ASC 606 – Revenue From Contracts with Clients

by | Updated January 29, 2020 | Dynamics GP, Financials

Time is running out for companies to make the appropriate changes in order to be compliant with ASC 606. The new guidelines are effective for public companies for reporting periods beginning after December 15, 2017. Private companies and not for profits need to comply with the reporting period following December 15, 2018. However, everyone can early adopt starting December 15, 2017. With these deadlines fast approaching, companies need to make a plan now to avoid headaches in the future.

What is ASC 606 – Revenue From Contracts with Clients?

The ASC 606 is a new revenue recognition standard required by the government to eliminate industry-specific standards and instead have a single principle-based approach. According to the Financial Accounting Standards Board, the new standard will:

  • remove inconsistencies and weaknesses in existing revenue reporting requirements
  • provide a more robust framework for addressing revenue issues
  • improve comparability of revenue recognition practices across entities and industries
  • provide more useful information to users of financial statements through improved disclosure requirements

This is a very large change and shouldn’t be taken lightly. It will affect all aspects of your business and you’ll need to put a plan in place to meet the requirements.

Who needs to comply?

Every industry and business will need to comply with the new standards, with some industries being affected more than others. Any business that accepts complex contracts for projects to be delivered over a period of time will need to comply.

Make sure you recognize if you are selling solutions or a product. Be careful with items that are not “distinct” in terms of the contract and the associated revenue. Items sold as part of a solution may need to be deferred for the life of the contract. For example, if you sell a solution that includes hardware, software, and a three-year service contract you may have to defer the entire amount if not “distinct”. Additionally, even if an item is “distinct” in terms of the contract, if it is “immaterial” you can elect to combine it with an associated performance obligation.

The New Five-Step Model for Recognizing Revenue

Model for Recognizing Revenue

The New Regulation and Microsoft Dynamics GP

Microsoft Dynamics GP will be able to separate the performance obligations, but it cannot reallocate the revenue. Without an add-on product, you’ll be forced to manually complete the calculations and go through the revenue recognition steps on your own.

In order to comply without an add-on solution, you’ll need to build a complex spreadsheet to calculate the standalone selling price and reallocation of revenue. From there, you would manually have to journal entry that information back into GP.

There are a few different software solutions that integrate directly with Microsoft Dynamics GP and will keep you in compliance with this new standard without any headaches. Depending on your business and your budget, Stoneridge Software can help you determine which solution is the best fit for you.

Do not wait – start your path to compliance before it’s too late. Contact Stoneridge Software to get started.

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