Private calendar year filers have less than seven months until the new “Revenue from Contracts with Customers” standard (“ASC 606”) comes into force.
Already effective for public companies, ASC 606 will be effective for private companies for annual periods beginning after December 15, 2018. Private companies will report under the new standard for the first time in their 2019 financial statements.
The standard replaces nearly all revenue guidance in ASC 605, including industry-specific guidance.
The impact of ASC 606 may vary depending on the nature of customer contracts; however, at a minimum there is a documentation exercise to demonstrate to auditors that a company has considered the impact of ASC 606 on its revenue streams.
In the first installment of a four-part series, we cover the scoping of a successful ASC 606 implementation.
Sometimes knowing where to start is the hardest part of a project. The following represents a few ingredients for a successful scoping phase:
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Revenue by contract file: The importance of a revenue by contract file that reconciles to the company’s financial statements cannot be understated. It is the basis by which a company can demonstrate that it has identified all revenue generating contracts (completeness) and the means by which it can ensure significant contracts are tested (coverage).
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Use existing revenue or contract data: Understand how contract and revenue data is tracked. For example, is there a contract database and what data points are captured? Can these data points help you bucket your contracts? (E.g. short-term vs long-term, good/service type, pricing mechanism.).
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Educate your team: Early on in the process it is helpful to ensure that your team has some knowledge of the new standard and the key accounting issues for your industry. This increases your reach in identifying contracts that may be impacted by the new standard.
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Understand who negotiates and administers your contracts and utilize their knowledge: This knowledge can further inform the different contract types/revenue buckets or unique contractual features that exist. Consider asking them to identify any contracts with certain features (e.g. long-term financing options, bundled goods and services, fixed price contracts, contracts with minimum volume commitments or tiered pricing, as well as any contracts they consider non-standard) to assist in identifying areas of focus.
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Understand the contracting process: Does the company enter into many standard form agreements or are there a large number of bespoke agreements? This may drive the number of contracts you review in order to get a representative sample of the entire population.
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Involve your auditors early: Discuss approach to scoping, levels of testing, expectations on documentation to ensure there are no surprises at the culmination of the process.
