Public companies were required to adopt ASC 606, Revenue from Contracts with Customers, as of January 1, 2018. Since then, companies that have adopted ASC 606 (including early adopters) have shared important advice, and have started to receive comment letters from the SEC. All of this information can be beneficial for private companies, which are required to adopt ASC 606 as of January 1, 2019.
The overall theme to adopting ASC 606 has been: “it’s not as easy as you think!”. This article discusses revenue recognition fatigue and how adopters struggled with obtaining the correct data. The data challenge caused companies to switch to the modified retrospective approach, which is applied at the date of initial adoption with a cumulative adjustment to the opening balance of equity and no restatement of comparative periods is required. A full retrospective approach is also an option, which is where the company would apply the new standard to each period presented as if it had been in effect since the inception of all contracts with customers. But as discussed in this Journal of Accountancy article, out of 40 S&P 500 companies analyzed, 87.5% elected the modified retrospective approach to adoption. Even though the modified retrospective approach requires less effort, this article points out that the modified retrospective approach may increase a company’s risk that the market will misinterpret reductions in revenue numbers because of the lack of historical context presented within the financial statements.
The Journal of Accountancy article also cites an Intelligize analysis, which you can download here, which reviewed SEC comment letters on companies that elected to early adopt ASC 606 (32 companies out of approximately 4,000 listed companies). It was discovered that 69.7% of all comments received related to the measurement of performance obligations, which is the second step in the new five-step process. Satisfying these performance obligations is proving to be extremely judgmental, which is also highlighted in this Wall Street Journal article. As pointed out in the article, just because a company receives a comment letter doesn’t mean they are wrong; it’s sometimes received in order to clarify additional information or explain how certain decisions were made. But the adoption of ASC 606 doesn’t only impact the financial statements! Companies need to make sure their disclosures, including MD&A and risk factors, are appropriately considered. This article provides some helpful insight into benchmarking disclosures against other companies and why disclosures are so important as it relates to the principles-based model of ASC 606.
Private company advice
As noted in this Accounting Today article, 45% of private companies surveyed by PwC have not finished assessing the impact of ASC 606, including 17% of companies that have not even started! This article provides helpful advice to private companies for a smooth transition, which reiterates the focus on disclosures, providing yourself enough time, and evaluating your data. Providing yourself with enough time is critical and within this Q&A, the “three Cs” for success are discussed: completeness (revenue streams, performance obligations, data); clarity (vetting special activities); and control (controls around the process and the implementation of new controls).
As always, we are here to help with anything you need related to ASC 606. We are offering a collection of eLearning courses on ASC 606 or we can tailor a customized workshop! Contact us today with any questions!
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