What ASC 606 Rev Rec means and why you should care as a business owner
Business owners and Board members –
Do you have any clue at all what ASC 606 Rev Rec means and why you should care?
ASC means “Accounting Standards Codification”.
ASC 606 or “606” refers to the accounting rules for Revenue From Contracts With Customers often referred to by CPAs and CFOs as “Rev Rec”. In countries not following GAAP International Financial Reporting Standards (IFRS)15 provides the accounting “guidance”.
So 606 or the new “Rev Rec” is the accounting rules (GAAP in the US) on how sales need to be recorded in the company’s books – and what the auditors will be auditing.
The changes in these rules do not just impact publicly traded companies. Private companies, including portfolio companies owned by private equity firms, must also comply. The deadline to adopt ASC 606 was December 15, 2018 (last year). Private companies need to share accounting and financial information with their bankers, other lenders, insurance companies etc.
Revenue recognition from customer contracts will change the sales on the business’ income statement from what it was before these new accounting rules – even if absolutely nothing changed in the underlying business. For this reason business owners, CEOs, and Boards need to understand the implications.
To further complicate matters there are 2 “methods of adoption”:
1 Full Retrospective
2 Modified Retrospective
Key word: “retrospective”. The CPA and the business management of the company must look retroactively at contracts already signed in prior years, not only those for new clients and customers nor only those for this year.
Some good news is that 606 provides a 5 Step Model to get this very time intensive process started:
1) Contracts – identify all of them
2) Performance Obligations – identify all of these commitments in each contract
3) Transaction Price – determine it
4) Transaction Price from 3) above – allocate it to 2) above
5) Recognize (record or book) Revenue as performed.
Thankfully there is software to assist with the migration to ASC 606 / IFRS 15 and the process to do the accounting.
Hopefully you found this helpful.
Middle Market Advisory