ASU 2014-9, Revenue from Contracts with Customers (Topic 606) makes much of what you and I know about revenue recognition obsolete. The new standard was issued by the Financial Accounting Standards Board (FASB) in May 2014. It takes effect for public corporation reporting years beginning after December 15, 2017, and for private company reporting years beginning after December 15, 2018. Let’s make this real: a current contract ending on or after either of these two dates must be accounted for under both the new and old guidance this year to enable transition year comparative reporting. That fact makes this immediately relevant to many companies.
All U.S. companies must apply ASC 606 to attain unmodified audit opinions. The only contracts specifically exempted are lease contracts, insurance contracts, financial instrument contracts, guarantees and certain non-monetary exchanges. If that’s your business, you can probably take a pass. The rest of us are on the clock.
Sage Intacct has been hard at work fully preparing us to help you meet the challenges resulting from this new guidance. On May 9th, Sage Intacct announced Contract Accounting; a new module designed from the ground up to fully support the new standards of ASC 606. This is the first product to be announced supporting the specific challenge of transition year comparative reporting. That means you'll be able to correctly report out of the box during the transition year on pre-transition year contracts under the new guidance. As mentioned above, a three-year contract currently less than three months old is a contract to which transition year reporting rules apply. In other words, next year is here!
ASC 606 results from ongoing efforts to converge Generally Accepted Accounting Principles (GAAP) with the International Financial Reporting Standards (IFRS) used in approximately 120 countries, including Canada and European Union (EU) nations.
IFRS lacks much of the industry-specific guidance found in GAAP and relies more on principles than detailed rules.ASC 606 reflects those IFRS characteristics and directs companies to recognize revenue through this five-step process:
- Identify the customer contract.
- Identify performance obligations.
- Determine transaction price.
- Allocate transaction price to performance obligations.
- Recognize revenue when a performance obligation is met.
All of us in the software industry, as well as many in other industries, must apply this five-step process to our contractual relationships. Please stay tuned as I share more about we’ve learned for helping you apply ASC 606. Contact me directly when you need assistance with complying with these new standards.