When Did ASC 606 Become Effective? A Review of Dates

Accounting Standards Codification (ASC) 606, developed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), created a unified framework for revenue recognition. Titled “Revenue from Contracts with Customers,” this standard significantly shifted how companies report earnings. It aims to provide a consistent and comparable approach to revenue recognition across industries and global jurisdictions, enhancing financial reporting transparency and reliability.

Understanding ASC 606

ASC 606 addressed inconsistencies in revenue recognition practices that existed across industries and transaction types. Previously, industry-specific rules led to disparate accounting treatments for similar activities. The core principle of ASC 606 is to recognize revenue when an entity transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those items. This principle emphasizes the transfer of control over goods or services as the key event for revenue recognition, rather than merely cash receipt.

To achieve this, ASC 606 introduces a comprehensive five-step model that entities must apply to determine when and how revenue is recognized. These steps include identifying the contract with a customer, identifying the performance obligations within that contract, determining the transaction price, allocating the transaction price to the performance obligations, and finally, recognizing revenue as performance obligations are satisfied. This structured approach provides a consistent framework for analyzing contracts and ensuring revenue is recognized appropriately. While systematic, applying these steps requires significant judgment based on specific contract terms and conditions.

Determining Effective Dates

The effective dates for ASC 606 varied depending on the type of entity, with public business entities adopting the standard earlier than non-public entities. For public business entities (PBEs), the standard became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that fiscal year. For example, a calendar year public company began applying ASC 606 on January 1, 2018.

Non-public entities, which include private companies and not-for-profit organizations, initially had a later effective date. The standard was originally effective for these entities for annual reporting periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019. A calendar year private company’s original adoption date was January 1, 2019.

The FASB later deferred the effective date for certain non-public entities that had not yet adopted ASC 606. Formalized by Accounting Standards Update (ASU) 2020-05, this deferral allowed adoption for annual reporting periods beginning after December 15, 2019, and interim periods within annual reporting periods beginning after December 15, 2020. This extension provided additional time for implementation, especially due to COVID-19 challenges.

Approaches to Adoption

Entities had two primary transition methods for adopting ASC 606: the full retrospective method and the modified retrospective method. The chosen method influenced how prior financial statements were presented and their comparability. Both approaches required considerable effort, as companies often accounted for contracts under both old and new guidance during the transition.

Under the full retrospective method, entities were required to restate prior financial statements as if ASC 606 had always been applied. This typically involved restating financial information for the two preceding periods presented in the financial statements. While providing comparability across periods, this method was more complex and resource-intensive due to the need to re-evaluate historical contracts.

The modified retrospective method, also known as the cumulative effect method, provided a less complex alternative. Under this approach, entities recognized the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the period of adoption. Prior periods presented in the financial statements were not restated under this method, which simplified the implementation process. However, prior period financial statements were not directly comparable to those prepared under ASC 606 in the adoption year, potentially requiring additional disclosures to explain the change’s impact.