When Was ASC 606 Effective? Dates & Transition Explained
Navigate the historical application timeline and implementation approaches for ASC 606, the revenue recognition standard.
Accounting standards provide a framework for how companies report their financial performance, ensuring consistency and transparency. A significant development in this area was the introduction of Accounting Standards Codification (ASC) 606, titled “Revenue from Contracts with Customers.” This standard marked a substantial change in how businesses across various industries recognize revenue from their customer agreements. It aimed to unify disparate industry-specific guidance into a single, comprehensive model.
Understanding ASC 606
ASC 606, issued by the Financial Accounting Standards Board (FASB) in May 2014, established a framework for recognizing revenue from contracts with customers. Its purpose is to provide a consistent approach for companies to depict the transfer of promised goods or services to customers. This framework ensures revenue reflects the consideration a company expects to receive for those goods or services. The standard replaced previous U.S. Generally Accepted Accounting Principles (GAAP) that often included industry-specific rules, leading to varied practices.
The standard improves comparability of financial statements across different entities, industries, and jurisdictions. It mandates that revenue be recognized when control of goods or services is transferred to the customer, rather than when risks and rewards are transferred. This shift requires companies to analyze their contracts and identify distinct performance obligations. ASC 606 also introduces enhanced disclosure requirements, providing users of financial statements with more detailed information about revenue streams.
Determining the Effective Dates
The effective dates for ASC 606 varied based on the type of entity, with public companies adopting the standard earlier than non-public entities. For public business entities (PBEs), the standard was effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption was permitted for public entities as of annual reporting periods beginning after December 15, 2016.
Non-public entities initially had a later effective date for the standard. The original effective date for these entities was for annual reporting periods beginning after December 15, 2018, with interim periods within annual periods beginning after December 15, 2019. However, the FASB subsequently deferred this date.
Through Accounting Standards Update (ASU) 2020-05, the effective date for non-public entities was further extended. This deferral allowed these entities to apply the guidance for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. Early adoption remained an option for non-public entities, but no earlier than the effective date for public entities.
Approaches to Transition
Companies implementing ASC 606 had two methods for transitioning to the new standard: the full retrospective method and the modified retrospective method. Both approaches required effort to account for contracts during transition. The choice of method influenced how prior financial statements were presented upon adoption.
Under the full retrospective method, companies applied ASC 606 to each prior reporting period presented in their financial statements. This approach required restating historical financial statements as if the new standard had always been in effect. The cumulative effect of applying the standard was recognized at the beginning of the earliest period presented. This method provided users with comparable trend information across all periods presented.
Alternatively, companies could elect the modified retrospective method. This approach applied ASC 606 only to the current reporting period, meaning prior periods were not restated. Instead, the cumulative effect of initially applying the standard was recognized as an adjustment to the opening balance of retained earnings or other appropriate equity components in the period of initial application. This method required less effort in restating prior amounts, but necessitated additional disclosures to explain the impact of the change on financial statement line items.