ASC 606

Definition

ASC 606, or Accounting Standards Codification 606, is the standard established by the Financial Accounting Standards Board (FASB) for recognizing revenue from contracts with customers. It aims to provide a more consistent framework for revenue recognition across various industries, ensuring that companies report their revenues in a way that reflects the transfer of goods and services to customers.

5 Must Know Facts For Your Next Test

1. ASC 606 was implemented to replace the previous revenue recognition standards and create uniformity across various industries.
2. Under ASC 606, revenue is recognized when control of a good or service is transferred to the customer, rather than when risks and rewards are transferred.
3. The five-step model under ASC 606 includes identifying the contract, identifying performance obligations, determining the transaction price, allocating the price, and recognizing revenue when performance obligations are satisfied.
4. Companies must disclose more information about their revenue recognition policies and practices under ASC 606, enhancing transparency for investors and stakeholders.
5. ASC 606 has significant implications for installment sales and deferred revenue, as it requires careful assessment of when revenue can be recognized based on customer contracts.

Review Questions

• How does ASC 606 change the way companies recognize revenue compared to previous standards?
  • ASC 606 shifts the focus from transferring risks and rewards to recognizing revenue when control of a good or service is passed to the customer. This change means that companies must carefully evaluate their contracts to determine specific performance obligations and when they are satisfied. The introduction of a five-step model under ASC 606 standardizes the approach for recognizing revenue, making it more consistent across different industries.
• Discuss the impact of ASC 606 on deferred revenue accounting practices.
  • ASC 606 requires companies to reassess how they account for deferred revenue by focusing on the performance obligations outlined in customer contracts. Under this standard, deferred revenue is recognized only when control over the underlying goods or services is transferred. This can result in changes to timing for recognizing revenue compared to prior practices, as entities may need to track multiple performance obligations within a single contract.
• Evaluate the challenges companies might face when transitioning to ASC 606 and how they can address these challenges effectively.
  • Transitioning to ASC 606 can pose significant challenges for companies, including the need for updated accounting systems, training staff on new recognition criteria, and ensuring compliance with additional disclosure requirements. Companies may struggle with identifying all performance obligations accurately and determining transaction prices. To address these challenges effectively, organizations should conduct comprehensive training sessions, utilize expert consultation for system updates, and develop robust internal controls that support accurate revenue recognition in line with ASC 606.

Related terms

Revenue Recognition:

The accounting principle that dictates how and when revenue is recognized in financial statements, particularly when it is earned and realizable.

Performance Obligations: Promises in a contract with a customer to transfer distinct goods or services, which must be identified to recognize revenue under ASC 606.

Contract Liability: An obligation to transfer goods or services to a customer for which the entity has received consideration from the customer, often resulting from deferred revenue.