New Revenue Recognition Standard – ASC 606 Implementation

ASC 606 is the new revenue recognition standard that affects all businesses that enter into contracts with customers to transfer goods or services – public, private and non-profit entities. The purpose of introducing ASC 606 was to eliminate differences in how businesses handle accounting in the case of similar transactions across various industries.

Business Challenge

The client who was a leading provider of secure access and mobile security solutions, had to be compliant to the new revenue recognition standard, ASC 606 from January 1, 2019. The client was at present compliant to ASC 605 and the change meant complex technical accounting process changes related to:

Multiple performance obligations (hardware, perpetual software license, subscription software license, multi-year post-contract customer support, unspecified software updates/upgrades).

Variable considerations – Different resellers agreement and focus on the nature of the promises in a contract, required detailed contract review.

Revenue allocation, contract acquisition cost deferral.

Major changes compared to prior standard (ASC 605) for the client included:

• Identifying hardware and software as a single performance obligation, as opposed to the previous standard (ASC 605) for the customer.
• Dividing subscription revenue between software and post-contract customer service.
• Contract acquisition cost (sales commission) is capitalized and settled over the contract life.
• In place of the old Vendor Specific Objective Evidence (VSOE), a new fair value approach known as Standalone Selling Price (SSP) is being used.
• Determining whether or not there is a major finance component to SKU price and its impact.

Aeries Solution

Aeries understood the requirement of the client and developed a phased transition/ implementation plan to migrate to ASC 606

• Assessment – Aeries prepared an assessment for understanding gaps between 606 vs 605.
• Implementation – Aeries adopted the Cumulative effect transition method (no prior period restatement) and collaborated with the IT team to automate/customize Rev Rec modules for subscription licenses. In addition, the team also took on the development of manual spreadsheet models for sales commission. ERP customization involved dividing subscription software licenses into two parts: license (upfront revenue recognition) and support (ratable revenue recognition).
• Duals books of records – Aeries maintained 2019 books both as per ASC 606 & ASC 605, since company adopted Cumulative effect transition method.
• Disclosure requirements – Aeries helped the client with transition disclosures (required only in the year of adoption), and recurring, annual disclosures (disaggregated revenue, contract balances, performance obligations)
• Sign off from Auditors– Auditors reviewed and verified the GAP assessment report and changes to ERP support system, all supporting details for financial impacts, new revenue recognition policies and SSP policies (fair value allocation) and signed off the financials comfortably.

Business Impact

The phased transition/ implementation plan developed by Aeries allowed the client to have a positive impact on its business in the following ways:

• By implementing all critical areas by Q1 2019, all books were closed on time in accordance with the new standard, and the audit was completed on time.
• Changes were made to ERP in a timely manner to ensure that subscription revenue splits were managed and dual books of records ASC 606 and 605 were maintained without disrupting business operations. Explore our Finance Transformation Services.