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What is ASC 606?

Glossary definition

What is ASC 606?

ASC 606 and IFRS 15 are customer contract revenue recognition standards drafted in 2014 by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Officially titled Revenue from Contracts with Customers (Topic 606), the purpose behind the newly imposed standards was to standardize, 1) when an entity may recognize revenue and 2) how much it may recognize. Alongside IFRS 15, it brought standardization to revenue-recognition accounting processes for a variety of industries, from contract-based business-like SaaS companies to manufacturers around the globe.

The new guidance went into effect in early 2018 for Public companies. Nonpublic companies had a start date in 2019. The FASB has recently extended ASC 606 effective dates to certain companies.

The FASB and IASB essentially diagrammed five steps entities need to take to achieve the core principals:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price
  5. Recognize revenue when or as the entity satisfies a performance obligation. The web abounds with more detail on the five steps to recognizing revenue under ASC 606.

Executives, finance teams, and investors alike, stand to benefit from the increased transparency and consistency the improved reporting is meant to bring.

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