ASC 606 Compliance provides guidelines on recognizing, measuring, and disclosing revenue from contracts with customers.
It’s crucial for businesses selling goods and services to strive for accurate and transparent financial reporting and compliance with accounting standards. If your company is not ASC 606 compliant, you could face financial penalties, legal liabilities, reputational damage, and potential audits or investigations by regulatory authorities.
Let’s explore the impacts of ASC 606 compliance and how NetSuite eases the burden of financial reporting.
Defining ASC 606 Compliance
Accounting Standards Codification (ASC) 606 is a set of accounting guidelines developed by the Financial Accounting Standards Board (FASB). It provides a comprehensive framework for revenue recognition and reporting for businesses across various industries.
Organizations that enter into customer contracts, such as those involving the sale of goods or services, must comply with ASC 606.
The standard has led to increased transparency, greater accountability, and improved comparability of financial statements between companies and industries, making it crucial for businesses to maintain accurate financial reporting and avoid penalties.
Why is ASC 606 Compliance Important?
The primary objective of ASC 606 is to facilitate the comparison of revenue across organizations and industries, benefiting investors, regulators, and other stakeholders. Non-compliance with ASC 606 can have serious consequences, including job loss, financial penalties, and potential incarceration.
You need to maintain precise financial reporting to avert penalties and ensure transparency and accuracy in your business.
The Role of the FASB and IASB
FASB and IASB are two key players in the accounting world that collaborated to create ASC 606. They aimed to fix inconsistent or inadequate revenue recognition standards prevalent prior to ASC 606.
Their joint effort established comprehensive revenue recognition guidelines for all entities entering customer contracts. They facilitated uniformity and comparability in financial reporting between industries and geographic regions.
For public companies, the effective date for ASC 606 compliance was set to start in all fiscal years after December 15, 2017. Non-public companies had an effective date in all fiscal years after December 15, 2018.
Industries Most Affected by ASC 606
ASC 606 is particularly relevant in industries such as Software as a Service (SaaS), construction, manufacturing, and telecommunications. The complexity of revenue recognition and the need for long-term contracts in these industries make them particularly sensitive to the modifications introduced by ASC 606.
Other industries impacted by ASC 606 include aerospace and defense, airlines, automotive, energy and utilities, engineering and construction, financial services, franchisors, and healthcare.
Key Components of ASC 606
At the heart of ASC 606 compliance are three critical concepts:
- The Revenue Recognition Principle
- Performance Obligations
- The Five-Step Compliance Model
Let’s take a closer look at these components and their significance in revenue recognition.
1. Revenue Recognition Principle
The revenue recognition principle, a cornerstone of ASC 606, states that revenue should be recognized upon its realization or realizability and when it has been earned.
This means businesses must carefully assess when and how to record their revenue, ensuring it accurately represents the value provided to customers through goods or services.
For example, revenue recognition can occur when goods are delivered, services are performed, a customer takes possession of goods, or when a customer has the right to use a product.
Adhering to the revenue recognition principle is essential for accurate financial reporting, maintaining investor confidence, and ensuring compliance with ASC 606.
2. Performance Obligations
Performance obligations, or distinct performance obligations, are distinct goods or services promised in a contract with a customer.
You must satisfy all unmet obligations before recognizing cash received from the customer as revenue. Recognition is not allowed until then.
For instance, a store selling a refrigerator with complimentary installation is an example of a distinct performance obligation per ASC 606. Revenue is recognized once the fridge installation is completed.
How to Stay Compliant with ASC 606 (The Five-Step Compliance Model)
Steps representing the Five-Step Compliance Model of ASC 606 compliance
The five-step compliance model provides a framework for recognizing revenue under ASC 606. The steps include:
- Identify the contract with the customer: A contract must exist between the company and its customer, outlining the rights and obligations of both parties.
- Identify the performance obligations: The company must identify the specific goods or services it has agreed to provide to the customer under the contract.
- Determine the transaction price: The company needs to determine the amount of consideration it expects to receive in exchange for fulfilling the performance obligations.
- Allocate the transaction price: The company must allocate the transaction price to each obligation based on its relative standalone selling price if the contract includes multiple performance obligations.
- Recognize revenue as performance obligations are satisfied: Revenue is recognized when the company satisfies its performance obligations by transferring control of the goods or services to the customer.
Accurate financial reporting promotes transparency and comparability across industries, ultimately benefiting investors, regulators, and other stakeholders.
