Private and nonprofit companies are preparing for new accounting guidelines that are set to take effect Jan. 1, 2019. Understanding how the new rules work is one thing, but introducing it into your own business – and making it work – is another entirely.

Accounting Standards Codification 606 (ASC 606), formally known as Revenue from Contracts with Customers, is a new accounting standard that will replace existing guidance on recognition of revenue for companies who report on a U.S. Generally Accepted Accounting Principles (GAAP) basis. While ASC 606 includes a number of critical changes to revenue recognition rules, the overall goal is to better reflect the timing of transfer of goods and services to customers.

 

When should I start thinking about ASC 606?

Learning about ASC 606 is important for all private and nonprofit companies. However, if you are facing circumstances such as having a current audit requirement or expecting to have an audit requirement for 2019 due to funding rounds or a potential acquisition, your preparation for the new standard is more urgent.

 

Why a new standard?

Currently, revenue recognition guidance is very industry-specific, making it difficult for investors and other stakeholders to perform a comparative analysis between companies in different industries. The new revenue standard will significantly affect the revenue recognition practices of most companies. It is expected to improve comparability and consistency across industries and to better reflect the timing of the transfer of goods and services to customers. While adopting uniform revenue recognition standards will eliminate these discrepancies, it requires strong diligence from companies in the global economy.

 

What changes should I expect?

For most companies, the biggest change will be earlier revenue recognition due to changes in revenue deferral rules. Later recognition may still be possible but will be less common. Other changes to financials include certain costs needing to be capitalized and amortized as well as requiring new disclosures.

Read More: ASC 606 is here — How do your revenue disclosures stack up? (Deloitte)

 

It is also worth considering how ASC 606 will affect not only your accounting experts but your entire team including HR, IT, legal and sales/marketing. Each of these roles has a critical part to play in helping a business run smoothly, and each role will be just as critical to the process of adapting to the new standard (outlined below).

 

How will the new revenue recognition work?

ASC 606 establishes a five-step process in the new revenue recognition model, which largely depends on details of the customer contract. The process will require a change in processes and internal controls:

  1. Identify the contract
  2. Identify performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations in the contract
  5. Recognize revenue as performance obligations are satisfied

Three key implementation challenges and how 9Gauge can help

 

 

Adoption of ASC 606 is well underway for public companies, but it is imperative for private and nonprofit companies to start thinking about ASC 606, what it means for their businesses and their plans of action to meet the deadline in just a few short months. ASC 606 is filled with various nuances and can seem daunting, but it doesn’t have to be – let 9Gauge help you face compliance challenges ahead, and contact us when you’re ready to get started!

 

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