ASC 606

ASC 606, or Accounting Standards Codification Topic 606, is a revenue recognition standard that was issued by the Financial Accounting Standards Board (FASB) in 2014. The standard replaced the previous revenue recognition standard, ASC 605, and took effect for public companies for fiscal years beginning after December 15, 2017.

ASC 606 provides a five-step process for recognizing revenue:

  1. Identify the contract with the customer.
  2. Identify the performance obligations in the contract. 3. Determine the transaction price.
  3. Allocate the transaction price to the performance obligations.
  4. Recognize revenue when (or as) the performance obligations are satisfied.

ASC 606 is a principles-based standard, which means that it provides general guidance rather than specific rules. This allows companies to apply the standard in a way that is most appropriate for their specific circumstances.

The goal of ASC 606 is to provide a more comprehensive and consistent approach to revenue recognition. The standard is also designed to improve the transparency of financial reporting and to make it easier for investors and other users of financial statements to understand how companies are recognizing revenue.

Here are some of the key changes introduced by ASC 606:

  • The five-step revenue recognition process: ASC 606 requires companies to follow a five-step process for recognizing revenue. This process provides a more comprehensive and consistent approach to revenue recognition.
  • The concept of performance obligations: ASC 606 requires companies to identify the performance obligations in a contract. A performance obligation is a promise to deliver a good or service to a customer.
  • The transaction price: ASC 606 requires companies to determine the transaction price for a contract. The transaction price is the amount of consideration that a company expects to receive in exchange for the goods or services that it is providing to a customer.
  • Allocating the transaction price: ASC 606 requires companies to allocate the transaction price to the performance obligations in a contract. This allocation is based on the relative fair values of the performance obligations.
  • Satisfaction of performance obligations: ASC 606 requires companies to recognize revenue when (or as) the performance obligations in a contract are satisfied. Satisfaction of a performance obligation occurs when a company has transferred control of the good or service to the customer.

ASC 606 is a complex standard, and companies should carefully consider their specific circumstances when applying the standard. However, the standard provides a more comprehensive and consistent approach to revenue recognition, which can improve the transparency of financial reporting and make it easier for investors and other users of financial statements to understand how companies are recognizing revenue.

This info was pulled from Scribd and Hanson.

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