ASC 606, also known as the Accounting Standards Codification (ASC) Topic 606, is a set of accounting standards issued by the Financial Accounting Standards Board (FASB). It provides guidance on how to recognize revenue from contracts with customers. The standard was issued in 2014 and became effective for public companies in 2018.
The purpose of ASC 606 is to provide a single source of revenue recognition guidance for all entities that enter into contracts with customers. It replaces the previous revenue recognition guidance which was based on industry-specific rules. The new standard requires companies to recognize revenue when it is realized or realizable, and when it is earned.
Under ASC 606, companies must recognize revenue when they transfer control of goods or services to their customers. This means that companies must identify the performance obligations in each contract and determine when those obligations have been satisfied. Companies must also estimate the amount of consideration they will receive from each customer and allocate it to each performance obligation.
In addition, companies must disclose information about their contracts with customers, including the nature of the performance obligations, the timing of revenue recognition, and any significant judgments made in applying the standard. This information helps investors understand how a company recognizes revenue and assesses its financial performance.
The adoption of ASC 606 has several benefits for companies. First, it provides a consistent framework for recognizing revenue across different industries. This makes it easier for investors to compare financial statements between different companies. Second, it eliminates industry-specific rules which can be difficult to interpret and apply.
Finally, ASC 606 encourages companies to focus on providing value to their customers rather than simply meeting certain criteria for recognizing revenue. This helps ensure that companies are providing goods and services that are beneficial to their customers and not just trying to maximize their own profits.