ASC 606: Complying with the New FASB Standard

A company is largely measured by its financial performance. That’s surely no surprise. Since finances are such a critical indicator of an organization’s success and growth trajectory, accounting is an essential area of focus. With such an emphasis on businesses’ financial standing, following sound accounting practices has always been vital for small and enterprise-level businesses alike. Accountants and companies that plan to keep pace with the ever-evolving accounting landscape must be aware of and adapt to changing standards and practices. The beginning of fiscal year 2018 saw perhaps the most significant changes to accounting standards that have ever occurred. They came under the name ASC 606 from the FASB. 

One of the cornerstones of accounting, particularly in the corporate world, is the revenue recognition principle. Since companies are largely evaluated by the amount of revenue they bring in, the revenue recognition principle plays a significant role in the overall picture of an organization’s financial standing.

To ensure accurate reporting and present the right financial outlook to board members and potential investors, companies have been given specific revenue recognition standards by organizations like the Financial Accounting Standards Board (FASB). Following precise revenue recognition standards not only appeases investors and board members, but also helps businesses better keep track of revenue and chart growth more accurately.

In the past, different industries have been subject to unique revenue recognition standards. Real estate, software, and construction contracts, for instance, followed different standards than other industries. In the past, revenue recognition standards were often complex and difficult to implement, with little guidance handed down from the board. The FASB’s recent enforcement of ASC 606 aims to simplify and consolidate the standards for revenue recognition across industries.

ASC 606 is a new accounting standard handed down by the FASB that has to do specifically with revenue recognized from contracts with customers. ASC 606 is known internationally as IFRS 15. The goal of the new guideline is to make reporting more clear when it comes to how revenue is recognized between clients and customers, and to make that clarity applicable across all industries, company sizes, and countries.

ASC 606 essentially states that revenue between customers and clients should be accounted for in an amount equal to the consideration that the entity expects to be entitled to in exchange for the services or goods. ASC 606 has been broken down into five key steps.

Step 1: Identify the contract with a customer.
Step 2: Determine the performance obligations in the contract.
Step 3: Decide on the price of the transaction.
Step 4: Allot the transaction price to the performance obligations set in the contract.
Step 5: Recognize revenue when or as the entity fulfills a performance obligation by transferring control of the good or service to the customer.

The implications of ASC 606 are massive. Speaking about ASC 606, Meredith Schmidt, EVP of Global Revenue Operations for Salesforce stated, “It’s going to change everything. The intent was to create a single way to recognize revenue regardless of what industry you’re in, what country you’re in, and no matter how big or small you are. We’re all going to be following the same revenue accounting guidance now.” She added that the new ASC 606 guideline is more principle-based and open to interpretation. “If you aren’t thinking about technology right now to solve the accounting issues,” said Schmidt, “you’re running the risk of complexity in your business.”

Several entities were affected by the new ASC 606 standard. Quite simply, the standard is applicable to any businesses that deal with complex contracts for projects that are delivered over a period of time. Industries that were expected to face the most drastic changes included construction, real estate, aerospace, software, and telecommunications.

Originally, public companies and most nonprofits were required to comply with ASC 606 by December 15, 2017, while private companies were given until December 15, 2018.

Understandably, there were considerable difficulties for companies adopting the new ASC 606 standard. A survey by Deloitte-Bloomberg BNA suggested that nearly 70% of companies weren’t on track to meet the new revenue recognition standards deadline a mere seven months previous to its arrival. Determining performance obligations and complying with disclosure requirements proved to be some of the most prominent pain points for public companies. According to a study by PWC, 84% of public companies found it difficult to comply with disclosure requirements, and 76% of public companies found determining performance obligations challenging.

 

Companies who had success in adapting to the new revenue recognition standard gave some tips to those organizations still struggling to comply. Here are 10 of the lessons learned:

1. Diving in and getting started is key.
2. It’s important to get everyone onboard with implementation early on.
3. A software solution is vital.
4. Interpreting FASB’s guidance and making decisions is key.
5. Being thorough and reviewing processes is crucial.
6. Managing large amounts of data is important.
7. Planning for disclosures early is wise.
8. Gathering data will take longer than anticipated.
9. Train and communicate with the right people.
10. Secure resources for implementation early and plan for the future.

With completely new standards for recognizing revenue, the ability to understand the entire revenue cycle and quickly identify multiple elements of the process has become ever more critical. The ASC 606 changes have forced many companies to rethink everything from how they go to market to how they structure deals and monitor customer subscriptions and transactions. A number of different software options have proven successful for organizations as they adapt to the new changes, but many have found configure, price, quote (CPQ) software to be one of the most beneficial implementations.

Salesforce CPQ makes compliance possible because of the capabilities it has to capture and structure contract data. With Salesforce CPQ, companies benefit from a single platform that captures data. Users have benefitted from the ability to enforce robust and accurate data capture across multiple areas including quotes, contracts, and orders. What companies get with Salesforce CPQ is peace of mind, ultimate control, and data tagging capabilities.

Automation spreads from the way you capture data all the way through permissions and approvals. Users can simply specify rules and the system will run many time-consuming processes automatically. There’s no need to fuss over data capture, or where contracts and customers flow. The information that must be captured in order to ensure ASC 606 compliance can be captured with Salesforce CPQ.

Reporting is a vital consideration under the new standard. And the capabilities offered by Salesforce CPQ not only help you comply, but also enable you to take a deeper look at deal and pricing structure in real time. Even non-standard deal structures can be reported upon. While adapting to the new revenue recognition standards is certainly a monumental task, it’s a lot more manageable with a tool like Salesforce CPQ on your side.

It’s clear that ASC 606 is one of the biggest changes in accounting in quite some time. While there are certainly growing pains associated with the shift, there are a number of amazing benefits on the horizon. Order and clarity have been added to the way revenue is recognized from customers, and more transparency and the ability to compare companies is bettering the business landscape as a whole.

Whether you’ve already made the changes necessary to comply with ASC 606 or you are still hustling to get everything aligned, you’ll find comfort in knowing that many have been through the process. With the right software at your disposal and tips and tricks from those in compliance, you’ll be well on your way to a successful future under the new revenue recognition standard. Salesforce is always ready and waiting to help you through the challenges you may face with a range of solutions that will help you manage your relationship with customers and capture data across many customer touchpoints.

Learn more about how Salesforce CPQ can help you navigate the complexities of the new world of revenue recognition.