One year from ASC 606

ASC 606 Takes Effect in One Year: Are You Ready?

The winds of accounting standards are changing, and public companies now have a new requirement in place for the way they recognize revenue from contracts. The next reports they file will need to account for the new standards in their next financial reports.

For private companies, the year may be one year later. But many organizations have found this to be more challenging than the average accounting standard change—because ASC 606 affects nearly every department, every process, and every contract you have. This is why it’s so important to get started now—companies who have already made the shift have found many unforeseen challenges in making the transition, most notably driven by internal revenue considerations, new disclosure requirements, concept and impact of revenue allocation, timing of the adoption, and issues pertaining to recognizing revenue in advance of billing. Read more

ASC 606 Determining the Transaction Price

ASC 606 Step-by-Step Part 3: Determine the Transaction Price

A lot to cover, and not a lot of time to make it happen. ASC 606 is bearing down, and public organizations are in the final countdown. For private organizations, 17 months is not that long of a time, because you will need to get your accounting, legal, sales, and others on board, decide how you intend to transition, and make the move. Simply put, it’s not easy.

This is why we are breaking down the 156-page standard and providing key takeaways, including who ASC 606 affects, a brief overview on the five steps, and a look at how ASC 606 will affect different industries, but today we would like to introduce a deeper look at each step:

  1. Identify Contract(s) with a Customer
  2. Identify Performance Obligations in the Contract
  3. Determine the Transaction Price (Today)
  4. Allocate the Transaction Price to the Performance Obligations in a Contract (August)
  5. Recognize the Revenue When (or as) the Entity Satisfies a Performance Obligation (September)

ASC 606 Deep Dive Step 3: Determining the Transaction Price

Biggest Impacts: Aerospace and Defense, Asset Managers, Construction, Building, Engineering, Healthcare, Licensors, Software

From variable consideration to financing components to noncash considerations, there are many pitfalls that occur in determining the transaction price that make step three a complicated one.

In simple terms, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring goods and/or services to a customer. ASC 606 gives attention to the following factors in transaction price:

  • Variable Consideration
  • Constraining Estimates of Variable Consideration
  • The Existence of a Significant Financing Component
  • Noncash Consideration
  • Consideration Payable to the Customer

Variable Consideration (and the Constraint)

An entity estimates the amount of variable consideration to which it expects to be entitle, taking into account the risk of revenue reversal in making the estimate. 602-10-32-5 through 606-10-32-9 look into some of the determinations of variable consideration, which we look into below.

Fixed vs. Variable Consideration

The first, most obvious determination that needs to be made in this is whether the consideration is fixed or variable.  If the consideration is fixed, include the consideration in the transaction price. However, if the contract includes discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items, there are different steps to determining the price.

Expected Value vs. Most Likely Amount

There are two methods in estimating the amount of variable consideration, depending on whichever one better predicts the amount of consideration to which it is entitled.

  • The expected value—The expected value is the sum of probability weighted amounts in a range of possible consideration amounts. This method is best used when an entity has a large number of contracts with similar characteristics.
  • The most likely amount—The most likely amount is the single most likely amount in a range of possible consideration amounts. This method is best used when the amount of variable consideration has only two possible outcomes.

Additional Determinations in Variable Consideration

In this, there are some additional observations made by KPMG that can impact the variability of the transaction price:

Consideration Could be Variable Even if Price Stated in the Contract is Fixed

Promised consideration could be determined to be variable if an entity’s customary business practices indicate that the entity may accept a price lower than stated in the contract (for example, an implicit price concession). To address this, the entity needs to determine whether it has offered an implicit price concession or has chosen to accept the risk of default from the customer.

Variability of Consideration in the Event of an Undefined Quantity of Output

In the event that a contract is for an undefined quantity at a fixed contractual rate, consideration may be variable. In this, it’s important for the entity to determine how to treat the consideration under the new standard (distinct series of goods and/or services, stand-ready obligation, or an obligation to provide specified goods and services)

Is it a Customer Option or Variable Consideration?

