The ASC 606 Revenue Recognition Standard came into force for private companies in the US from 15th December 2018. The adoption of ASC 606 will require subscription businesses to change the way they recognise revenue. So, is your subscription business compliant?
Revenue recognition standards continue to evolve across the globe. While international businesses have been subject to IFRS standards since January, US-based private companies now have to conform to the new ASC 606 accounting standards as of 15th
December 2018. ASC 606 is a robust accounting framework that aims to unify revenue recognition standards across the industries in the US. Incidentally, US public companies have already adopted ASC 606 since 15th
Jointly developed by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), ASC 606 impacts US-based companies whereas IFRS 15, its global counterpart, sets revenue recognition standards for businesses worldwide. ASC 606 is essentially the same as IFRS 15, and we highly recommend that you check out our earlier blog where we detailed the five-step approach
which can be applied to both the standards in order to recognise revenue with any contractual arrangement.
Advantages of ASC 606 for businesses
has listed three key advantages that ASC 606/IFRS 15 offer to businesses:
- Global Compliance – ASC 606/IFRS 15 are truly global standards that help you to present information to a global audience more easily and transparently. This is extremely important if your business is seeking global expansion or looking to raise capital from the markets.
- Finance can become more strategic – The robust set of standards will ensure that businesses can spend more time on strategic analysis rather than devising their own recognition policies. The new standards can also boost the top and bottom lines of companies by fostering some unique arrangements, such as recognising more contract revenue upfront in some cases. More importantly, it will give management the true picture about the financial health of their business.
- Tighter controls for contracts – Since ASC 606 is based specifically on contracts, the sales teams will have to standardise their contract offerings ensuring that their practices are in the best interest of the business and revenue goals.
How do ASC 606/IFRS 15 impact subscription businesses?
The ASC 606/IFRS 15 standards pose a significant challenge to subscription businesses who can no longer stick to simple revenue recognition rules for accounting purposes. They have to take into account the multiple updates and changes that can happen during a customer’s subscription lifecycle, potentially raising questions at each step of the five-step model referenced above.
For instance, subscription terms can change frequently during a subscription lifecycle due to upgrades, disputes or account suspensions, for example. Since identifying the contract is such a critical piece of these standards, changes to contracts mid-term or even cancellations can pose a challenge to businesses. All these changes need to be accounted for in the revenue recognition reports.
In addition, other types of unique subscription arrangements such as usage-based pricing, discounts and upfront fees, among others, can make it extremely difficult to accurately track and recognise contracted and deferred revenue.
Just like GDPR, we think that ASC 606/IFRS 15 is a step in the right direction that will have a positive impact on the industry in the long term. Many businesses take a very myopic view of regulations since it involves short-term inconvenience owing to change in processes. However, subscription businesses depend on customer lifetime value (CLV) and therefore need to take a long-term view of things and realise that these regulations will bring in more transparency and efficiencies within their finance departments.