ASC 600; Considerations for Private Companies Prior to Adoption.

• Author: Loyd, Brianne
• Position: FASB NEW STANDARD

The FASB's new revenue recognition standard, ASC 606, will soon be effective for private companies, and it is likely that every private company will be affected.

ASC 606 supersedes most legacy revenue recognition guidance, including industry specific-guidance. The core principle under the new guidance is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.

Accordingly, ASC 606 requires an entity to assess whether the customer has obtained control of the good or service to determine whether the good or service has been transferred to the customer. By contrast, under legacy U.S. GAAP, revenue recognition is based on the transfer of substantially all of the risks and rewards of ownership to the customer. In addition to changing the core principle of revenue recognition, ASC 606 requires entities to provide extensive new quantitative and qualitative disclosures.

Given the new concepts introduced under ASC 606, entities may need to evaluate revenue transactions differently, which may involve more significant judgment and estimation. Further, because of the standard's adoption, entities may be required to update their systems and add or modify internal controls to address potential new risks of material misstatement.

As such, the effort associated with the implementation of ASC 606 at private companies should not be taken lightly. On the basis of discussions with some public company executives, it appears that implementation of the new revenue standard often involved more effort than anticipated. In addition, many public company executives were surprised that the implementation affected so many facets of their organizations.

This article illustrates the potential accounting implications resulting from the standard's adoption and discusses key considerations related to risk assessment, planning, and indirect and direct internal controls.

Examples of Potential Accounting Implications Under ASC 606

Some common scenarios in which entities may need to assess how ASC 606 affects their revenue recognition include:

Rebates and Discounts

Identifying all performance obligations in a contract with a customer is critical under ASC 606. A material miscalculation in the identification of performance obligations will often lead to an error in the recognition of revenue.

For example, certain types of rebates and discounts provided to customers may give rise to the identification of a separate performance obligation under ASC 606. In practice, entities may offer their customers rebates or discounts on the pricing of products or services once a certain volume threshold has been met (i.e., they may retrospectively or prospectively adjust the price of their goods or services).

Under ASC 606, volume rebates or discounts that are retrospectively applied should be accounted for as variable consideration, generally in a manner similar to legacy U.S. GAAP. However, when a volume rebate or discount is applied prospectively, entities will need to evaluate the facts and circumstances of the contract to determine whether the rebate or discount represents a material right to the customer and therefore should be accounted for as a performance obligation. This determination can ultimately affect the timing of revenue recognition and can result in the deferral of a portion of revenue.

Bill-and-Hold Arrangements

Determining when to recognize revenue is the most common challenge associated with revenue recognition. The new standard's change from a risks-and-rewards model to the control model may...