There are new rules for accounting, and even if you aren’t in a financial role, the new accounting standard—ASC 606—could impact the business decisions you need to make.
Because of the tie-in to revenue, Samuel Monastra, an accountant with more than 20 years of experience in the industry, says it’s important to get this rule right. Monastra will host a conference for Eli Financial, “Revenue Recognition Standard ASC 606,” which is designed to offer a comprehensive overview of the new standards, which went into effect in January.
New Rules ‘Likely To Roil Earnings Reports,’ One Expert Predicts
ASC 606 is the biggest accounting change to be enacted in the United States since at least the 1990s, said Denis Pombriant of Beagle Research in an article for CRM Buyer titled “Big Accounting Deal.” Pombriant said companies that offer subscription services are in the new rule’s crosshairs since the standard covers annual and monthly recurring revenue as well as unbilled and deferred revenue.
“The changes, which will affect the reporting of revenue streams, balance sheets and net income, are likely to roil earnings reports,” wrote Denise Lugo in an article for Bloomberg. “These far-reaching accounting changes stem from new rules on revenue, leases and credit losses on loans.”
Lugo added that work required to adhere to ASC 606 could affect a company’s ability to address other, smaller rules changes that will also appear this year.
Big Corporations Are Seeing Big Impacts
The International Accounting Standards Board and the Financial Accounting Standards Board adopted the new revenue recognition rule back in 2014. The goals?
- Remove inconsistencies and weaknesses in existing revenue requirements
- Provide a stronger framework for addressing revenue issues
- Improve revenue recognition comparability across entities, jurisdictions, markets, and industries
- Reduce the number of requirements an organization has to refer to, which should simplify the preparation of financial statements.
But while an improved system may be the long-range outcome, the short-term horizon is looking rather painful for many companies.
As a result of the new rule, some of some of America’s largest and most successful organizations are having to make some significant revisions to their practices. Companies such as Verizon, Workday, and Tesla have had to hire teams of contract reviewers and are warning that financial statements could look radically different this year.
“General Motors Co. announced in a filing with the Securities and Exchange Commission that the impact of the changes could be as much as $1 billion,” reported Market Watch.
How to React? Build a Team and Start Your Review
Financial Executives International recommended a number of key points for companies and their accountants who are tasked with responding to ASC 606:
- Assemble a cross-functional team
- Conduct a comprehensive contract review
- Document process changes
- Determine data requirements
- Identify changes through system mapping and configuration
Monastra said that understanding the conditions under which revenue is recognized can be tricky. He suggests starting with an identification of your contractual obligations and then allocating the associate transaction price to perform a technical analysis.