This is an important note, as an entity needs to determine whether purchases of additional goods and services are variable consideration or customer options.

Customer options exist when the customer is not contractually obligated to pay consideration and the entity is not obligated to transfer goods or services. In this event, an entity needs to evaluate the options to determine whether they include a material right.

Comparatively, if the terms of the contract require a vendor to stand ready to transfer the goods and/or services, and the customer does not make a separate decision to purchase, the future event results in additional consideration.

Volume Discounts and Rebates May Convey a Material Right

Different structures and rebates may have different effects on the transaction price. In the event that a vendor offers discounts or rebates, pricing, variability, and the existence of material right is determined on when the discount is applied (retroactively upon customer meeting threshold vs. discount beginning after customer meets threahold)

KPMG provides additional looks at exchange rates and whether liquidated damages represent variable consideration or warranty in their Revenue Issues In Depth Article.

Reassessment of Variable Consideration

At the end of each reporting period, an entity shall update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. The entity shall account for changes in the transaction price.

Constraining Estimates of Variable Consideration

An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 606- 10-32-8 only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

To determine the impacts of the estimates, an entity needs to determine how likely and how impactful a revenue reversal would be. Factors in determining this probability include:

  • Factors outside the entity’s influence (market factors, third-party factors, weather)
  • Time period surrounding the uncertainty
  • Entity’s experience with similar contracts
  • Entity business practices (i.e. entity has a history of offering concessions or changing terms)
  • A broad range of consideration amounts

Examples of possible constraints are discussed in the KPMG Revenue Issues in Depth Guide.

The Existence of a Financing Component

If a significant financing component exists, the entity will need to adjust the promised amount of consideration based on the time value of money. To make this assessment, the entity must consider relevant factors, including:

  • Difference between promised consideration and the cash selling price
  • Combined effect of the expected length of time between the transfer of goods or services and the customer paying for those goods or services.
  • Interest rates in relevant markets

Observations Pertaining to Significant Financing Components

Some important implications exist in determining whether significant financing components exist and should be accounted for, as discussed below:

Assessment Taken at Individual Contract Level

When looking at whether or not a financing component is significant, the entity determines the significance of the financing component at the individual contract level as opposed to the portfolio level.

No Significance if Transfer of Goods or Services is at Customer’s Discretion

In the event the customer pays for goods or services in advance (e.g. prepaid phone cards, gift cards), it is at the customer’s discretion on when he or she purchases said goods or services. In this event, there is no significant financing component.

Long Term or Multiple-Element Arrangements

In long-term or multiple arrangement contracts (transfers at various points in time, cash payments throughout the contract, changes in estimated timing), an entity faces complexity in determining the time value of money.

There are many additional observations discussed, including the fact that contracts with interest rates of zero may contain in one way or another a financing component, the presentation of income interest as revenue, and determinations on whether it is important to use an interest rate explicitly stated in the contract.

Noncash Consideration

To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure this, depending on whether the noncash consideration can be measured:

  • If it can be reasonable estimated, noncash consideration is measured at fair value.
  • If it cannot be reasonably estimated, an entity is to use the stand-alone of selling price of the good or service that was promised in exchange for noncash consideration.

Consideration Payable to a Customer

In the event there is consideration paid back to the customer, an entity needs to determine if the consideration payable back to the customer should be accounted for as a reduction in transaction price, a payment for a distinct good or service, or a combination of the two.

The following table shows how an entity needs to look at consideration payable to the customer, and whether the consideration payable is a reduction in the transaction price or a purchase from suppliers:

Q1. Does the consideration payable to a customer (or the customer’s customer) represent a payment for a distinct good or service? (Yes/No)

Yes (Move to Q2)

No (Move to Conclusion 3)

Q2. Can the entity reasonably estimate the fair value of the good or service received? (Yes/No)

Yes (Move to Q3)

No (Move to Conclusion 3)

Q3. Does the consideration payable exceed the fair value of the distinct good or service? (Yes/No)

Yes (Q3): Excess of consideration payable is accounted for as a reduction in the transaction price, remainder is accounted for as a purchase from suppliers.

