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A Summary: What is ASC 606?

ASC 606, the new revenue recognition standard, requires an explanation in order to fully understand. If that’s what you want, you’re in the right place.

ASC 606, the new revenue recognition standard, requires an explanation in order to fully understand. If that’s what you want, you’re in the right place.

Here, we will answer your questions about ASC 606.

  • What are the Criteria for Revenue Recognition?
  • What is ASC 606?
    • What is the Purpose of ASC 606?
    • Who Does ASC 606 Apply to?
    • How is ASC 606 Implemented?
  • How is ASC 606 Different Than the Previous Standard?
  • Final Thoughts

What are the Criteria for Revenue Recognition?

As far as GAAPs are concerned, revenue recognition has four central criteria.

  1. Clear evidence of a financial arrangement
  2. Completion of product or service delivery
  3. Price to the buyer is fixed or measurable
  4. Funds are reasonably collectible

And, there are several methods to measure revenue recognition. Here are some of the most common:

  • Sales basis method - Revenue is recognized at the time that goods or services are delivered to the buyer, whether paid or invoiced.
  • Percentage of completion method - Revenue is recognized based on the percentage of project completion with long-term contracts.
  • Cost-recoverability method - Revenue is recognized when all costs to complete the project or transaction are complete.
  • Installment method - Revenue is recognized each time a payment (installment) toward a project or transaction is made.
  • Completed-contract method - Revenue is recognized when a contract is complete, and all costs and transactions have been recorded.

Other revenue recognition methods include accrual, appreciation, brokerage agreement, deposit, proportional performance, and transactions under bill & hold. Each method has its own set of pros and cons and specific situations wherein they would be most effective.

So, based on your operations, you should select the most appropriate method. Then, using this method, you’ll need to make changes to your accounting based on the new standards outlined ASC 606.

What is ASC 606?

In accounting, ASC stands for Accounting Standards Codification as defined by the Financial Accounting Standards Board (FASB). FASB’s purpose is to establish best practices for GAAP accounting professionals and companies who follow these principles.

ASC 606 is a recent change in standardized accounting principles for revenue recognition. In a nutshell, Topic 606 covers revenue from contracts with customers and identifies performance and licensing obligations. The document explains, step-by-step, how to account for revenue earned from your business operations.

What is the Purpose of ASC 606?

The reason Topic 606 was issued by the FASB and International Accounting Standards Board (IASB) was to update the pre-existing standards for revenue recognition and drive a more consistent financial reporting experience. Furthermore, this codification enhances and simplifies comparative analysis and financial statement preparation.

Basically, ASC 606 is supposed to make it easier for companies to get on the same page with their accounting. The guidelines help establish a clear outline to determine revenue calculations for tax purposes.

Who Does ASC 606 Apply to?

All businesses and organizations that enter into contracts or sales agreements with customers starting in the fiscal year after December 15, 2017 are affected by ASC 606. Both private and public as well as profitable and non-profit institutions are included. So, if you sell goods or services, this framework applies to you.

How is ASC 606 Implemented?

The structure of ASC 606’s new guidance is laid out in five steps:

How is ASC 606 Implemented

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

For each step, there are distinct guidelines. The idea is that, by following the process, companies should gain a sharper image of their actual revenue generation.

How is ASC 606 Different Than the Previous Standard?

The primary change with ASC 606 versus 605 is that more comprehensive and detailed disclosures are now required. For example, entities will need to reveal separate revenue streams. And, if a contract liability was disclosed at the beginning of an accounting period and becomes revenue at the end of the period, the dots will need to be connected.

In addition to the quantitative data, companies must now share qualitative data such as performance obligations. ASC 605 did not require such information. Hence, there are strong debates taking place (such as which length amortization periods to use within SaaS and subscription business structures).

In most cases, new systems need to be implemented and can take excessive time and effort to adjust. So, if you’re not yet implementing the new standards, they might be overwhelming at first.

Final Thoughts

You should now have a stronger understanding of ASC 606 and how the new instructions might affect your accounting. Still, the details and added requirements can be a bit overwhelming. That’s why you should be able to turn to incentive compensation management software to take the load off your plate.

Performio’s platform already collects the granular data needed to meet updated revenue recognition standards such as total commission paid, product category, the period in which commission was paid, amortization amount, PTD amount expensed, and asset balance. We can help you automate sales commission calculations and reporting, no matter how complicated your compensation plans.

Request a demo today and let us help you manage your sales commissions.

FAQs

What is revenue recognition ASC 606?

ASC 606 is the latest iteration of standardized accounting principles for revenue recognition. It was developed by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), to provide all businesses with a unitary framework for recognizing revenue. The purpose of ASC 606 is to eliminate discrepancies in how businesses handle accounting in the case of similar transactions across various industries.

What is ASC 606 summary?

As the new revenue recognition standard, the ASC 606 requires a detailed explanation. This summary of ASC 606 will provide you with an understanding of:
  • The criteria for revenue recognition
  • The purpose of ASC 606
  • The applicable entities for ASC 606
  • The implementation of 606
  • The differences between 606 and previous standards.

How is ASC 606 different?

Compared to 605, the primary change introduced with ASC 606 is the requirement for more detailed and comprehensive disclosures. Business entities are now required to increase the transparency of separate revenue streams. Companies must also share qualitative data, like performance obligation — contrary to 605 where there was no requirement for such information.

What are the five steps to revenue recognition?

