Understanding the Converged Standard on Revenue Recognition
What is the converged standard on revenue recognition?
What are the specifics of the converged standard on revenue recognition?
To consolidate and simplify the way revenue is recognized, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) banded together to create a new standard, often referred to as ASC 606. Previously, the IASB regulated the International Financial Reporting Standards (IFRS), while the FASB was responsible for similar, but distinct United States Generally Accepted Accounting Principles (U.S. GAAP). This new converged standard brings together the principles outlined in the IFRS and the U.S. GAAP all under one uniform formula. The new standard lays out five guidelines that companies must follow when recognizing revenue.
The new revenue recognition standard (ASC 606) involves the following five steps:
1. Begin a contract with a customer and establish a valid agreement between the two parties.
2. Identify the performance obligations in the contract. The promises within the contract must be deemed capable of being distinct and also be distinct within the context of the contract.
3. Determine the transaction price. This means estimating all of the variable considerations in the contract on day one. It also means constraining them so that a significant revenue reversal is not probable. Also included in the transaction price under ASC 606 is a list of noncash considerations.
4. Allocate the transaction price to the individual performance obligations identified in step two based on the standalone prices. If standalone prices are not available, allocation can be done based on third-party evidence (TPE), all the entities’ cost plus standard margin, or by the residual approach if the prices of other performance obligations are known.
5. Recognize the revenue when or as the entity satisfies a performance obligation. This entails determining whether the performance obligation will be satisfied over time or at a point in time. The new set of criteria for “over time” might move some products from one category to another. If revenue cannot be recognized over time, it will have to be recognized at the point in time when control of the product gets transferred to the customer.
Why a new standard of revenue recognition?
Many wonder why there was such a need for a new converged standard of revenue recognition. Quite simply, the new standard is meant to simplify and standardize. It’s meant to make a complex system more uniform across industries and nations, facilitating a clearer picture of a given company’s financial standing, and offering a clearer way to consistently compare companies all across the world. Plainly, as the global economy continued to grow in complexity and depth, a simplified revenue recognition standard was required.
Before the standardization under the new ASC 606 converged standard, the way revenue was recognized across industries was often different and complex. The new principle-based approach under ASC 606 does leave some room for interpretation, but it is meant to provide a simple framework for standardization across the globe.
How did they arrive at this conclusion?
What are the compliance deadlines for the converged standard on revenue recognition?
Is there anyone who will help you become compliant with the new converged standard on revenue recognition?
Yes. In fact, the FASB and IASB have together formed something called the Transition Resource Group (TRG). This group meets every so often to publicly discuss issues that emerge as the new standard is implemented. The group serves as the middle man between concerned parties and the FASB and IASB in taking into account common implementation concerns and taking any necessary action regarding the standard. The TRG also strives to provide a forum where those implementing the new standard can learn from others who have also grappled with the complexities of implementation.
The TRG is happy to field questions and accept concerns over issues of implementation via an emailed submission form. Questions made to the TRG must be related to ASC 606/IFRS 15, represent diversity in practice, and concern an implementation issue that is likely to be pervasive or to apply to a large group of people.
What tools can help you become and remain compliant with the new converged standard?
How can Salesforce and Salesforce CPQ help you become and remain ASC 606 compliant?
Maybe you understand the implications of ASC 606 and you want to clean up the way you recognize revenue in order to become compliant, but you don’t know where to start. That’s where the Salesforce Platform and Salesforce CPQ come in. Salesforce helps you focus on your data, and the CPQ platform enables you to automate the revenue process all the way from leads to closed deals and recurring clients. Becoming compliant means understanding your data. That data must be clean, complete, and consistent. You must also be able to control it and get detailed and flexible reports. That’s precisely what you get with Salesforce CPQ.
With Salesforce CPQ, you can easily specify and enforce accounting rules upfront to ensure everything from how you sell to how you recognize revenue and pay commissions is clearly defined and standardized. When you combine the Salesforce Platform with Salesforce CPQ, you get an end-to-end solution for revenue management and recognition. There’s no need to go it alone. See what Salesforce CPQ can do for your revenue recognition process today.