The new revenue recognition standard as outlined in ASC 606 “Revenue from Contracts with Customers” became effective for private companies in 2019.
The consensus amongst accounting firms and financial executives is that the new regulation is the biggest accounting change since Sarbanes-Oxley. Whose impacted today: (1) Companies (and their auditors) planning their 2019 financial statement audit – which is starting now! How to adopt ASC 606 and the supporting documentation is a major audit planning focus. (2) Companies involved in (or planning for) an M&A exit will need a trend of ASC 606 sales data to fairly value the company.
ASC 606 BASICS
The core principle behind ASC 606 is to “recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services.” This sounds simple, but the devil is in the details. The new principles require management judgments and estimates, such as fair market value, segregating performance obligations, and determining timing – over time vs. a point in time. Additionally, variable considerations such as bonuses, penalties and refunds will need to be considered when determining probable obligations, plus costs in support of these sales. To help entities apply the standard, ASC 606 outlines five steps for deciding when to recognize revenue:
YOUR AUDITOR MUST MAINTAIN INDEPENDENCE
The effects of revenue recognition pervade the financial statements. Per AICPA Ep 9: “Independence considerations when implementing FASB ASC 606,” auditor provided help in this area is a bigger risk to independence than most other nonaudit help an auditor may want to offer. The ASC 606 principles require management judgments and estimates that are outside of the auditors’ purview. The AICPA advice is ‘be careful’ and that is where Hardesty comes in.
Hardesty LLC has extensive experience assisting middlemarket companies with ASC 606 projects and has assembled a talented team of accounting professionals. We complement the auditor and the client by taking the lead on advising the company on revenue recogntion under ASC 606, and in preparing the source documents supporting the transition from ASC 605 to ASC 606.
With our business-savvy CFO’s and our supporting technical team of controllers, we provide services that not only help our clients make their financial statements audit-ready, but we also assist with analyzing the changes from current revenue practice. We provide the documentation and memorandum in support of the 5-step approach and often assist with the ASC 606 footnote preparation.
Revenue Recognition Rules & Working with your Auditors – Private Company Focus