ASC 606: Outlining the Five-Step Process for Recognizing Revenue

In the sales world, customer contracts are a daily part of life. If every company's contracts had different terms, even for similar sales, it could create a reporting nightmare and complicate sales deals and compensation.

Instead, businesses around the world use a common standard — the 606 standardized accounting principle developed by the Accounting Standards Codification (ASC).

In this article, we outline the ASC 606 framework, how to implement it, and how to make sure that your business complies with standards that are universally accepted. Dive in and learn everything you need to know about ASC 606.

• The ASC 606 framework
• Implementation of ASC 606
• Compliance solutions for ASC 606
• Sales compensation considerations with ASC 606
• Make ASC 606 compliance an easy-to-tackle priority

To eliminate any discrepancies in how businesses handle accounting for similar transactions across various industries, the ASC developed standardized accounting principles for revenue recognition with ASC 606.

ASC 606 is a revenue recognition standard that outlines how companies should recognize revenue from contracts with customers. It was developed by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) and went into effect in 2018. All businesses that engage in contracts with customers must use the same standards to ensure that revenue is reported consistently and accurately across the board.

ASC 606 outlines a five-step process for recognizing revenue from contracts with customers:

1. Identify the contract with the customer: Before entering into a contract with a customer, take the time to review the agreement, including the rights, payment terms, and how you'll collect payment.
2. Identify performance obligations: Once you identify a contract, analyze the nature of the promised products or services. Are they distinct? Should they be accounted for separately? A product or service is considered distinct when it is valuable to the customer and can stand alone and be transferred independently from the other products or services in the contract.
3. Determine the transaction price: This involves figuring out how much you expect to receive for the products or services. Consider whether the products or services will be paid over time, by credit card, in cash, or by bartering. Then, factor in any discounts, prorations, upgrades, or pricing customizations.
4. Allocate the transaction price: Once you determine a price, it needs to be allocated to each performance obligation — the commitment to transfer the product or service to the customer — within the contract.
5. Recognize revenue: Finally, record the revenue when you transfer control of the promised products or services to the customer.

(Back to top)

ASC 606 establishes the standard to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers. Implementing ASC 606 involves several steps to ensure compliance with the universal common standard.

Here's a brief outline of the process:

• Assess current contracts: Go through all of your customer contracts to see which ones are affected by ASC 606.
• Identify performance obligations: Break down each contract into specific promises — list all products or services you're delivering.
• Determine the transaction price: Figure out the total amount you expect to receive, including any variables like discounts or incentives.
• Allocate the transaction price: Spread the transaction price across the performance obligations based on their individual selling prices.
• Recognize revenue: Record revenue when you fulfill each performance obligation, either over time or at a point in time. This depends on when you transfer control to the customer.
• Update your systems and processes: Adjust your accounting systems, processes, and controls to handle the new requirements, including how you collect and report data.
• Train your staff: Make sure that all relevant teams in your company, including finance, sales, and legal, are trained on ASC 606. Each department needs to understand its impact on contracts and revenue recognition.
• Disclose information: Be sure to include the necessary disclosures in financial statements. ASC 606 requires detailed information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
• Monitor and adjust: Regularly review contracts and revenue recognition practices to ensure you're continuing to comply with ASC 606.

(Back to top)

Making sure that your business complies with the ASC 606 standard doesn't have to be complicated. Compliance solutions can streamline the process and ensure your organization is in consistent compliance.

When choosing a solution, make sure that it has the capability to capture and structure contract data effectively. Companies tend to benefit from having everything on a single platform since it allows them to collect data in one place. Users also benefit from capturing robust and accurate data across quotes, contracts, and orders.

Automation covers everything, from the way you capture data to permissions and approvals. With the right compliance solution, users can specify rules and the system will automatically run many time-consuming processes. There's no need to fuss over data capture or where contracts and customers flow.

Reporting is vital under the new standard. The right solution not only helps you comply, but it also enables you to take a deeper look at your deal and pricing structures in real time (even nonstandard deal structures can be reported upon). While adapting to the new revenue recognition standards might seem daunting, it can be much more manageable with the right tool.

(Back to top)

Your sales team will appreciate the ASC 606 revenue recognition standard because it ensures that commissions and bonuses are implemented when revenue is actually recognized — and not just when a sale is made. This approach provides several advantages that are beneficial for both sales professionals and for your company as a whole.

As a general rule, salespeople don't like to see their commissions reversed or restructured after the sale. Compliance with the ASC 606 revenue recognition standard minimizes — if not eliminates — this frustration.

With ASC 606, revenue is only recognized once certain performance obligations are met. And by linking commissions to recognized revenue, the sale translates into real value for your company. This ensures that commissions are paid on stable, secured income instead of on deals that may be incomplete.

Knowing that commissions will be paid based on solid, recognized revenue gives salespeople peace of mind, allowing them to focus on long-term client relationships instead of just short-term wins.

Another advantage of complying with ASC 606 is that salespeople are more motivated to close. When compensation is tied to recognized revenue, salespeople will prioritize high-quality deals. And because salespeople will only receive commissions when your company recognizes the revenue, they'll focus on deals that are sustainable, contractually sound, and more likely to generate long-term value.

Instead of focusing on "closing the deal," complying with ASC 606 instills a mindset in salespeople to secure long-lasting customer satisfaction. And when salespeople concentrate on high-integrity deals, they're more motivated to complete the performance obligations that trigger revenue recognition. This leads to stable and predictable earnings for the company — and for the salespeople.

(Back to top)

By following ASC 606 guidelines, businesses not only ensure compliance, but also promote transparency and consistency in revenue recognition. And with the right tools, ASC 606 compliance is easy. Check out Salesforce's CPQ and billing capabilities to see how a powerful solution can help you bring together sales and finance and recognize revenue.