A study on ASC 606

ASC 606, also known as Accounting Standards Codification Topic 606, is a set of guidelines for revenue recognition issued by the Financial Accounting Standards Board (FASB). These guidelines were developed to provide a consistent method for companies to recognize revenue and to improve the comparability of financial statements across different industries.

The history of ASC 606 began in 2002 when the FASB and the International Accounting Standards Board (IASB) began a joint project to converge the US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The goal was to improve the comparability of financial statements across different industries and countries. In a nutshell, ASC 606 covers revenue from contracts with customers and identifies performance and licensing obligations.?

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014 - 09, Revenue from Contracts with Customers, which provided a new revenue recognition model based on the 5 step model outlined in ASC 606. The new guidelines were intended to provide more useful information to investors.

The ASC 606 effective date for public companies was December 15, 2017, for annual reporting periods and interim periods within those annual periods. For private companies, the ASC 606 effective date was December 15, 2018, for annual reporting periods and December 15, 2019, for interim periods within annual periods.

The ASC 606 guidelines have been widely adopted by companies across different industries, and have had a significant impact on revenue recognition practices. It's important for companies to be aware of the changes brought by ASC 606 and to ensure that their revenue recognition processes are in compliance with the new guidelines.

One key aspect of ASC 606 is the 5 step model for revenue recognition, which includes the following steps:

1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.

In detail, these can be understood as follows:

1. Identify the contract(s) with a customer: This step involves identifying the agreements that exist between the company and the customer. The contract should include all terms and conditions that are legally enforceable and should be evaluated to determine whether it is a contract as per the ASC 606.
2. Identify the performance obligations in the contract: This step involves identifying the promises to transfer goods or services to the customer. These promises are referred to as performance obligations. These performance obligations need to be identified and described in detail so that they can be properly accounted for in the revenue recognition process.
3. Determine the transaction price: This step involves determining the amount of consideration to which the entity expects to be entitled in exchange for transferring the goods or services to the customer. The transaction price should include all forms of consideration, such as cash, credits, and other forms of payment.
4. Allocate the transaction price to the performance obligations in the contract: This step involves allocating the transaction price to the performance obligations identified in step 2. The allocation should be done using a reasonable method, such as the relative standalone selling price method.
5. Recognize revenue when (or as) the entity satisfies a performance obligation: This step involves recognizing revenue when the company satisfies a performance obligation by transferring the goods or services to the customer. Revenue is recognized when the customer obtains control of the goods or services, which is when the customer has the ability to direct the use of and obtain the benefits from the goods or services.

It's worth noting that the 5 step model applies to all contracts with customers, regardless of the industry or type of goods or services being sold. Also, the model may require additional analysis and judgment in certain situations, such as when dealing with variable consideration, significant financing component, or non cash consideration.

The standard applies to all entities that enter into contracts with customers, including non profit organizations, as well as public and private companies.

ASC 606 applies to a wide range of industries, including but not limited to:

1. Software: Companies that sell software licenses, subscriptions, and maintenance services must apply ASC 606 to recognize revenue from these contracts.
2. Construction: Companies that enter into contracts to build or improve real estate properties must apply ASC 606 to recognize revenue from these contracts.
3. Manufacturing: Companies that manufacture and sell products must apply ASC 606 to recognize revenue from the sale of these products.
4. Telecommunications: Companies that provide telephone and internet services must apply ASC 606 to recognize revenue from these services.
5. Professional Services: Companies that provide services such as consulting, legal, and accounting must apply ASC 606 to recognize revenue from these services.
6. Healthcare: Companies that provide healthcare services must apply ASC 606 to recognize revenue from these services.
7. Retail: Companies that sell goods or services to customers must apply ASC 606 to recognize revenue from these sales.
8. Leasing: Companies that enter into lease agreements for property or equipment must apply ASC 606 to recognize revenue from these agreements.

ASC 606 affects the way companies recognize revenue from contracts with customers, and it may also have an impact on their financial statements. It's important for companies to understand the requirements of ASC 606 and how they apply to their specific industry in order to ensure compliance and accurate financial reporting.

The future of ASC 606 in the current economic situation may depend on the ongoing effects of the COVID-19 pandemic and other economic factors like the upcoming recession. The FASB may consider issuing additional guidance or clarifications to help companies navigate the unique challenges caused by the pandemic. Additionally, the SEC may offer additional guidance on the application of ASC 606 in light of the pandemic's impact on business operations and revenue recognition.

Overall, it is important for companies to stay informed about any developments or updates related to ASC 606 and to consult with their accounting and financial advisors to ensure compliance with the guidelines.