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ASC 606, the new revenue recognition standard is something you may have heard a lot about lately.  It’s the FASB’s (Financial Accounting Standards Board) answer to keeping revenue evaluations balanced and comparable across different industries.   It was supposed to be in effect for private companies in 2019 but was ultimately delayed a year because of Covid-19.  (Thank you, FASB, for not making us count AND worry about being 6 feet from our peeps)

But they feel like they have given us enough time, so now this standard will start applying to companies with fiscal years beginning after Dec. 15, 2019.

What is it?

Any company that records revenue (which is a fancy way of saying ‘notating your income made from the sale of your product or services’) must adapt to this new standard.  Currently, you are probably using GAAP (General Accepted Accounting Principles).  This is the benchmark system most companies abide by and follow in their books.  But like any tried and true system, after time we see the need for certain improvements.

Enter ASC 606.  The full name of the rule is: ASC 606 – Revenue from Contracts with Customers.  Basically, it changes the revenue recognition process from the traditional rules-based accounting standard to a new principles-based framework.

Obviously, this will require more detailed and comprehensive disclosures about your revenue.

What is the purpose of ASC 606?

The purpose of the new standard is to eliminate variations in accounting across different industries for similar transactions. Before ASC 606, there was considerable divergence in practice, creating difficulties for investors to compare results across industries, or sometimes compare companies in the same industries.

Who is impacted by ASC 606?

All businesses and organizations that enter into contracts with customers will be affected by ASC 606, including public companies, private companies, and non-profit organizations. However, this new standard has larger impact on companies in certain industries. Publications show that the Aerospace & Defense, Automotive, Communications, Engineering, Construction, Media & Entertainment, Pharmaceuticals, and Technology industries will be impacted the most.

How has ASC 606 been implemented?

The new revenue standard has a five-step model for recognizing revenue. There are distinct guidelines for each step so that companies in different industries could apply the same model. But what are the five steps and how exactly is the revenue recognized?  We will illustrate in detail in our next post.

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