BST8 & BST10 Support ASC 606 Compliance

Identify the Contract With a Client

ASC 606 states that a firm can account for a contract when all these criteria are met:

• Both parties should approve the contract (in writing, verbally or by another agreed-upon method)
• Both parties have identified what goods or services are to be transferred to the client
• Payment terms are identified and agreed upon
• The contract has commercial substance
• The business believes it is probable that it will collect the agreed-upon payment in exchange for transferred goods or services to the client

Identify the Performance Obligations in the Contract

A performance obligation is the promise to transfer goods or services to a client. The firm needs to identify all distinct performance obligations in this firm/client arrangement. A good or service is defined as distinct if:

• The client can benefit from it on its own or with resources the client already has
• The good or service can be transferred independent of other performance obligations

Note: Any goods or services that can’t be deemed distinct should be bundled together until they can be.

Performance obligations can also cover an obligation the client might expect because of the client’s history, which can make this part of the process more complex.

Determine the Transaction Price

The transaction price is the amount the firm expects to receive in return for transferring the goods or services outlined in the contract. The amount can be fixed, variable or a combination, but the amount must be allocated specifically to the performance obligations outlined in Step 2. Once these performance obligations are fulfilled, the firm can recognize this as revenue.

Allocate the Transaction Price

If the contract has more than one performance obligation, the firm needs to provide an accurate estimation of that obligation’s standalone selling price versus the total agreed-upon transaction price.

Determining the transaction price allocations can be complicated. Additionally, these allocations can be influenced based on the aspects of the transaction. ASC 606 includes three methods that can be used to determine a performance obligation’s transaction price:

• Expected Cost Plus Margin Approach: Expected cost plus margin considers the forecasted costs of fulfilling the performance obligation and adds margin at the amount the market would be willing to pay.
• Adjusted Market Assessment Approach: This approach considers the market in which the goods or services are sold and estimates the price that a client in that market would be willing to pay.
• Residual Approach: This approach allows a firm that has observable standalone selling prices for one or more of the performance obligations to allocate the remaining transaction price to the goods or services that do not have observable standalone selling prices.

Recognize Revenue as Performance Obligations Are Satisfied

Performance obligations are considered satisfied when the client obtains control of the asset. The firm can recognize revenue on the performance obligations when the promised good or service is transferred to the client. The accounting standard defines methods for recognizing when the control passes at a point in time or over time.

If the obligation is satisfied over time — for example, when project deliverables are completed — the firm needs to decide how to measure the progress and completion of that obligation.