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ASC 606 Deadline Looms for Privately-Owned Companies

Businesses will need skilled experts to cope with new accounting standard.

Across the country, privately-owned companies are focused on implementing the new revenue recognition guidance in Accounting Standards Codification (ASC) Topic 606 in anticipation of next year’s big compliance deadline.

Implementation of this standard may demand considerable time, resources, and expertise as well as a focused team working to meet a tight deadline. The goal of the new standard is to create a comprehensive revenue recognition model that is agnostic to all industries and increases comparability of companies’ financial statements within and across markets. To do so, it ties the recognition of revenue more closely to when control of a product or service is transferred to a customer, aligning revenue recognition to when the obligations in the contract are met. The new rules move to a more principles-based model, meaning that various judgments, assumptions, and estimates may be required, and this may result in a change in the amount and/or timing of companies’ revenue recognition.

ASC 606 will go into effect as of January 1, 2019 for calendar year-end, and will impact all private companies in ways that go beyond the balance sheet and income statement. ASC 606 contains a new five-step process for recognizing revenue from contracts, which requires businesses to: identify the contracts, identify performance obligations, determine the transaction price, allocate the transaction price to the performance obligations, and recognize revenue when performance obligations are met.

Auditors understand that many companies won’t be able to analyze every contract. However, they do expect that private companies will select an appropriate representative group of contracts to review to ensure all types of revenue streams are covered and reviewed for impact. Companies can elect to create portfolios of contracts where applicable; however, many companies are finding there are more types or portfolios of contract than expected, requiring more time to properly analyze and conclude on the impact.

The process will likely consume a surprising amount of time and resources. Here’s why: a single contract can stretch to 25 pages or more with complex terms and conditions, and carefully reviewing a document of this length takes time. The review will also require highly qualified individuals who understand both the legal and accounting impacts of the contracts, including issues like material rights, options to renew, termination provisions, and enforceability. Companies will also need to evaluate concepts such as collectability of a contract, existence of a legally enforceable arrangement in verbal arrangements, combining contracts, and contract modifications, and various other core items.

About the Author: William Andreoni is senior director at Pine Hill Group, a leading accounting, financial reporting and transaction advisory firm with offices in New Jersey, Philadelphia and New York City.