As a business owner, you have an obligation to comply with all the rules and regulations that are put in place to protect consumers. You may have heard of ASC606, but what exactly is it? Is it something you need to be aware of? If so, how can you tell if your company’s subscription model falls under this standard? We’ll answer all these questions and more as we go over everything you need to know about ASC606.
What is ASC606?
ASC606 is a new standard for revenue recognition that replaces ASC605. The primary purpose of ASC606 is to remove inconsistencies in how companies recognize revenue, which in turn helps investors better understand the financial health of a company. It also helps companies determine their profit margins and provides them with more flexibility when recording revenues.
The FASB and IASB collaborated on ASC606 because they recognized that there was a need for a common set of rules across jurisdictions so that global companies could be more consistent in their accounting practices.
Do I need to know about it?
If you’re reading this, I’m going to assume that your job revolves around accounting. And if that’s the case, then it makes sense that you’d be curious about ASC606 — a new standard that rose to the surface in 2020 and covers revenue recognition.
Most accounting standards are complicated (especially how they can change over time), and tend to be more relevant for larger companies than smaller ones. But ASC606 is different — it applies across all industries regardless of size or sector specialization (unless some other standards take over). In addition, even if your company doesn’t sell products or services yet, this might be something worth learning about just so that when others ask about it in interviews, you’ll have an answer ready.
How is it different from previous standards?
ASC606 is the latest standard, and it’s quite different from its predecessors. It’s more comprehensive, covering more than just revenue recognition for subscriptions. It also outlines good practices for measuring revenue and costs in a more granular — yet still general — way.
This is important because there are many reasons to be aware of ASC606 even if your organization doesn’t have any subscriptions or deferred revenue today. If you’re negotiating a contract with terms that will result in some element of your business being classified as a subscription, or if you’re trying to figure out how much non-cash revenue should go on the books when dealing with non-monetary exchanges (such as advertising), then understanding what constitutes “subscription” might be helpful.
You may be wondering why this new standard exists. Well, previous standards were too broad, and businesses (and accountants, tax preparers) needed more specific guidance to comply with them. ASC606 was developed as a narrower standard that can be applied to many situations, but owners need to be aware of it to ensure they’re in compliance.
What if I don’t have subscriptions?
While ASC606 is often referenced in connection with revenue-generating entities like software companies, it’s important to note that ASC606 applies to all types of businesses and not just those with a subscription component. In fact, ASC606 is applicable to any entity that has revenue — including those that sell goods instead of services.
This means that even if your company isn’t using software or technology as part of its operations, you may still need to adopt this standard.
If you’re like many others, your first question was probably “When do I need to implement the standard?”. Well, the good news is that ASC606 wasn’t effective until January 1, 2020. However, there are some important caveats:
- If your organization has a subscription component (as defined in ASC 606), then you had to implement ASC606 by January 1, 2021.
- If your organization doesn’t have a subscription component (for example, if you sell products with no annual payments required or recurring access fees), then there’s no requirement to implement ASC606 at this time.
Even if you don’t think that ASC606 will affect your business directly, it’s important to be aware of this (and other) accounting standards because they have a significant impact on your customers and suppliers, as well as who you hire.
ASC606 is here to stay, so it’s important that you understand as much as possible about this new standard. No one can guarantee that it won’t affect your business in some way, but if you keep up with the news and industry changes like this one, then you’ll be prepared when it does come time to implement.