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ASC 606 & IFRS 15: Revenue from Contracts with Customers

As we all know, on May 28, 2014, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) together issued a converged standard about recognition of revenue from contracts with customers.

Known as ASC 606, Revenue from Contracts with Customers, the standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally, the Boards say.

Under the new revenue reporting regulations, which would establish a common revenue standard for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), an entity will have to implement the following five steps for contract creation process .

  1. Identify the contract(s) with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations in the contract.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

There is a misconception by some that ASC 606 only applies to SaaS companies. While recurring revenue companies are certainly impacted, any company with contractual obligations to their customers are impacted.

The new rules will affect companies that use even moderately complex contracts in their dealings with customers. They include, for example, contracts that are structured using tiered pricing or volume discounts or ones that routinely involve modifications, such as adding or dropping users, or that allow seasonal changes to services

More reading : ASC 606 Revenue Recognition

FASB’s new single, principle-based approach to accounting for revenue from contracts with customers is a turnaround from the existing rule-based system, and auditors and consultants are providing a lot of guidance regarding the new standard in regards to how it changes revenue accounting and related disclosures: