Armanino Blog

ASC 606: What Early-Stage Companies Need to Think About Now

by Eric Thomas
May 02, 2017

As a CEO, COO or CFO of an early-stage company, you have enough to worry about. Lining up investors, getting a minimally viable product to market, and persuading customers to sign a contract are pursuits that get the lion's share of your attention—as they should. However, there is one additional thing you need to focus on right now: how your company recognizes revenue. That's because the new ASC 606 (and IFRS 15) revenue recognition standard—which affects virtually all entities—makes the issue more than a minor, routine accounting question.

Switch now or double your effort and cost later

The change for existing companies in how they account for revenue is not trivial, impacting internal controls, contracts, staff training and software systems used for accounting and reporting. That's why regulators extended the deadline for adoption to January 1, 2018, for public companies and to January 1, 2019, for non-public companies.

Don't let the future deadline fool you into waiting to take action. If you wait to adopt, you would then have to restate your revenue for two comparative years prior to the implementation date. That requires capturing the right data now and performing dual reporting of both the old method and new until adoption. (This is what established companies with entrenched processes, contracts and controls are doing.)

As an early-stage company with somewhat of a green field of accounting processes, it makes the most sense to adopt the new standard now and save yourself additional work down the road.

How ASC 606 impacts your business

What does it take to adopt the new standard for revenue recognition? Your company should be prepared to follow the new five-step approach.

> ASC 606 Five-Step Revenue Recognition Approach What This Means for You 1. Identify a contract with a customer. Your signed contract should identify the good or service to be delivered, payment terms and rights. It should also be probable that you will collect the agreed-upon consideration for providing the god or service. 2. Separate the contract's commitments. You need to identify and separate the components of the contract that represent more than one distinct good or service, for example, SaaS and implementation services. 3. Determine the transaction price Determine the true revenue to be recognized by considering the many components of the contract:
  • Discounts
  • Refunds
  • Credits
  • Bonuses
  • Penalties
  • Incentives
4. Allocate a price to each commitment Determine the price of each good or service as it it was sold by itself.
Allocate the related Step 3 components to the price of each individual good or service.
Allocate changes to the price, such as refunds or discounts, which occur after contract execution. 5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract. Determine when the customer gains control of the good or service:
  • Is the good or service delivered at a point in time or over a period of time?
  • Have you satisfied your obligation(s) to the client?
  • Are you satisfying the obligation(s) over a period of time?
  • How will you measure the progress of each commitment over time?

Get the right support

As a startup, your company is in the enviable position of not having to dedicate extensive time and effort to changing software systems, processes, internal controls and more to support the new standard. You can switch now with less effort and cost than long-established companies, and avoid the expense and hassle of dual efforts down the line.

That said, getting the new revenue recognition standard implemented correctly requires accounting expertise your company may not yet have. For instance, how you do handle a discount offered during the last two months of a 12-month contract when a customer re-subscribes for two additional years? For which time period should you apply the discount? The answer depends on your company's business model and contracts. Expert guidance can help you avoid missteps in implementing the standard within your company.

It's also the opportune time to consider deploying software that supports ASC 606, rather than waiting until your current system or Excel spreadsheets can no longer handle your company's volume and needs. There are excellent systems available that will help you efficiently manage revenue recognition and contracts based on the new standard.

For guidance on implementing the new revenue recognition standard, contact the Armanino Outsourced Finance and Accounting team.

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Eric Thomas - Partner, Consulting - San Ramon CA
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