No (Q3): Consideration payable is accounted for as a purchase from suppliers.

Conclusion 3: Consideration payable is accounted for as a reduction in the transaction price and recognized at the later of when

  • The entity recognizes revenue for the transfer of related goods or services
  • The entity pays or promises to pay the consideration.


Additional Observations

In addition to the relative complexity of the above flowchart, there are additional situations that need to be analyzed by legal and accounting teams.

Payments to Distributors and Retailers

A common practice in the CPG industry, payments from brands to distributors or retailers are sometimes accounted for as identifiable goods or services. In these cases, the goods and services provided by the customer may be distinct from the customer’s purchase of the seller’s products. Refer to questions 2 and 3 on the flowchart above.

Scope of Consideration Payable to the Customer is Wider than Payments Made under the Contract

In the event that an entity pays a customer consideration, and the scope of the consideration payable is wider than the payments made under the contract, the entity will need to develop a process for evaluating whether any other payments made to a customer are consideration payable to a customer.

This adds more complexity if payments are made to a customer’s customer and if the amounts paid are outside the direct distribution chain (client/agency relationships, etc.).

Conclusion: Time to Get Moving

17 months may seem like a long time (it’s only five if you’re a public entity), but many organizations are seeing challenges in making the move to implement new processes and systems to meet the requirements of the new standard.

Even if we’re posting monthly blogs leading up to the effective date, you should already be looking at transition methods and other industry-specific considerations that you need to make. To address this, we’ve compiled a list of resources for companies looking to prepare for the upcoming standard:

On Demand Webcasts: ASC 606/IFRS 15

Intacct recently presented a three-part series on the new standards, which you can view on-demand.

We welcome you to peer through the full text, the AICPA guidance, and to get in contact with us to learn more about preparing for ASC 606 with outsourced accounting services and/or a new accounting software designed with new RevRec Standards in mind.

ASC 606 Industry Considerations

How Will ASC 606 Affect Different Industry Standards?

We discussed some of the changes and challenges the new standards pose for organizations across all industries in our two-part blog. Part one explores the basics of ASC 606, including background and departmental effects, and part two explores the five step process to recognize revenue as defined under the standard.


The new Revenue Recognition Standards (ASC 606/IFRS 15) were jointly announced by the Financial Accounting Standards Board and International Accounting Standards Board in May 2014, and after comments, effective dates were set: Companies are to officially move to the new standards for annual reporting periods beginning after December 15, 2017 for public companies and annual reporting periods after December 15, 2018 for private companies.

With this in mind, the new standard was meant to condense a wide range of standards, so the changes that an Airline will need to make will differ from a Life Sciences organization, a Construction Firm, a Nonprofit, and so on.

The standard as a whole makes changes to the following industries, which we will explore below.

Industries Affected by ASC 606

  • Aerospace and Defense
  • Airlines
  • Automotive
  • Energy and Utilities
  • Engineering & Construction
  • Financial services including asset managers, alternative asset managers, banks and credit cards
  • Franchisors
  • Healthcare
  • Hospitality including hotel managers and timeshares
  • Insurance
  • Life sciences including biotech, medical devices and pharmaceuticals
  • Manufacturing
  • Media and Entertainment
  • Mining, Oil and Gas
  • Real Estate, residential real-estate
  • Software
  • Telecommunications

Different Industries, Different Changes and Challenges

As we explored in part 2 of our ASC 606 Overview, there are five steps to revenue recognition, which we will discuss in-depth in coming months (UPDATE: Click the links below to read in-depth advice on each step):

  1. Step 1: Identify a contract with a customer
  2. Step 2: Identify performance obligations
  3. Step 3: Determine the transaction price
  4. Step 4: Allocate the transaction price to the performance obligations
  5. Step 5: Recognize revenue when/as performance obligation(s) are satisfied

The new standard replaces over 200 specialized and/or industry-specific revenue recognition standards under current GAAP. In essence, this will make things easier a decade from now, but will take a lot of work now. Knowing this, the steps most likely to affect each industry differ, as summarized below.

