Attention! ASC 606 will affect insurers. Are you ready?

Many insurance entities believed ASC 606 would not affect them because insurance contracts are scoped out.

But other transactions such as risk management services, claims administrations, property valuations/appraisals, financial planning, and commissions or bonuses will be affected by ASC 606.

Revenue is one of the most important measures used by investors in assessing a company’s performance and prospects. However, revenue recognition accounting guidance differs between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) — and many believed both standards were in need of improvement.

On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue from contracts with customers. The new guidance is a major achievement in the boards’ joint efforts to improve this important area of financial reporting.

Presently, U.S. GAAP has complex, detailed and disparate revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.

The new guidance:

• Removes inconsistencies and weaknesses in existing revenue requirements
• Provides a more robust framework for addressing revenue issues
• Improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets
• Provides more useful information to users of financial statements through improved disclosure requirements
• Simplifies the preparation of financial statements by reducing the number of requirements to which an organization must refer

To meet these objectives, the new guidance establishes the following core principle:

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.