Fasb Accounting Standards Codification Topic 606 Revenue from Contracts with Customers

FASB Accounting Standards Codification Topic 606: Revenue from Contracts with Customers

Revenue recognition is critical for every business, as it determines the financial health of the company. The FASB Accounting Standards Codification Topic 606: Revenue from Contracts with Customers is a framework that covers five steps that a company must follow to recognize revenue from contracts with customers accurately.

The new revenue recognition standard (ASC 606) was issued by the Financial Accounting Standards Board (FASB) in May 2014, and it replaces the old revenue recognition standard (ASC 605). It is effective for non-public entities with annual reporting periods beginning after December 15, 2018.

The purpose of the new standard is to provide a more robust and uniform approach to revenue recognition across different industries. It provides a principles-based approach that focuses on the transfer of control over goods and services to customers. The five steps in the FASB Accounting Standards Codification Topic 606 framework are as follows:

1. Identify the contract with the customer

The first step is to identify the contract between the company and the customer. A contract is defined as an agreement between two or more parties that creates enforceable obligations. The parties must have the intention to create a legally binding agreement, and the terms and conditions of the agreement must be clear.

2. Identify the performance obligations in the contract

The second step is to identify the performance obligations in the contract. A performance obligation is a promise to transfer a distinct good or service to the customer. A good or service is distinct if the customer can benefit from it on its own or with other resources that are readily available.

3. Determine the transaction price

The third step is to determine the transaction price. The transaction price is the amount of consideration that the company expects to receive from the customer in exchange for the goods or services. It includes estimates of variable consideration, such as discounts, rebates, and refunds.

4. Allocate the transaction price to the performance obligations

The fourth step is to allocate the transaction price to the performance obligations. The transaction price must be allocated based on the relative standalone selling prices of the goods or services. If the standalone selling price is not available, the company must estimate it based on observable data.

5. Recognize revenue when the performance obligation is satisfied

The final step is to recognize revenue when the performance obligation is satisfied. A performance obligation is considered satisfied when the customer obtains control over the goods or services. Control is transferred when the customer has the ability to direct the use of the goods or services and to obtain the benefits from them.

In conclusion, the FASB Accounting Standards Codification Topic 606: Revenue from Contracts with Customers provides a framework for companies to follow when recognizing revenue from contracts with customers. By following the five steps, companies can ensure that revenue recognition is accurate and consistent across different industries. If you need help with implementing this standard, it`s always best to consult with an experienced accountant.

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