ASC 606 Compliance revenue recognition criteria changes are the most sweeping changes to come to accounting in over a decade, and many companies are not prepared. ASC 606 revenue recognition criteria goes into effect for public companies on December 15, 2017, and December 15, 2018 for private companies. For many companies, this is a wake-up call in terms of how they recognize revenue. Standardizing contract details will be critical, so accounting can accurately capture details and recognize revenue in line with the new rules.
Being in the middle of the transition period right now, there are important rules for tracking and reporting revenue under both methods. In order to adopt the new standards, FASB has issued specific guidelines for what a company can do to adopt the new standard that organizations should implement immediately. Businesses that use Excel-based accounting practices could find themselves facing an even more complicated task. Many companies are turning to Intacct to fill this gap in functionality in their current accounting solutions.
Here are five steps to recognizing revenue for subscription-based businesses:
Identify contracts and thresholds
The ASC 606 standard will require organizations to treat multiple related contracts as one contract. Ideally, accounting systems should be “contract aware”- with contract management capabilities built in. It will not be able to recognize revenue until a contract reaches a collectability threshold. Start the process by identifying contracts and the likelihood that the contract will be collected.
Manage performance obligations and renewals
There are several criteria for determining whether a good or service is a performance obligation. This has an impact on when and how much revenue will be recognized. Organizations need to establish a procedure for handling performance obligations, which means contract intelligence, is even more essential in the accounting software.
Determine the transaction price
Normally the transaction price is the amount for good and services that a company receives. However, this can be considerably more challenging for companies with complex contracts or subscriptions. Under ASC 606, businesses need to establish processes and controls around appraisal methods, so consistent methods will be in place and contracts with non-standard terms can be identified.
Allocate the transaction price
Once a transaction price has been determined, it must be assigned to each performance obligation, based on the relative standalone sales price. This will require a complex rules-based approach that spreadsheets and Excel-based accounting systems will not be able to replicate.
With the new revenue recognition criteria, revenue will be recognized over time as goods and services are satisfied. It is essential that billing and revenue recognition systems work in harmony, so each time the obligation is complete, the organization can recognize the corresponding income.
Working in sync is exactly what Intacct does best. With templates and schedules that automatically allocate revenue and amortize expenses, Intacct handles dual treatment of contracts, as well as important integrations.