Leveraging ERP systems for ASC 606 revenue recognition compliance
The Financial Accounting Standard Board’s (FASB) Accounting Standards Codification (ASC) 606 was originally issued in May 2014 to replace virtually all existing revenue recognition guidance. All organizations must act quickly to establish a path to ASC 606 compliance, with the implementation deadline for public companies with a calendar year-end set for Jan. 1, 2018, and for the year ending Dec. 31, 2019, for private companies with a calendar year-end. A key strategy to assist with compliance efforts is utilizing enterprise resource planning (ERP) solutions to increase automation and report financial results in an accurate and timely manner.
ASC 606’s core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. A key change from previous guidance is the incorporation of more judgments and estimates in the new guidance. The second major change is the focus on the transfer of control, rather than the risks and rewards of ownership under existing guidance.
Modern ERP platforms are designed to help your organization adhere to the updated five-step process for revenue recognition outlined in ASC 606:
- Identify the contract with a customer: Regardless of the source, ERP solutions can identify the transactions that represent a customer contract.
- Identify the performance obligations in the contract: Your ERP system can gather information on expectations, and promised goods and services can be gathered from source documents.
- Determine the transaction price: ERP platforms can collect the elements of the transaction price from all applicable source documents.
- Allocate the transaction price to the performance obligations: ERP systems can automate allocation processes based on standalone selling prices.
- Recognize revenue when (or as) each performance obligation is satisfied: ERP systems help keep track of whether revenue should be recognized over time or at a point time and help calculate the revenue that should be recognized each period if revenue should be recognized over time.
Your ERP system can also automate revenue recognition processes, including foreign exchange gains or losses, as well as establishing the correct asset and liability balance.
Regardless of whether your business provides products, services or both, when contracts are entered into with customers, modern ERP systems can help you calculate and present revenue accurately within financial statements.
With ASC 606 effective dates rapidly approaching, time is of the essence. Your organization should assess your ERP solution to determine if you can leverage its functionality to automate key revenue recognition processes and significantly reduce manual efforts and potential errors during the transition process.
For more information on ASC 606 compliance, visit RSM’s Revenue Recognition Resource Center