How Generative AI can help in ASC 606 reporting?

Generative AI can enhance ASC 606 reporting through several critical functions:

?

1. Automating Contract Analysis

?? - Extraction and Interpretation: AI technology can efficiently extract and interpret essential contract terms, including performance obligations, payment conditions, and variable considerations.

?? - Classification: It can categorize contracts appropriately and apply the relevant ASC 606 criteria.

2. Identifying Performance Obligations

?? - Detection: AI can pinpoint distinct performance obligations within contracts, assessing whether they should be recognized separately.

?? - Allocation: It aids in distributing the transaction price among these obligations based on historical data and specific contract details.

3. Estimating Variable Consideration

?? - Forecasting: AI can project variable considerations such as discounts, rebates, and returns that must be factored into the transaction price.

?? - Scenario Analysis: It can create various scenarios for different outcomes, facilitating the estimation of expected values.

4. Determining Timing of Revenue Recognition

?? - Assessment: AI supports the evaluation of when performance obligations are fulfilled, thereby assisting in the timing of revenue recognition.

?? - Real-Time Adjustments: It offers real-time updates and forecasts for revenue recognition as new information becomes available.

5. Automating Journal Entries

?? - Drafting Entries: AI can autonomously produce draft journal entries for revenue recognition, minimizing manual workload.

?? - Error Detection: It can examine entries for errors or discrepancies in relation to ASC 606 standards.

6. Generating Disclosures

?? - Narrative Generation: AI can compose necessary disclosures by summarizing contract terms, performance obligations, and revenue recognition trends.

?? - Visualization: It can develop visual representations of revenue recognition over time and illustrate the effects of variable considerations.

7. Supporting Internal Controls and Audits

?? - Assistance: AI can bolster internal controls and facilitate audit processes by providing comprehensive data analysis and documentation support.

Here are a few simple examples of how generative AI can help with ASC 606 reporting, including some basic calculations:

1. Contract with Multiple Performance Obligations

Scenario: A company sells a product bundle that includes a piece of hardware and a 1-year service contract for software support. The total contract value is $1,200. The standalone selling prices are $1,000 for the hardware and $400 for the service contract.

AI Application:

1. Performance Obligation Identification: The AI identifies two performance obligations: hardware and service support.
2. Allocation of Transaction Price:Total Standalone Selling Price = $1,000 (hardware) + $400 (service) = $1,400 Allocation for Hardware = ($1,000 / $1,400) × $1,200 = $857.14 Allocation for Service = ($400 / $1,400) × $1,200 = $342.86
3. Revenue Recognition:The $857.14 allocated to hardware is recognized at the point of delivery.The $342.86 allocated to the service is recognized over the 12-month period, resulting in monthly revenue of $342.86 / 12 = $28.57.

Impact: AI automates the allocation calculation and helps in generating journal entries for the revenue recognized over time.

2. Variable Consideration with Refunds

Scenario: A company sells 1,000 units of a product at $50 each, expecting 5% of the products to be returned based on historical data.

AI Application:

1. Expected Returns:Total Revenue = 1,000 units × $50 = $50,000 Expected Returns = 5% × 1,000 units = 50 units Expected Refund = 50 units × $50 = $2,500
2. Revenue Recognition:Recognized Revenue = $50,000 - $2,500 = $47,500

Impact: AI forecasts the expected returns, allowing the company to recognize $47,500 as revenue and create a liability for the expected refund of $2,500.

3. Recognizing Revenue Over Time for Subscriptions

Scenario: A company provides a 12-month software subscription for $1,200, billed upfront.

AI Application:

1. Transaction Price Allocation: Total Revenue = $1,200 Monthly Revenue = $1,200 / 12 = $100
2. Revenue Recognition: Recognize $100 monthly as the service is delivered over the 12-month period.

Impact: AI automates the monthly revenue recognition entries, ensuring consistent recognition over the contract term.

4. Significant Financing Component

Scenario: A customer agrees to pay $20,000 for a product, with payment deferred for 2 years. The product is delivered upfront. The company's borrowing rate is 5%.

AI Application:

1. Calculating Present Value: Present Value of $20,000 = $20,000 / (1 + 5%)^2 = $18,140.59
2. Revenue Recognition:Recognize $18,140.59 as revenue at delivery.Recognize $1,859.41 as interest income over the 2-year period.

Impact: AI calculates the present value and automatically splits the revenue and interest income over the relevant periods.

These examples show how generative AI can handle complex calculations and streamline the revenue recognition process according to ASC 606 standards.