The ASC 606 transition: A revenue recognition primer

In May 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued the long awaited converged standards on revenue recognition, Accounting Standards Update 2014-09 (Topic 606), Revenue from Contracts with Customers (affecting Accounting Standards Codification (ASC) 606) and International Financial Reporting Standards (IFRS) 15. The issuance culminated a lengthy due process by the boards, consisting of extensive outreach to users and preparers of financial statements. During the course of the due process, the original draft was changed significantly in response to the comments of various stakeholders.

The objective of the project was to create a unified, principle-based standard on accounting for revenue from customers. In doing so, the FASB replaced hundreds of pages of rules-based guidance designed for specific industries, like construction or software, while the IASB provided the first comprehensive revenue recognition guidance contained in IFRS. This is a significant and important event, as the standard affects virtually every entity that prepares financial statements in accordance with GAAP or IFRS. Moreover, the standard impacts what is arguably the most important number in financial statements: revenue.

With this article, Baker Tilly is beginning a series designed to provide you with a general overview of the requirements of the standards and insight into the challenges of transitioning to the new standard. Although the impact on the revenue recognized will vary across a wide spectrum for different organizations and industries, for all there will be a need for significant changes in the process of how revenue is recognized and a need for changes and modifications to internal controls, IT systems, contracts, and other business processes. Depending on the financial statement impact, there could be effects on compensation arrangements, loan agreements, etc. as well.

Transition preparation timeline

If you have not begun to address this transition in your organization, the time to act is now. After a deferred effective date was issued by the boards, the standard is now effective for: