ASC 606 / IFRS 15 is guidance developed by FASB and the International Accounting Standards Board (IASB) to drive consistency in financial reporting across industries through a five-step model for revenue recognition. Its goal is to create a standard method of recognizing revenue at the contract level for companies in the public, private, and non-profit sectors. SOFTRAX developed the ASC 606 checklist to inform companies of the various components involved in the five steps of ASC 606, so that they have a better understanding of the depth and breadth of reporting considerations.
To understand ASC 606, it is important to recognize its five steps:
- Identify the contract.
This step includes evaluating whether the contract creates enforceable rights and obligations and whether it has commercial substance. Where contract identification can get tricky under ASC 606 is when upgrades or the chance to buy additional products / services are included.
- Identify the performance obligations.
Performance obligations are the promises of a good or service provided to a customer. With complicated contracts, companies need to define performance obligations carefully, making sure that the each good or service that can stand on its own is in its own performance obligation, for example.
- Determine the transaction price.
This involves estimating the net revenue expected for each contract term, but this price can be difficult to determine because of rebates or discounts.
- Allocate the transaction price.
The objective is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
- Recognize revenue when or as the entity satisfies a performance obligation.
This step determines that a good or service is transferred when the customer obtains control.
Companies then need to put these steps into the context of their company and industry. Although ASC 606 is straightforward, it can vary from past accounting practices. Companies implementing ASC 606 may find disparities with their previous practices that can affect the bottom line, and it is important that they understand all components of the ASC 606 landscape.