Application of ASC 606 is a major issue for businesses impacted by the new revenue recognition rules. Most companies seem to be generally familiar with the new revenue recognition standard; however, there are specific areas within the rules are vague. Many are left with wondering how the new revenue recognition rules will impact their business. This causes major challenges and risks for any business that doesn't take the time to fully understand how ASC 606 and IFRS 15 affects their operations.
The FASB and IASB created what they think to be a “simple” 5 step rules for revenue recognition. The principles are laid out in a 700 page document which discusses how to handle contracts with customers when reporting revenue. The document is extremely lengthy and the 5 principles are a substantial amount of changes. These significant changes, and not just restricted to when and how revenues can be recognized – new rules on reporting and disclosures substantially up the amount of revenue data companies are required to provide, especially for long-term contracts.
To alleviate confusion with new rev rec guidelines both boards, FASB & IASB, are rolling out clarifications to the rules. However, there’s a notable divide in how much clarity each body is actually offering. In general, IASB has been the more conservative of the two, declining to provide rulings even for areas where FASB has weighed in, such as sales tax presentation or noncash considerations. More crucially, clarification is only being offered where there’s a particularly high degree of confusion or concern.
Confusion is an issue for companies because they are left potentially unaware about the new guidelines impact them and what processes they should take to implement the New Revenue Recognition Standard. To ensure consistent application of revenue recognition rules, companies need to be armed with a strong internal understanding of how ASC606 applies to their particular business model. Understand the risks and difference between IFRS and New GAAP rules will prepare them for implementing the new ASC 606 - revenue recognition standards.
Vagueness is not the only challenge that the ASC 606 perfect storm presents. Internal controls is also repercussion of handling new rev rec rules. Stay tuned for next blog post.
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