Does ASC 606 Apply to Private Companies?
Business accounting regulations are continually changing, making it challenging to keep up with which forms to submit and how to file your contracts and revenue. One of the more recent changes and questions does ASC 606 apply to private companies. Under this new rule, businesses need to divide their contracts into specific products or services and assign a price to each.
The revenue is only recognized when you deliver the product. However, does ASC 606 apply to private companies? The answer is yes, but only since 2019. Continue reading to find out more...
With the introduction of ASC 606, accounting rules have changed. Previously, companies only had to recognize revenue and record sales transactions when they earned money. This was regardless of when they received the cash (accrual accounting) Under the new system, companies have to dive deeper into their contracts with consumers.
They now have to evaluate the type of service they provide, how long they provide it for, and how much revenue they'll receive for each service. This means not much will change for retail businesses. ASC 606 can, however, significantly change how service-based companies keep their books.
Does ASC 606 Apply to Private Companies?
ASC 606 applies to all public and private companies that follow generally accepted accounting principles (GAAP). Suppose you have no legal obligation to follow GAAP. In that case, you might not have to follow these principles. But it remains good practice to create a consistent accounting system!
It’s easy to get this confused because until recently, ASC 606 only applied to public companies in a phase-in period.
Now, however, it applies to virtually all businesses. If you haven’t applied ASC 606 before, here's what you need to know.
Why Does ASC 606 Apply to Private Companies and Non-Profits?
The Financial Accounting Standard’s Board (FASB) and the International Accounting Standards Board (IASB) developed this new accounting standard. It aims to standardize how revenue is consistently recognized across businesses. Variations in how businesses recognize revenue have led to difficulties for investors and other consumers of financial statements in comparing and understanding results across industries.
As a result, the new compliance standards level the playing field. While ASC 606 compliance takes careful planning, both small and large organizations can transform their businesses better under consistent accounting rules.
How to Implement ASC 606 for Private Companies
You don't need to dread the implementation of this consistent accounting rule. However, changing the way your accounting works may have broader implications for your business. Both your IT systems and HR policies will need to follow suit. To apply ASC 606 to your private company, you should make a plan for its implementation.
The good news is, most private companies have more straightforward revenue cycles. Identifying contract terms, prices, and obligations are often more manageable. Challenges can still arise you don't know how to start your business and it doesn’t have access to an accounting expert. As you prepare for ASC 606, here are a few tips for your consideration:
- List your revenue sources - This will allow you to assess how much of an impact ASC 606 will have on your organization
- Review your contracts and become aware of the obligations involved in each
- Evaluate how you gather information - You may need to modify your current system to allow for a more modular approach to recognizing revenue; an accounting expert will be able to assist with this
You should also decide how to implement and review the financial statement disclosures. You can implement ASC 606 via two methods - retrospective to all comparative periods or retrospective to the current period.
How to Recognize Revenue Under ASC 606
To comply with ASC 606 as a private company, you need to follow this simple five-step process:
Identify a contract (such as for an installation) with a customer. This covers every legal obligation with customers.
The company should be aware of the payment terms, collectability, all included parties and the transaction's commercial substance.
Divide it into performance obligations. For example, the installation itself, recurring maintenance, training, checkups.
These will become the milestones to recognize your revenue and give businesses a clearer idea of what processes go into each transaction.
Calculate the entire contract's total price. You may already be determining this by calculating how much to charge for each separate obligation.
Divide the total price to assign a cost to each sub-obligation. Each performance obligation should now have its own expense that adds up to the total transaction price.
For example, $1000 for installation, $100 for maintenance, $50 for each regular checkup. Lastly, once you have satisfied each obligation, recognize the revenue you assigned for it. If a contract applies to multiple periods, such as a one-year contract, you should recognize revenue across the 12 periods.
How Does ASC 606 Affect the Bottom Line of Private Companies?
Your profits and losses won’t change as a result of how you recognize your revenue. It will only change when you record income in your books so that profits and losses could shift from one tax year into the next. Over the years, the small resulting tax differences should level out. ASC 606 presents primarily a change in your accounting, not your actual revenue.
Is Your Private Company Ready for ASC606?
The answer to the question “Does ASC 606 apply to private companies” is a simple yes, as long as your business follows GAAP. As such, you need to ensure your accounting standards are compliant. You should have a system for recognizing revenue when you fulfill performance obligations. As with all your accounting needs, thorough organization and documentation are critical.
At ThePaystubs, we help you stay organized by printing paystubs to get ready for your tax return. We also provide a bunch of other tips on mastering tax regulations with ease. Check out our blog page for more useful articles.