Best Practices for Maintaining ASC 606 Compliance
Maintaining ASC 606 compliance involves regularly reviewing financial policies, training, and educating employees on the standard.
Regularly Review and Update Financial Policies
Bookmark this article and ensure that you have a comprehensive understanding of ASC 606, including its principles, requirements, and implementation guidelines.
Follow these steps on a regular basis:
- Stay updated with any amendments or interpretations issued by the FASB.
- Conduct periodic reviews to assess the effectiveness of your revenue recognition processes and controls.
- Evaluate the impact of ASC 606 on your financial statements, processes, systems, and contracts.
- Identify any potential changes needed to comply with the standard and develop an implementation plan.
- Review your customer contracts to determine the appropriate revenue recognition method under ASC 606.
- Identify performance obligations, transaction price, and allocation of revenue across contracts.
Training and Educating Employees
Businesses should invest in training programs and educational resources to keep employees up-to-date on ASC 606 requirements. This includes providing workshops, seminars, and online courses and creating internal resources such as guidelines and policy documents.
If you’re using software like NetSuite, it’s vital to get comprehensive support and training on maximizing the system’s benefits. Working with a NetSuite implementation team can aid you in this process.
Using NetSuite to Achieve ASC 606 Compliance
Even though ASC 606 provides guidelines for revenue recognition, you may need help to achieve compliance efficiently.
NetSuite supports ASC 606 compliance by offering end-to-end revenue recognition and reporting capabilities. With Advanced Revenue Management, NetSuite can automatically recognize revenue based on predefined schedules or milestones aligned with ASC 606 and IFRS 15 standards.
The software solution allows businesses to handle contract modifications, merge revenue arrangements, and re-evaluate old and new contracts to determine if revenue booking needs adjustment. This systematic approach to revenue recognition helps ensure seamless and pain-free compliance with ASC 606.
NetSuite Revenue Recognition enables you to schedule revenue so it’s recognized at the right time — automatically.
Get powerful revenue recognition features, including:
- Managing exceptions with revenue policy automation
- Rule-based revenue scheduling with planning automation
- Unbilled revenue recording automation
- Transactions across multiple currencies
- Real-time financial reporting
- Flexible Forecasting
Keep in mind that NetSuite is built for precise real-time accounting and financial management and outweighs basic accounting software like QuickBooks for achieving complaince.
NetSuite’s revenue recognition rules are designed to help businesses comply with accounting standards and accurately recognize revenue from customer contracts. NetSuite provides a robust set of tools and features to support revenue recognition processes through automation.
Here’s an overview of the features and benefits of using NetSuite for revenue recognition:
Allocations
Set prices for individual items and decide how to divide revenue among different parts of a contract using fixed or changing formulas.
NetSuite’s system can automatically follow these rules. You can also adjust the revenue allocation if there are changes to the contract, like adding, modifying, or canceling items.
Revenue Recognition Rules & Schedules
Create revenue recognition schedules for individual customer contracts. You can set up custom revenue recognition schedules or use predefined templates NetSuite provides. Various approaches you can use include:
- Subscription
- Fulfillment by quantity
- Fulfillment by date
- Project completion milestone
- Project completion percentage
- Time-based
- Materials-based
Get real-time data to update forecasts and projections. These forecasts are automatically generated for each contract and its respective revenue recognition schedule.
Revenue Plan Management
You can easily change revenue plans one by one or in bulk. When you make changes, the totals will automatically update, which saves time and prevents mistakes. You have the option to update only the future periods in the plan or modify the entire plan.
Reporting
NetSuite offers reporting capabilities that allow you to generate revenue recognition reports, including recognized revenue, deferred revenue, and contract balances. These reports help with financial analysis, forecasting, and compliance with accounting standards like ASC 606.
Final Word: Make ASC 606 Compliance Easy with NetSuite
Businesses can effectively achieve and maintain compliance by understanding the key components of the ASC 606 standard, adapting to new revenue recognition methods, automating and streamlining the compliance process, and investing in employee training and education.
Additionally, the right toolset and support team are invaluable to demystifying ASC 606 compliance and making financial reporting a breeze.
Get in touch with an expert on the StratusGreen team to learn more about how NetSuite simplifies ASC 606 compliance — especially for SaaS businesses. We pride ourselves on providing industry expertise with personalized human care.
