Corporate accounting systems must be in compliance with the ASC 606 rule for revenue recognition as of December 15 of this year. This requirement will not be a problem for companies using Acumatica Cloud ERP’s Deferred Revenue Accounting module. Those that don’t have this software or the equivalent will be in a rush to get right with this important accounting rule. So, it’s worth taking a moment to examine ASC 606 as an example of how the interplay between software and accounting rules can affect financial reporting.
A Brief Overview of ASC 606 and Its Implications
If you’re a CPA, ASC 606 is probably not that big a deal. You should already know all about it. However, if you’re in IT and supporting the accounting department or a business analyst trying to build efficient financial workflows, a quick review of ASC 606 is in order. The Accounting Standards Codification (ASC) rule 606 is one of many rules by which companies control their financial reporting. ASC 606 is paired with International Financial Reporting Standards (IFRS) rule 15. The rule is thus known as ASC 606/IFRS 15. In the US, they’re being promulgated by the Financial Accounting Standards Board (FASB), the accounting profession’s rule-making body.
The goal of ASC 606/IFRS 15 is to standardize revenue recognition in accounting practices worldwide. Before these rules were adopted, revenue recognition was not subject to any global standards. Companies in different countries could recognize revenue on different bases. Revenue recognition relates to the period in which a company will claim a sale is actually revenue, for reporting purposes. As a result, it can have an impact on tax liabilities and many other aspects of financial reporting.
A quick cash transaction is easy. If you get paid $100 in cash in 2019 for an order that started and finished in 2019, you will recognize that $100 as revenue in 2019. However, what happens if you get $50 to start an order in 2019 and $50 upon completion of the order in 2020? Under the old rules, some companies might recognize all $100 in 2019 (and pay tax on it in 2019) while others will split it. The second $50 becomes “deferred revenue.” ASC makes everyone follow the same rules for these practices. It has implications for taxes, lending, incentive-based bonuses (e.g. revenue growth bonuses), share prices, entity valuation and so forth.
How Acumatica Deferred Revenue Accounting Enables Compliance with ASC 606
Acumatica Cloud ERP has a portfolio of specialized accounting modules. Deferred Revenue Accounting is one of them. It enables your accounting team to handle the detailed, potentially confusing revenue recognition requirements of ASC 606 in a centralized, intuitive and automated accounting workflow. In particular, the module helps users identify a contract with a specific customer—itself a major component of ASC 606. Revenue recognition is contract-based.
The module then identifies the performance obligations in the contract, such as revenue milestones for partial completion and so forth. It can determine and then allocate transaction prices to specific financial periods. Revenue is then recognized when the performance obligation is satisfied. Acumatica’s Deferred Revenue Accounting module can handle bundled contracts, multi-item contracts and related contracts. The system makes these aspects of ASC 606 compliance compatible with other accounting rules already in place.
Each company will have its own distinct revenue recognition requirements. Acumatica adaptable, allowing for Customized Deferral Schedules based on templates or created from scratch. Users can link schedules to specific transactions and line numbers on income documents.