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Accounting Procedures

The FASB Accounting Standards Codification (ASC) houses the endorsed generally accepted accounting principles (GAAP) sanctioned by the FASB, catering to non-governmental entities. For SEC-registered firms, the SEC regulations hold the same weight as official GAAP. The information below has been carefully aligned with these standards to the best of our abilities. The listed procedures and processes should be considered as benchmarks for your use.

Revenue Recognition - ASC 606

ASC 606, introduced by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), provides a unified approach to recognizing revenue across various industries and regions. Its primary objective is to enhance clarity and consistency in financial statements, making them more transparent and comparable.

Key Elements:

  1. Contract Identification: Recognize an agreement with clear obligations between a company and its customer.

  2. Performance Obligations: Identify all the goods or services promised to the customer.

  3. Transaction Price Determination: Estimate the total payment expected from the customer.

  4. Price Allocation: Distribute the transaction price to each promise or obligation in the contract.

  5. Revenue Recognition: Report revenue as and when the company fulfills its promises to the customer.

In essence, ASC 606 ensures revenue is recognized when goods or services are delivered, and in an amount reflective of the value provided to the customer. This standard harmonizes revenue recognition practices, offering stakeholders a clearer perspective on a company's financial health.

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Examples:

  1. Software Subscription Service

    • Scenario: A tech company sells a one-year software subscription for $1200.

    • Under ASC 606: Instead of recognizing the entire $1200 upfront, the company would recognize $100 of revenue each month as the software service is provided over the 12-month period. This aligns revenue recognition with the ongoing delivery of value to the customer.

  2. Construction Contract with Milestones

    • Scenario: A construction firm is hired to build an office complex for $5 million, with payments made at three milestones: foundation completion, structure erection, and final finish.

    • Under ASC 606: If each milestone is considered a distinct performance obligation and the payments are $1.5 million, $1.5 million, and $2 million respectively, the company would recognize revenue as each milestone is reached. So, revenue is recognized only when each specific obligation (milestone) is met, not before.

  3. Bundled Products

    • Scenario: An electronics retailer sells a bundle containing a smartphone, a case, and a 2-year warranty service for a total of $800. If sold separately, the smartphone is $700, the case is $30, and the warranty service is $70.

    • Under ASC 606: The retailer needs to allocate the transaction price based on the standalone selling prices. So, revenue recognition would be: $686.27 for the smartphone [(700/800)*800], $30 for the case, and $83.73 for the warranty [(70/800)*800]. Revenue for the smartphone and case would be recognized at the point of sale, while the warranty revenue would be recognized over the two-year period.

These examples underscore the importance of aligning revenue recognition with the delivery of value to the customer, as emphasized by ASC 606.

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