Over these last several months we have explored the new revenue recognition standard, ASC 606, in great detail. We conclude the series with this article discussing effective dates and transition methods, including the related guidance.
For annual periods beginning after Dec. 15, 2017, the following entities must apply ASC 606:
Public business entity, is an entity meeting any of the below criteria:
a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.1
Not-for-profit entity, that:
Has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
Employee benefit plan, that:
Files or furnishes financial statements with or to the Securities and Exchange Commission (Form 11-K)
Note that the definitions used in ASC 606 noted above have not changed from current practice in the Codification. The standard must be applied for any interim periods within the above fiscal years. As such for an issuer, the first period reported in accordance with ASC 606, will be the first quarter of 2018.
All other entities will apply the guidance for the first annual period beginning after Dec. 15, 2018 and for interim reporting periods beginning after Dec. 15, 2019.
All entities are permitted to adopt earlier, as of annual periods beginning after Dec. 15, 2016.
The standard provides for two transition methods which will be discussed below; and included several practical expedients to provide some relief. In discussing the transition methods, the standard provides a specific definition for “completed contracts,” which is to be used in applying the transition guidance.
A completed contract is a contract for which all (or substantially all) of the revenue was recognized in accordance with revenue guidance that is in effect before the date of initial application.2
A. Retrospectively in accordance with the following guidance:
In this method, an entity shall apply the new standard retrospectively to each prior reporting period presented, in accordance with current guidance in ASC 250-10-45 (5-10), Change in Accounting Principle. In doing so, an entity may use one or more of the following practical expedients:
- An entity need not restate contracts that begin and are completed within the same annual reporting period.
- For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
- For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue (see paragraph 606-10-50-13).
- For contracts that were modified before the beginning of the earliest reporting period presented in accordance with the pending content that links to this paragraph, an entity need not retrospectively restate the contract for those contract modifications in accordance with paragraphs 606-10-25-12 through 25-13. Instead, an entity shall reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with the pending content that links to this paragraph when:
i. Identifying the satisfied and unsatisfied performance obligations
ii. Determining the transaction price
iii. Allocating the transaction price to the satisfied and unsatisfied performance obligations.3
If an entity decides to use any of the practical expedients, it must apply the expedients consistently to all the periods presented and disclose: the expedients that were used; and a qualitative assessment of the effect of using the expedients, to the extent reasonably possible.
B. Retrospectively in accordance with the following guidance:
An entity shall recognize a cumulative effective change to opening retained earnings in the year of adoption of the standard. An entity may apply this to all contracts as of the date of initial application (Jan. 1, 2018 for instance) or to contracts that are not completed. An entity shall disclose which approach was used. An entity may also apply the practical expedient in f (4) above and provide the relevant disclosures to its use.
If an entity uses this transition approach, the prior year financial statements will be presented in accordance with its historical revenue recognition methods. Additional disclosure is therefore required to provide:
- The amount by which each financial statement line item is affected in the current reporting period by the application of the pending content that links to this paragraph as compared with the guidance that was in effect before the change.
- An explanation of the reasons for significant changes identified in 1.4
The transition decision is an important one for all entities as it will impact the level of effort needed to adopt ASC 606. For public entities which are accelerated filers, adopting method A will require the restatement of the 2017 and 2016 income statements. As such, entities considering this method, should consider the need to make estimates of the impact in connection with the preparation of the calendar 2016 financial statements. The adjustments will be subject to audit in 2018, and therefore internal control over financial reporting must be maintained as well. The need for parallel accounting records needs to be determined based on the complexity of an entities contracts and the expected impact as a result of the adopting of ASC 606. Public entities also need to consider their SAB 74 disclosures for 2016 as the SEC as indicated an expectation that the disclosure will contain more detail as to the expected impact of the adoption and the entity’s decision on the transition method.
For more information on revenue recognition, or to learn how Baker Tilly’s specialists can help, contact our team.
1ASC Master Glossary