08 Aug ASC 606: What you need to know
by John Shields
On December 15, 2017, the most significant accounting changes the financial industry has seen since Sarbanes-Oxley begin.
In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), and the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. From those two updates, ASC 606 and IFRS 15, FASB and IASB fundamentally changed how companies will recognize revenue starting in 2018 for publicly traded companies and 2019 for privately held companies. Stemming from these changes, the need for a powerful and flexible quote-to-cash solution for companies has become increasingly important.
Whether you’re a startup or an enterprise, you can achieve compliance with ASC 606 and IFRS 15 by utilizing the Salesforce CPQ solution.
What is the Change in Recognizing Revenue?
ASC Topic 606 contains an overarching principle: A company should recognize revenue when it transfers goods or services to a customer. The amount of revenue recognized should represent the consideration to which the company (or the seller) expects to be entitled. The AICPA created a five-step approach that companies should follow to determine the appropriate revenue treatment for goods and services.
- Identify the Contract with the Customer
- Identify Performance Obligations in the Contract
- Determine the Transaction Price
- Allocate Transaction Price to the Performance Obligations in the Contract
- Recognize Revenue When the Company Satisfies a Performance Obligation
The steps do not need to be performed sequentially by the company, but revenue must be recognized when the risk of loss of the good or service transfers from the company to the customer. That is, revenue recognition is triggered when control of the good or service passes to the customer.
The Benefit of ASC 606 and IFRS 15
There are several benefits to ASC 606 and IFRS 15. They afford a company:
- Guidelines that can be applied to a single contract or a portfolio of contracts
- Measurable compliance criteria
- Opportunity to revamp antiquated revenue recognition and billing processes
The Costs of ASC 606 and IFRS 15
ASC 606 and IFRS 15 can also cost a company:
- Significant fines for noncompliance
- Significant impact on the amount and timing of how revenue is recognized
- Reliance on manual processes when existing systems can’t comply with ASC 606 and IFRS 15
Why Salesforce CPQ?
Salesforce CPQ and billing can provide an integrated quote-to-cash solution on the Salesforce Platform that helps to ensure ASC 606 and IFRS 15 compliance in several ways.
- A single data sheet. Salesforce CPQ puts the rules and processes in place to capture all of the data you need when you first create products in Salesforce. Then that data is transformed and utilized by sales, operations, and finance as it moves through the customer lifecycle. No more PDFs, excel docs, or email–you can capture it all into a single data sheet.
- IT automated controls. There’s no need to worry that your sales reps might structure a deal in a way that is noncompliant with the new rules for recognizing revenue. Salesforce CPQ puts guardrails in place to ensure compliance.
- Better reporting. Because all of your financial data is in Salesforce, you can report on it all. It doesn’t matter if you have a nonstandard, multi-year deal with deep discounts, future revenue, and a start date of Feb. 29. You can report on it.
In the upcoming blog posts, we will provide examples of how companies like a brick-and-mortar retailer, a medical research firm, a custom software developer, and many others can use Salesforce CPQ and billing to become compliant with ASC 606. Stay tuned!