Navigating the Path to Successful Revenue Recognition Implementation
Revenue recognition is one of the most critical accounting principles for companies as it plays a vital role in your financial reporting and is often the most important figure for users of your financial statements. Under U.S. GAAP, ASC 606 Revenue from Contracts with Customers (ASC 606) is authoritative, and navigating it can be quite complex and subjective at times. Improperly accounting for revenue recognition is one of the most common causes of restatements that can damage your brand and investor relations.
ASC 606’s core principle is that an entity should recognize revenue to depict the transfer of goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 establishes a five-step process to recognize revenue:
- Identify Contract(s) with Customer
- Identify Performance Obligation(s) (P.O.) in the Contract
- Determine Contract Price
- Allocate Transaction Price to Performance Obligation(s)
- Recognize Revenue When Entity Satisfies Performance Obligation(s)
The core principle of ASC 606 is simple, but the implementation is fraught with nuances, complexities, and interpretations that pose a risk to your financial reporting. ASC 606 replaced legacy guidance that was more prescriptive and included industry-specific examples. This principles-based approach can feel ambiguous at times which can only increase the risk to your financial reporting.