Under the terms of the ASC 606, the structure of revenue recognition is laid out over five steps:
  1. Identifying the contract with a specific customer
  2. Identifying the performance obligations as per the contract
  3. Determining the transaction price
  4. Allocating the transaction price
  5. Recognizing the revenue while or when the entity completes the performance obligation

When should I apply for ASC 606?

ASC 606 is a revenue recognition standard that affects all entities entering into contracts to provide services or goods — including non-profit, private, and public entities. Considering that, every private and publicly held entity should comply with ASC 606 after 2017 and 2018.

How is ASC 606 implemented?

The new ASC 606 standard is implemented across a series of five steps — each of which is outlined with strict guidelines for the process. The idea is that all business entities should receive a clearer picture of their real revenue generation throughout the process.

What changed in ASC 606?

The main change in ASC 606 is the requirement of more comprehensive and detailed disclosures. Qualitative data must also now be shared, which was not previously required.

What did ASC 606 replace?

The ASC 606 accounting standard replaced the previous ASC 605, and the main reason for the switch was a need to bring GAAP revenue recognition standards in the US to a better level of compliance with the IFRS (International Financial Reporting Standards). At the same time, the new ASC 606 raised the level of standardization in revenue recognition across all industries.

Does ASC 606 apply to private companies?

ASC 606 is a revenue recognition standard that applies to all business entities that enter into contracts to provide goods or services to customers; including non-profit, private, and public companies. Considering this, both private and public companies need to comply with ASC 606.

Who issued ASC 606?

The original guidance for ASC 606 was issued by the FASB — the Financial Accounting Standards Board — in May 2014, for their regular Accounting Standards Updates. The FASB is a non-profit, private organization for standard-setting, intending to improve the GAAP (Generally Accepted Accounting Principles) in the United States.

What does ASC mean in accounting?

Starting with 2009, the FASB announced their Accounting Standards Codification (ASC). This was an organized effort to codify and better organize already accepted accounting principles in the United States, by restructuring reporting and accounting standards for easier user access to authoritative literature. The ASCs represent a codification of thousands of accounting pronouncements.

How do you recognize revenue?

GAAP (generally accepted accounting principles) dictate that revenue must be recognized by an accrual accounting feature called the revenue recognition principle. In short, this means revenue is recognized in the period when it was earned and realized, on the income statement — instead of when the money is received.

What are the four criteria for revenue recognition?

According to the GAAPs, there are four primary criteria for revenue recognition:
  • The funds being reasonably collective
  • The price being measurable or fixed to the buyer
  • The product or service delivery is completed
  • The evidence of an existing financial arrangement being clear

What are the revenue recognition methods?

The generally accepted revenue recognition methods are:
  • Percentage of completion method — most useful for long-term or large contract agreements
  • Cost recoverability method — most applicable to contracts where the likelihood of collection can’t be reasonably estimated
  • Installment method — most often used for high-value purchases (large machinery, real estate) for which the reliability of buyer payments is not completely guaranteed
  • Completed-contract method — simply allowing an entity to recognize revenue when all contract obligations are fulfilled
  • Sales-basis method — recognizing revenue at the time when a sale is made.

What's the difference between ASC 605 and 606?

One of the major differences between ASC 605 and 606 is the capitalization of sales commissions — whereas ASC 605 allowed companies to either expense or capitalize the sales commissions, ASC 606 dictates that they must be capitalized. Apart from this, software sales have changed in revenue recognition — ASC 606 allows the sale of software to be broken into multiple chunks, while 605 allowed only for the support and product revenue chunks.

When can revenue be recognized?

The generally accepted accounting principles allow for revenue recognition via multiple methods. In most cases, there must be a critical event that signals the existence of a transaction, like a product sale or a contracted project with an incoming payment that matches the agreed-upon price. After that, a company may record this as revenue in its accounting books.

How do you recognize revenue over time?

When you need to recognize revenue over time, the percentage of completion method is the best option. It allows business entities to recognize revenue after certain milestones or other progress indicators. In turn, this method demands the existence of a detailed contract, outlining all of the deliverables and milestones clearly.

What is revenue recognition for example?

The simplest example of revenue recognition would be a software company releasing a new program that costs $500, upfront. If a consumer buys the software and receives access to the installation within a given month — like February, for instance — the company can book this as $500 of revenue in that month.

What is new revenue?

In accounting “new revenue” refers to all revenue that is generated from new revenue sources or new lines of business; as well as anticipated future incremental revenue. Also, “net new revenue” represents the positive difference (if one exists) between New Revenue and New Revenue Expenses for a given year.

What is legacy GAAP?

Legacy GAAPs are outdated, previously applied generally accepted accounting principles — when new ones are prescribed by the Financial Accounting Standards Board (FASB); they’re mostly used to compare different iterations of revenue recognizing standards.

When was ASC 606 effective for private companies?

The latest ASU (accounting standards updates) by the FASB have delayed the date when ASC officially goes into effect for private companies and some non-profit entities for a year — as such, the leasing standard will be effective for these entities starting the fiscal year beginning with December 15, 2021.

What is the major improvement in revenue accounting through the release of ASC 606?

The ASC 606 is there to supersede existing transaction-specific and industry-specific revenue recognition guidance, intending to improve this aspect of financial statements and increase the global consistency of financial reports.

What is unrecognized revenue?

Unrecognized revenue, also referred to as unearned or deferred revenue, represents money received for a product or service that has not been delivered or provided at the time of the transaction. In other words, it's money paid in advance, for services or products that are expected to be delivered or performed at some point in the future.

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