ASC 606 is an accounting regulation that concerns revenue recognition. It may be the biggest accounting change in decades for many companies. The regulation was drafted by the Financial Accounting Standards Board in 2014, but will only begin to take effect for most companies this year. It is designed to standardize the way that companies recognize revenue, but, as noted in this Forbes article by Tien Tzuo, that standardization may come with a hefty price tag for additional accounting practices and software which track and recognize said income.
When a company sells concrete objects, income recognition is fairly simple. The income is usually recognized when the object is sold. But in these days of subscription services and monthly contracts on the internet, contracts and services change frequently, and identifying what is cost and what is revenue turns out to be not so simple after all. Subscription processes often involve equipment of some type, and it is not always clear exactly when and how much of these equipment costs should be recognized. Different companies recognize revenue at different stages of the process. ASC 606 was designed to standardize this revenue recognition so that all businesses treat income in the same manner. But, although the accounting changes of ASC 606 were announced some 3 years ago, many companies did what we all do when faced with a problem that doesn’t require immediate action: they set them aside to deal with later.
But the day of reckoning is now coming due, as companies scramble to change accounting systems and software to be compliant with the new regulation. The regulation, which was designed to make things simpler and more universal, actually asks for more information and may require substantially more record keeping for some entities. This doesn’t make the regulation a bad one. It’s not. The goal of making the point of recognition of income universal in the digital age is valid and important. In the long run, it will simplify that process and standardize it. But right now, businesses entities are hastening to change their software systems and reporting to make sure they are compliant. For many, these accounting changes will affect not just accounting, but all areas of their business. Professional expertise is especially important in these days of substantial changes in the tax and accounting laws. Foster Financial CPA can help you to find out more about this and the many other important accounting and tax regulations that take effect this year.