On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 606.  This new standard modifies the way companies recognize revenues from contracts with customers and aims to unify revenue reporting across industries and markets.  Public companies have already implemented the new standard since they were required to do so for reporting periods beginning after December 15, 2017.  Nonpublic companies are required to implement this new standard for reporting periods beginning after December 15, 2018.  According to the new standard, there are five steps companies need to follow to properly recognize revenues.  The steps are:

  1. Identify the contract with the customer  (make sure the contract clearly spells out what goods and services are being delivered and what the payment terms are for those goods and services)
  2. Identify the contractual performance obligations (make sure the contract specifically spells out the separate performance obligations, including warranties)
  3. Determine the amount of consideration/ price for the transaction (make sure this is clearly written)
  4. Allocate the determined amount of consideration/ price to the contractual obligation (match the contracted price to the obligations in the contract)
  5. Recognize revenue when the performing party satisfies the performance obligation

For many companies, this new standard will have minimal impact on their income statement.  However, other companies will see a significant change in the revenue there recognize from year to year.  Companies should familiarize themselves with this new standard and modify their contracts to properly reflect these changes. 

Richard Skinner, CPA



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