Sacramento CPA Revenue Recognition (ASC 606) Accounting Services
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Topic 606 in the Accounting Standards Codification (better known as ASC) is the guiding reporting standard for businesses that have contracts with customers. Commonly known as ASC 606, it is intended to maintain consistency between business reporting requirements while providing a framework for addressing issues related to revenue. Regular revenue reporting is an important part of the health of businesses. California businesses that would like assistance with their ASC 606 revenue reporting should get in touch with an experienced accountant from Cook CPA Group at their earliest convenience. Businesses of all sizes and industries can benefit from accounting services when tackling their ASC 606 revenue reporting.
The Basics of ASC 606 Accounting StandardsASC 606 standards were adopted in 2014 by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). These reporting standards apply to organizations that enter into contracts with customers based on the transfer of goods or services; these standards do not apply to other types of contracts, such as lease agreements and insurance contracts. Their purpose is to streamline and improve methods of financial reporting and to make it easier for companies to disclose revenue. ASC 606 accounting standards were adopted in 2014, but public businesses were not expected to comply with these standards until the end of 2017; non-public companies were expected to comply with ASC 606 accounting standards by the end of 2018. ASC 606 standards serve as a framework that allows businesses to monitor the revenue they receive from consumer contracts. They are meant to eliminate variations in accounting between businesses in different industries, which makes reporting consistent and easy to manage. Types of revenue (including sales, termination fees, warranties, costs of shipping, etc.) are addressed in similar terms with the use of ASC 606 accounting standards. The purpose of ASC 606 is to encourage and enable organizations to recognize revenue in a way that corresponds to the obligations in their contracts with customers. Almost all businesses are affected by ASC accounting standards. However, businesses are more likely to be affected by ASC 606 if they sell recurring services (e.g., subscriptions and licenses). ASC 606 also provides clear guidelines for when to exercise judgment about certain issues related to revenue and outlines practices regarding disclosures to customers.
How Accounting Standards Codification (ASC) Can Affect You and Your BusinessSince the ASC 606 revenue recognition rules are fairly new, businesses may still be adapting to the changes in their reporting. In fact, ASC 606 is regarded as one of the biggest changes to accounting in recent history, which is reason for concern for many companies. ASC 606 can have an impact on the financial resources that are available to a company; since these standards require more complicated calculations around revenue, businesses may need to spend more resources on accounting. However, since all revenue reporting practices are the same across every industry, businesses no longer have to use accounting methods that are specific to their own industry. The way that businesses complete sales may also be impacted by ASC 606, since these reporting standards require businesses to report nearly every type of sale they make. This may make salespeople less likely to include bonuses, such as extended warranties or waived fees in sales, and can generally impact the way that salespeople conduct sales. ASC 606 can also have an impact on other departments within a company, including legal, IT, and HR. Since ASC 606 changes the requirements for what is included in contracts with customers and what is disclosed to them, more resources will need to be used to draw up contracts and gather data; companies may also have to use new forms of technology to make their revenue recognition process more automatic.
The Process of ASC 606 Revenue ReportingWith the help of an experienced accountant, your business can take certain steps to comply with ASC 606 revenue reporting standards; these steps are laid out below:
- Identify the contract with the customer: This contract must be approved by all parties, identify each party’s rights to goods and services, identify payment terms, include commercial substances, and include collectability of consideration.
- Identify performance obligations: Businesses must describe the methods for handling distinct performance obligations.
- Determine the transaction’s price: During this step, businesses will outline what factors should be considered while establishing the price of their transaction.
- Allocate the transaction’s price: Businesses outline and set guidelines for the allocation of transaction prices across performance obligations.
- Recognize revenue: What should happen when a business meets performance obligations will be outlined during this last step.