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ASC 606: A Roadmap to a Successful Implementation (Part 2)

TESTING AND DOCUMENTING CONCLUSIONS

By Sandy Dhariwal

Private calendar year filers have less than six months until the new “Revenue from Contracts with Customers” standard (“ASC 606”) is effective. The standard replaces nearly all revenue guidance in ASC 605, including industry-specific guidance.

Already effective for public companies, ASC 606 will be effective for private companies for annual periods beginning after December 15, 2018. Private companies will report under the new standard for the first time in their 2019 financial statements.

The impact of ASC 606 will vary based on industry and the nature of customer contracts; however, at a minimum there is a documentation exercise to demonstrate to auditors that a company has considered the impact of ASC 606 on its revenue streams.

In the first part of this blog series we looked at scoping of an ASC 606 implementation, including identifying your contract population, revenue streams and predominant contract features and selecting a preliminary testing sample. In the second installment of a four-part series, we cover the testing phase of an ASC 606 implementation.

Robust documentation is key to evidence the testing, key issues considered, conclusions reached and to provide a future reference point for both the company and its auditors. The following represent a few activities crucial to the testing and documentation phase:

  • Contract Checklists: Consider how you will evidence your review of individual contracts and capture features and data pertinent to your ASC 606 assessment. An abbreviated contract checklist tailored to your different contract types or revenue streams can facilitate this. Your auditors or other advisors may already have templates that you can leverage.
  • Resources: Consider who will perform the detailed review of contracts, specifically whether you will use internal or external resources. These resources should have a sound understanding of the principles of ASC 606 for a more effective review process.
  • Gather Contracts: Gather the contracts for your testing sample, including related amendments. This process can take time, particularly if there is not a centralized contract management system or depository.
  • Issues Tracking/Special Provisions: Keep a note of issues and areas requiring further technical assessment on a summary tracker. While many contracts may follow a standard format there may be contracts that are outliers or that have special provisions that will need to be individually assessed under the ASC 606 framework.
  • Understand How You Are Recording Revenue For Your Contracts Today: Once you determine the appropriate accounting under ASC 606 this knowledge will allow you to understand the impact upon adoption. Some key questions include: 
  1. 1.  When do you recognize revenue (e.g. upon delivery, shipment or as you provide the service)?
    2.  How do you estimate the transaction price when you have variable consideration?
  • Impact Assessment Memos: Document conclusions on the impact of ASC 606 to timing, method or quantum of revenue recognition. This is underpinned, for each revenue stream, by a walk-through of a typical contract using the five-step model in ASC 606 which is as follows:
  1. Step 1: Identify the contract(s) with a customer
    Step 2: Identify the performance obligations in the contract
    Step 3: Determine the transaction price
    Step 4: Allocate the transaction price to the performance obligations
    Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

THE BENEFITS OF WORKING WITH DACARBA

  • Dedicated ASC 606 subject matter specialists, including a former FASB staff member that served on the team leading the FASB revenue recognition efforts

  • Expertize across a wide range of industries

  • Tried and tested implementation approach: Dacarba has completed numerous ASC 606 impact assessments for public and private companies with revenues ranging from $10 million to $34 billion.

  • Customizable service offering from ad hoc technical support to full turnkey implementation

  • Strong working relationships with the "Big 4" accounting firms and other national and regional audit firms

  • Process and Technology expertise to help address process and systems challenges arising from the standard

HOW TO GET STARTED

Contact one of our Complex Financial Reporting team members for more information.


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Sandy DhariwalManager

Sandy Dhariwal is a Manager in Opportune’s Complex Financial Reporting practice. Sandy has over 12 years of experience gained across public accounting and industry in a wide range of technical accounting and reporting areas under both US GAAP and IFRS. Before joining Sandy was Senior Manager of Finance Projects for Vernalis PLC where she drove a wide range of finance and operational projects to establish a commercial infrastructure in the U.S. Previously, Sandy worked as Interim Controller at Vernalis plc and as an Audit Manager at PwC U.K. where she oversaw the audits of clients across a range of industries. Sandy received her BSC in Economics from the University of York, U.K.