Industry Step 1 Step 2 Step 3 Step 4 Step 5
Aerospace and Defense
Asset Managers
Construction, Building, Engineering
Licensors (Media, Life Sciences, Franchisors)
Real Estate


For even more information on the proposed changes, see the industry commentary from different task forces on the AICPA Website. For a full list of issues discussed and addressed, see the AICPA Document addressing the multiple issues.

Conclusion: Plan, Change, Execute

This standard is coming up fast, and it’s time to at least discuss your plans and next steps so that you can decide on a full or modified transition method, and make any necessary changes before the deadlines.

One of the most common issues that finance leaders notice is that their software isn’t equipped to handle the challenges posed by the transition to ASC 606, and on top of making changes to their revenue recognition practices, they may have to implement a new accounting software before making the switch. If this is the case, time is of the essence, as you will need to first make the decision on an accounting software, implement the software, and then begin working on adopting the new standard.

Learn more about the standard and how to choose an accounting solution that can ensure compliance by reading the following whitepapers and viewing the following three-part on-demand webcast.

Guides and Whitepapers: ASC 606/IFRS 15

On Demand Webcasts: ASC 606/IFRS 15

Intacct recently presented a three-part series on the new standards, which you can view on-demand.

ASC 606 Part 2

A Brief Look Into Revenue Recognition Standards Part 2

It’s hard to sum up the profound effects that the ASC 606/IFRS 15 Revenue Recognition Standard will have on businesses, as the standard affects nearly every department within nearly every business in nearly every industry. If you have a contract with a customer, you will have to make some changes in order to be compliant with the new GAAP, and the deadline is rapidly approaching.

In part one of this two-part series, we introduced you to the basics of the new standard—who it affects, what it changes, and how to learn more. Today, we will be talking about the basics of the five-step revenue recognition process and offer you additional resources to prepare for making the shift.

Five Steps to Revenue Recognition

One of the most important topics of discussion regarding ASC 606/IFRS 15 is the process in which revenue is recognized. The process consists of the following five-step process starting with contract identification and ending with revenue recognition.

Identify Contract(s) with a Customer

In-Depth AnalysisStep 1: Identify Contracts and Thresholds:

A contract is an agreement between two or more parties that creates enforceable rights and obligations. The guidance in this Topic applies to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, this Topic requires an entity to combine contracts and account for them as one contract. This Topic also provides requirements for the accounting for contract modifications. (See paragraphs 606-10-25-1 through 25-13.)

Identify Performance Obligations in the Contract

In-Depth Analysis: Step 2: Identify performance obligations

A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. (See paragraphs 606-10-25-14 through 25-22.)

Determine the Transaction Price

In-Depth Analysis: Step 3: Determine the Transaction Price

The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price also is adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. (See paragraphs 606-10-32-2 through 32-27.)

Allocate the Transaction Price to the Performance Obligations in a Contract

An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. The requirements specify when an entity allocates the discount or variable consideration to one or more, but not all, performance obligations (or distinct goods or services) in the contract. (See paragraphs 606-10-32-28 through 32-41.)

Recognize the Revenue When (or as) the Entity Satisfies a Performance Obligation

An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress toward complete satisfaction of that performance obligation. (See paragraphs 606-10-25-23 through 25-30.)

There’s More to Revenue Recognition Than That

The full text of ASC 606 can be found in the FASB Accounting Standards Codification (link to the FASB’s Web site; registration required), and additional guidance is continually announced by FASB/IASB on the topic, with the latest guidance released December 2016: ASU 2016-20, Technical Corrections and Improvements to Update 2014-09, Revenue From Contracts With Customers (issued December 2016).

Are There Gaps In Your Revenue Recognition Process?

As the date rapidly approaches, now is the time to act. Under the new ASC 606 standard, contracts are the basis for how organizations must recognize revenue. This places significant pressure on your accounting system. In addition to handling contract-related data, it must support revenue recognition and allocation, revenue reallocation, and expense amortization.

