Historically, revenue recognition has been a permanently inconsistent process across companies and industries. However, ASC 606: Revenue From Contracts With Customers has changed that.
As its name implies, ASC 606: Revenue From Contracts With Customers consists of a series of guidelines regarding the results of your end-to-end processes, starting with contracts to all the way through pricing, quotes, orders and, revenue recognition.
Issued by the Financial Accounting Standards Board (FASB) – the organization that maintains the country’s gold standard for accounting: the Generally Accepted Accounting Principles (GAAP) – ASC 606 ruling in public entities has been valid since December 15, 2017, while non public entities reporting under US GAAP are required to apply the revenue standard for annual periods starting December 15, 2018.
What this means for your business
Recognizing revenue involves so many different factors of a sale’s lifecycle including subscription models, product and service bundling, termination fees, rebates, warranties, and shipping. This makes it especially hard for bigger organizations, that are used to dealing with millions of transactions a day, to keep track of them all. However, this has all changed thanks to the ASC 606.
But how will it affect your business specifically?
For financial departments, ASC 606: Revenues from Contracts With Customers will signify a major change in some of the everyday work because until now, revenue recognition rules were specific to an industry, but with ASC 606 they are now more general.
Said changes will mean that finance resources won’t need to have as deep industry knowledge as before, but will spend more time strategizing around contracts, for which some of them may need to acquire and put new skills into practice. Revenue recognition calculations will become more complicated by needing new systems for processing and forecasting. In this particular case, Quote to Cash technology will be necessary in order to guarantee the most optimal outcomes.
For sales areas, it will be time to align incentives, such as commissions and bonuses, with the new revenue recognition policies. For example, items commonly used to incentivize sales such as free support, extended warranties, etc., will now need to be given a second thought, because they could actually slow down the revenue recognition process under the ASC 606.
This means finance teams will need to determine what works well with the new regulation, while sales teams will be required to sell products and services that provide the best revenue outcome and something that can be accomplished by offering incentives aligned to your business’ corporate strategy.
In the legal department, ASC 606 brings in a new challenges, since now every separate obligation, such as legal adds or changes, must be considered in revenue recognition. This means that some things will need to be added or changed as well.
Overall, what this all boils down to is the necessity of a greater collaboration between Finances, Sales and Legal departments, working together in creating customer contracts compliant with the ASC 606 standards.
By designing optimal strategies and contracts that offer incentives aligned to them, ASC 606 provides an opportunity to get ahead of your competitors and prepare for the changes necessary by examining your current processes and systems and identifying their weak spots.
Take action now and don’t let ASC 606 catch you off guard.