When Did the ASC 606 Standard Go Into Effect?

ASC 606, or Accounting Standards Codification 606, significantly changed how companies recognize revenue from customer contracts. This standard created a unified framework, enhancing the comparability and consistency of financial reporting across industries and entities, providing a clearer picture of financial performance.

Understanding ASC 606

ASC 606, formally “Revenue from Contracts with Customers,” originated from a collaborative effort between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). This initiative sought to create a converged, global standard for revenue recognition. The core principle of ASC 606 dictates that an entity should recognize revenue to depict the transfer of promised goods or services to customers, reflecting the consideration expected. To achieve this, the standard introduced a comprehensive five-step model for revenue recognition.

The Official Effective Dates

The implementation of ASC 606 occurred on different timelines for various entities. For public business entities, the standard became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that fiscal year. Non-public entities were granted additional time. For these entities, ASC 606 was effective for annual reporting periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019. Both public and non-public entities had the option for early adoption.

Preparing for Compliance

Companies undertook extensive preparations to ensure compliance with ASC 606. This involved applying the five-step model to their revenue streams. The first step required identifying the contract with a customer, ensuring it met specific criteria. Next, entities identified distinct performance obligations within that contract, representing promises to transfer goods or services. This often involved careful analysis of contract terms.

The third step focused on determining the transaction price, the amount of consideration an entity expects to be entitled to. This required assessing variable consideration, such as discounts or rebates. The transaction price then needed to be allocated to each distinct performance obligation based on its standalone selling price. Finally, revenue was recognized as each performance obligation was satisfied, meaning control of the promised good or service was transferred to the customer.

Beyond the five steps, practical preparations involved reviewing existing customer contracts for necessary modifications. Companies assessed and changed their accounting policies and procedures to align with ASC 606 requirements. This necessitated updates to internal controls over financial reporting for accurate data processing. Many organizations invested in or modified their information technology systems to support new revenue recognition calculations. Gathering and organizing required data, such as historical contract information, was also a significant undertaking.

Transitioning to the New Standard

Entities had two primary methods for transitioning to the new ASC 606 standard. The Full Retrospective Method required companies to apply the new standard to each prior reporting period presented. Under this method, prior financial statements were restated as if ASC 606 had always been in effect, providing a fully comparable view of financial performance. This approach involved re-evaluating all contracts ongoing at the earliest presented period.

The second approach was the Modified Retrospective Method, also known as the Cumulative Effect Method. Using this method, entities applied the standard only to the current period, without restating prior financial statements. Instead, a cumulative catch-up adjustment was recognized to retained earnings at the date of initial application. This adjustment represented the difference between revenue recognized under previous accounting standards and under ASC 606. While simpler to implement, this method resulted in less comparability with prior financial statements.