuation.
For many companies, this is a wake-up call in terms of how they recognize revenue. It’s no longer the “wild west” when it comes to amortizing revenue. It’s a time to balance the creativity of the sales team with the new standard accounting practices that need to be in place. No more “one-off” contracts and special subscriptions. Standardizing contract details will be essential so accounting can properly capture details and recognize revenue in line with the new rules.
We’re in the midst of the transition period right now where there are important rules for tracking and reporting revenue under both methods. In order to adopt the new standards, FASB has issued guidelines for what a business can do to adopt the new standard that organizations should implement immediately. Those that use Excel-based accounting practices could find themselves facing an even more complicated task.
Here are five steps to recognizing revenue for subscription-based businesses:
Identify contracts and thresholds
The ASC 606 standard will require organizations to treat multiple related contracts as one contract. Ideally, your accounting system should be “contract aware”- with contract management capabilities built in. You won’t be able to recognize revenue until a contract reaches a collectability threshold. Start the process by identifying contracts and the likelihood that the contract will be collected.
Manage performance obligations and renewals
There are several criteria for determining whether a good or service is a “performance obligation” (a promise to deliver a good or service). This has an impact on when and how much revenue will be recognized. Organizations need to establish a uniform procedure for handling performance obligations, which means “contract intelligence” is even more essential in the accounting software.
Determine the transaction price
Normally the transaction price is what a company expects to be paid for goods or services. However, this can be considerably more challenging for companies with complex contracts or subscriptions. Under ASC 606, it will be critical to establish processes and controls around valuation methods so consistent methods can be applied and contracts with non-standard terms can be identified.
Allocate the transaction price
Once a transaction price has been determined (step three), it must then be allocated to each performance obligation (step two), based on the relative standalone sales price. This will require a complex rules-based approach that spreadsheets and Excel-based accounting systems simply won’t be able to handle.
With the new revenue recognition criteria, revenue will be recognized over time as performance obligations (goods or services) are satisfied. It’s essential that billing and revenue recognition systems work in sync so that each time the obligation is complete, the organization can recognize the proportionate income.
Working in sync is exactly what Intacct does best. With templates and schedules that automatically allocate revenue and amortize expenses, Intacct can handle dual treatment of contracts, as well as important integrations. It’s past time to prepare for ASC 606 - it’s now time to take action. Partner with the experts at Arxis Technology to learn how Intacct can move your organization from unprepared to full compliance!