By: Paul Arne, Sean Lager, Alexander Woollcott
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014- 09 (Topic 606), Revenue from Contracts with Customers, which is a principles-based standard on accounting for revenue from contracts with customers and replaces the preexisting rules based guidance designed for specific industries. ASC 606, or the “New Standard,” is effective for public companies with fiscal years beginning after December 15, 2017 and for nonpublic companies with fiscal years beginning after December 15, 2018. This article will refer to the pre- ASC 606 standards as the “Old Standard” or “Legacy GAAP.”
ASC 606 impacts all companies that contracts with customers to provide goods or services. The New Standard will require organizations to re-evaluate not only how they recognize revenue related to promised goods or services they provide to their customers but how their customer contracts are structured.
The core of the New Standard provides for a five-part process for assessing how revenue should be recognized, which are as follows:
1. Identify the contract with a customer.
2. Identify the performance obligations (promises) in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.
5. Recognize the revenue when (or as) performance obligations are satisfied.
ASC 606 will have some form of impact on all industries but will arguably have the most significant impact on software and Software-as-a-Service (“SaaS”) based companies (collectively referred to as “Tech Companies”). Read more…
