ASC 606: A Roadmap to a Successful Implementation (Part 2)
TESTING AND DOCUMENTING CONCLUSIONS
By Sandy Dhariwal
Private calendar year filers have less than seven months until the new “Revenue from Contracts with Customers” standard (“ASC 606”) comes into force.
Already effective for public companies, ASC 606 will be effective for private companies for annual periods beginning after December 15, 2018. Private companies will report under the new standard for the first time in their 2019 financial statements.
The standard replaces nearly all revenue guidance in ASC 605, including industry-specific guidance.
The impact of ASC 606 may vary depending on the nature of customer contracts; however, at a minimum there is a documentation exercise to demonstrate to auditors that a company has considered the impact of ASC 606 on its revenue streams.
In the first part of this blog series we covered identifying your contract population, revenue streams and predominant contract features and selecting a preliminary sample. In the second installment of a four-part series, we cover the testing phase of an ASC 606 implementation.
Robust documentation is key to evidence the testing, key issues considered, conclusions reached and to provide a future reference point for both the company and its auditors. The following represent a few activities crucial to the testing and documentation phase:
- Contract Checklists: Consider how you will document your review of individual contracts and capture features and data pertinent to your ASC 606 assessment. Typically, an abbreviated contract checklist can facilitate this and the best ones are tailored to your different contract types. In addition, work with your auditors or other advisors to leverage templates they already have.
- Resources: Consider who will perform the detailed review of contracts, specifically whether you will use internal or external resources.
- Collate Contracts: Pull together contracts selected for testing, including related amendments. This process can take time, particularly if there is not a centralized contract management system or depository.
- Issues Tracking/Special Provisions: Track issues and areas requiring further technical assessment. While many contracts may follow a standard format there may be contracts that are outliers or that have special provisions that will need to be individually assessed under the ASC 606 framework.
- Understand How You Are Recording Revenue For Your Contracts Today. Once you determine the appropriate accounting under ASC 606 this knowledge will allow you to understand the impact upon adoption. Some key questions include:
- When do you recognize revenue (e.g. upon delivery, shipment or as you provide the service)?
- How do you estimate the transaction price when you have variable consideration?
- Impact Assessment Memos: Document conclusions on impact of ASC 606 to timing, method or quantum of revenue recognition. This is underpinned, for each revenue stream, by a walk-through of a typical contract using the five-step model in ASC 606 which is as follows:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
How To Get Started
About the Author:
Sandy Dhariwal is a Manager in Opportune’s Complex Financial Reporting practice. Sandy has over 12 years of experience gained across public accounting and industry in a wide range of technical accounting and reporting areas under both US GAAP and IFRS. Before joining Sandy was Senior Manager of Finance Projects for Vernalis PLC where she drove a wide range of finance and operational projects to establish a commercial infrastructure in the U.S. Previously, Sandy worked as Interim Controller at Vernalis plc and as an Audit Manager at PwC U.K. where she gained her ACA. Sandy received her BSC in Economics from the University of York, U.K.