To determine whether your current software fits these requirements or if gaps exist, ensure it can:

  • Handle revenue allocation, revenue reallocation and expense amortization through configurable templates, not custom scripting.
  • Provide flexibility to select the allocation method based on the type of performance obligation specified in a contract.
  • Easily allow you to configure new types of allocation as your business, its contracts and accounting regulations evolve.

Having the right software in place now can help you avoid headaches later, as nearly all of the software on the market today is ill-equipped to handle the needs of businesses under the new standard, says Brian Sommer of Diginomica:

“For those firms that elect to defer a software upgrade, they might confront 1-2 ugly alternatives . . . develop a custom application to support the new requirements . . . [or] create some makeshift functionality via a combination of CRM, financial package software and spreadsheet tools. Those firms that choose this path might find their RevRec ‘solution’ to be a jumble of potentially risky or temperamental spreadsheets.”

Prepare for ASC 606: Related Resources

ASC 606 Compliance starts with having the right information. Learn more about contract and revenue management software built to handle the needs of your business, be sure to download the following whitepapers, Six Rules for ASC 606 and Why Compliance Can’t Wait, and read up on the following to prepare:

Stay tuned for all of the latest by subscribing to the rinehimerbaker e-newsletter.

ASC 606 Overview

A Brief Look into Revenue Recognition Standards Part 1

The biggest change to accounting since Sarbanes-Oxley, ASC 606/IFRS 15 is on the horizon, and unlike the current regulatory environment, this verbiage isn’t changing and the effective date isn’t getting moved back again. In this two-part series, we look to explore the basics of this highly complex shift, and offer recommendations on how you can begin.

Background: ASC 606/IFRS 15

The FASB and IASB issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the complexity inherent in today’s revenue recognition guidance.

A Delay in Adoption

The date was delayed one year to its current state: Annual reporting periods beginning after December 15, 2017 for public companies and annual reporting periods after December 15, 2018 for private companies.

Few Companies Have Made the Switch

Nonetheless, even with this delay in place and expected to be final, a recent study by the Connor Group found that 87% of public companies haven’t made the switch (based on SEC filings), and the numbers are likely even more dire for private companies.

What ASC 606 Changes

The biggest change that ASC 606 makes for businesses is that revenue will be recognized based on “performance obligations” similar to deliverables, with each performance obligation being accounted for as a standalone good or service as defined within a contract and recognized when the good or service is transferred to the customer.

Five Steps to Revenue Recognition

The standard introduces a five-step process to recognize revenue:

  1. Identify Contract(s) with a Customer
  2. Identify Performance Obligations in the Contract
  3. Determine the Transaction Price
  4. Allocate the Transaction Price to the Performance Obligations in a Contract
  5. Recognize the Revenue When (or as) the Entity Satisfies a Performance Obligation

We will discuss this further in part two, but for more information, see the overview from Deloitte.

Who ASC 606 Affects

ASC 606 Affects Many Industries

While we could make it easy as saying “ASC 606 affects all businesses who have contracts with customers,” because, in reality it does. However, to be more specific, the standard will have the most profound impact on the following industries: Aerospace, Communications, Defense, Engineering, Law, Media, Information Technology, Management Consulting, Marketing Services, and Pharmaceuticals, per Blue Hill Research.

ASC 606 Affects Many Departments

The standard also impacts more than just the accounting department:

  • Information Technology will need to make a decision on new software to collect all of the data,
  • Legal will have to make changes to all new and existing contracts
  • Human Resources will need to hire and train or retrain everyone from accounting to sales on how this will impact them,
  • Compensation employees will need to rethink bonus and commission structures based on revenue.

What Can You Do to Prepare?

It starts with having the right information. Stay tuned for part two of this series, which will share an in-depth exploration into some changes you will need to make. Until then, watch the following video from Intacct, learn more about contract and revenue management software, and be sure to download the following whitepapers, Six Rules for ASC 606 and Why Compliance Can’t Wait.