The effective date of ASC Topic 606, Revenue From Contracts with Customers, is finally here for non-public business entities. All financial statements dated on or after December 31, 2019 will need to present revenue recognized under this new accounting guidance issued by the FASB.
However, just because the deadline is here doesn’t mean that your clients are ready to recognize revenue under ASC 606. Often, they will need to do much work in order to finish their transition to ASC 606 and to prepare their 2019 financial statements. And they will be looking for you to help them out. While clients’ accountants are generally in the best position to provide this type of assistance, you need to be careful in providing these professional services, especially if you perform engagements with require independence. Let’s examine some of the issues associated with assisting clients with their implementation of ASC 606 now.
First and foremost, you will need to both know ASC 606 and be able to apply it to your clients’ circumstances. While Topic 606 is a complex accounting standard that takes a lot of judgment to apply, remember that revenue recognition is really about answering two basic questions about the core principle of the new standard, how much and when?
As for the “how much” question, your focus needs to be on variable consideration in a revenue contract, that portion of a contract value that is subject to change. The elements of variable consideration haven’t changed, but the accounting for it may under ASC 606. The key for accurate accounting for variable consideration under Topic 606 is to identify all sources. Once you figure out the sources, you can develop estimates of how much revenue your clients expect to get and apply the rest of the Topic 606 accounting model. Remember that generally the largest impact of adopting variable consideration is the possible acceleration of including items like bonuses and incentives earlier into revenue.
As to the “when” question, this involves determining whether revenue should be recognized over time or at the point in time when control of the good or service passes from the seller to the buyer. In a large number of instances, companies are answering the “when” question similarly to how they answered it under prior accounting guidance. However, this determination is unique to your client’s fact pattern. Don’t just merely assume that you will get the same answer. You need to see if your clients’ contracts meet one of the three criteria for revenue recognition over time. If not, they must recognize revenue at the point in time when control passes.
Lastly, on the financial statement side, don’t forget about the new disclosure requirements. As very few private company examples are out there, a good rule of thumb is to take the disclosures from public companies in the same industry as your client and use them as an example. Remember to apply all the disclosure relief which nonpublic companies get under ASC 606.
One last point to consider is to make sure you understand the independence implications of whatever assistance that you provide to your clients. The guidance for this is found in the AICPA’s Code of Professional Conduct, section 1.295. This section of the Code details the restrictions that exist on providing non-attest services for attest clients, including supporting them in their ASC 606 implementations.
The general prohibition is that you can’t fulfill the role of your client’s management when providing these services. Section 1.295 provides good examples of what management’s responsibilities are. Specifically, remember that you can’t make the significant estimates and assumptions that your clients need to make when implementing ASC 606. Nor can you be part of their system of internal controls related to accounting for revenue recognition or any other aspect of financial reporting.
That said, there are a lot of ways to help your clients while not jeopardizing your independence. For instance, providing sample footnote disclosures, helping client management in their assessments related to ASC 606 and, of course, pointing out issues as part of the attest process, are all valuable professional services that will not impede your independence.
The key to making sure you stay on the right side of the independence question is to understand the rules. There is no substitute for reading the Code as well as the various other independence-related guidance published by the AICPA, including its FAQ guide on providing non-attest services to attest clients. All of this guidance is available at the AICPA’s website, accessible at AICPA.org.
While it is important to go back to the source documents to help you with these issues, Surgent is also here to help. We have a variety of courses to get you and your clients up to speed on ASC 606 as well as state-specific and generic ethics courses that detail all of the Code’s independence requirements, including those related to non-attest services.
By using all available resources, accountants can help themselves and their clients successfully complete the ASC 606 implementation process. While it still will require a lot of work, having a good grasp of both the ethical and accounting requirements related to ASC 606 implementation, as well as other complex accounting issues can enhance your client relationships and allow you to provide then with additional professional services beyond the attest function in this very challenging time.
For additional guidance on the concepts discussed in this article, consider the following courses:
- Guide to the Topic 606 Revenue Recognition Model for All CPAs (REV4)
- Revenue Recognition for Long-Term Construction and Similar Contracts: Topic 606 Implementation Challenges (LTC4)
- Revenue Recognition in the Technology Sector: Topic 606 Implementation Challenges (TEC4)
- Life After Adoption: Applying Topic 606 to Revenue Contracts on an Ongoing Basis (NRRS)
Rich Daisley, CPA, is Senior Director, Accounting and Financial Reporting Content for Surgent CPE. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.