ASC 606
Step 1 - Identify the Contract with a customer
ASC 606 (606-10-25-2) defines a contract as an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral, or implied by an entity’s customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries, and entities. ASC 606 also outlines on when a contract should be combined and when contract should not be identified even tough payment has been received by the party….. Read More
Step 2 - Identify the performance obligations in the contract
Step 2 – Performance Obligation, which involves identifying performance obligation is a sophisticated process and involves a lot of thought process and modification to the current process. As per ASC 606-10-05-4, identifying performance obligations consists of identifying distinct goods and services as promised in a Contract.
What is a Performance Obligation?
A performance obligation is the key factor for revenue recognition as per the new ASC 606. While determining a performance obligation, an entity will assess the goods or services promised, identifying a performance obligation as:
a. A good (that is distinct)
b. A service (that is distinct)
c. A bundle of goods or services (that is distinct)
d. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to a customer.
Step 3 – Determining the Transaction Price
What is Transaction Price?
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
Determine the Transaction Price
Well, the definition of transaction is pretty much straight forward but determining the transaction price is a bit sophisticated when variable amount comes in to picture, however, if one has clear understanding on the variable and fixed amount aberration, then determining the transaction price becomes much easier.
When determining the transaction price, an entity shall consider the effects of the following, which is various types of consideration in a contract other than fixed consideration:
Step 4 - Allocate the transaction price
ASC 606 brings a different way of allocating the transaction price. The concept of EITF 08-1, SOP 97-2 and VSOE is no more a headache for business to worry about. ASC 606 has made the allocation of transaction price straight forward.
With the 5 Steps model introduction, Step 4 speaks about allocating the transaction price to each performance obligation based on its relative standalone selling price, if the contract has more that one performance obligation. The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer.
This article layouts the basic steps on how to perform allocation transaction price to each performance obligation and the methods to identify the relative standalone selling price and other aspects linked to the allocation of the transaction price.
Step 5 - Recognize revenue as performance obligations are satisfied
Revenue is an important point of concern to the users of Financial Statements in assessing an entity’s Financial Performance and Position.
Accounting Standard Codification (ASC) 606 – Revenue from Contract with Customers is an Industry-wide revenue recognition guidance which has been formulated by the Financial Accounting Standard Board (FASB). This was a joint task by Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) to clarify the principles for Revenue Recognition and to develop common revenue standard for U.S. GAAP and IFRS.
ASC 606 will be applicable across all the industries and aid in recognizing revenue from all the types of transactions, except those transactions which are covered by more specific guidelines (for example – Insurance Contract or Leasing Contract).
Disclosure of Contract Asset, Contract Liability and Receivable
FASB Accounting Standards Codification 606-10-50-1 indicates that “the objective of the disclosure requirements in the revenue standard is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” The standard further says that “an entity shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements.”
This document provides explanation on what a Contract Asset/Contract Liability/Receivables are, as there are many situations where the presentation of financial position becomes sophisticated under new ASC 606 guidelines. This document also covers on how the balance of Contract asset and Contract Liability can be offset and at what level…. Read More
Revenue Recognition – ASC 606 and IFRS 15
The objective was to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer
Allocation Difference in ASC 606 / IFRS 15 Vs Ind AS 18
Revenue is an important point of concern to the users of Financial Statements in assessing an entity’s Financial Performance and Position.
Accounting Standard Codification (ASC) 606 – Revenue from Contract with Customers is an Industry-wide revenue recognition guidance which has been formulate by Financial Accounting Standard Board (FASB). This was a joint task by Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) to clarify the principles for Revenue Recognition and to develop common revenue standard for U.S. GAAP and IFRS.
ASC 606 will be applicable across all the industries and aid in recognizing revenue from all the types of transactions, except those transactions which are covered by more specific guidelines (for example – Insurance Contract or Leasing Contract).
Foreign Exchange Accounting
In today’s globalized economy, many businesses conduct operations in multiple regions. As a result of this, the volume of Multi-Currency transactions is always on the increase and the accounting standards for multi-currency scenarios must keep abreast to the rate of change.
Foreign exchange accounting also covers the recording of transaction in functional currency and recording the gain and loss incurred due to exchange rate fluctuation as well as the gains or losses in case of a change in the expected exchange rate between the functional currency of the entity and the currency in which a transaction is denominated.
But before directly jumping into the accounting aspects of foreign currency transactions, one must be aware of the basic terms and concepts like what is transaction currency, functional currency, reporting currency, etc.
Here are some handpicked points from RevGurus which will make any readers be a master in foreign exchange accounting…. Read More