Effective for annual reporting periods beginning after December 15, 2018, all U.S. Generally Accepted Accounting Principles (GAAP) nonpublic entities are subject to the new revenue recognition guidance under Accounting Standards Codification (ASC) 606. The standard eliminates the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principles-based approach for determining revenue recognition. This standard has the potential to affect your organization’s day-to-day accounting and possibly the way business is executed through contracts with customers. Additionally, new extensive disclosures are required under the standard if notes accompany the financial statements. Is your firm ready for this major change?

The first step that all entities should consider is to assess the impact that the standard will have on each of their revenue streams. Keep in mind that most revenue-generating exchange arrangements, except for certain leases, insurance contracts, financial instruments, nonmonetary exchanges, and guarantees under the scope of other ASCs will be affected.

When considering the impact of ASC 606, entities should evaluate a sample of contracts by applying the following five-step approach:

Step 1: Identify the contract(s) with a customer – does an agreement exist between two or more parties that creates enforceable rights and obligations by meeting the criteria defined in ASC 606?

Step 2:  Identify the performance obligations in the contract – what are the distinct goods or services promised in the contract?

Step 3: Determine the transaction price – what is the total amount of consideration expected to be received? This amount should represent the net total of all fixed amounts, estimates of variable amounts subject to a constraint, significant financing components, noncash considerations, and considerations payable to the customer.

Step 4: Allocate the transaction price to the performance obligations in the contracts – what is the standalone price of each performance obligation that can be used to allocate the total amount of consideration?

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation – is the promised good or service transferred at a point in time or over time? Revenue should be recognized when (or as) the good or service is transferred to the customer.

After assessing the impact of the new standard on each revenue stream, entities should draft a new revenue recognition policy based on ASC 606 and select an adoption method for implementation. The adoption methods allowed by the standard include the full retrospective method and the modified retrospective method. Additionally, entities should assess the new disclosure requirements to determine what data and information need to be collected. Required disclosures include disaggregated revenue information, a reconciliation of contract asset, liability and receivable balances, information about performance obligations, and information on significant judgments made in evaluating revenue.

Finally, entities should implement a plan to collect all data and information needed for the new revenue recognition policy and disclosures. This will likely require extensive coordination between the accounting department and multiple other departments such as IT, sales & marketing, or human resources.

Sciarabba Walker & Co., LLP is ready to help your business or organization with implementing the new standard and drafting your revenue recognition policy. We would also be happy to advise on other options available to you, such as preparing your financial statements under a basis of accounting other than U.S. GAAP, and what implications such a change would have.

The new standard will have a large impact on the financial statements of almost every entity. Our firm is committed to helping you successfully navigate this change.

By Katie Fisher, CPA