606 & 842 – Why These Numbers Should Have Your Attention

Private companies often have the luxury of having reduced reporting and compliance requirements as compared to public companies; however, for those companies currently utilizing an accrual basis of accounting in its demonstration of financial maturity to investors, banks, accountants, etc., two recent accounting standards are coming your way, the compliance of which should have your full attention:

ASC 606 – Revenue Recognition

• ASC 606 is a new revenue recognition standard that affects (primarily an income statement effect) all businesses that enter into contracts with customers to transfer goods or services.  With an effective date for private companies of Jan. 1, 2019, the standard contains a 5-step process to properly recognize revenue:

  1. Identify the contract with the customer – It is important to keep great records

  2. Identify the performance obligation(s) in the contract – How do you earn your $?

  3. Determine the transaction price – Not always as simple as it sounds!

  4. Allocate the transaction price – Revenue can be broken apart into different periods

  5. Recognize revenue when or as the entity satisfies a performance obligation

• What does this mean? The impact of ASC 606 can be broad and significant for certain industry segments, particularly healthcare or SaaS-based companies, in determining when companies are able to recognize revenue on a go-forward basis.

ASC 842– Lease Accounting

• ASC 842 is a new lease recognition standard that affects (primarily a balance sheet effect) all businesses that are lessors and/or lessees.  With an effective date for private companies of Jan. 1, 2020, nearly one-third of private companies say they are unprepared to comply with the new standard.

• What does this new standard entail?

  • For most organizations, the biggest change is having to recognize operating leases as liabilities or debt on their balance sheets.

    • Previously, operating leases were considered off-balance sheet and only reportable on the income statement.

  • The result of this change will create a lease liability of your discounted future minimum lease payments, as well as a corresponding “right of use” asset - both of which will amortize over the course of the lease term.

• What does this mean? Users of financial statements, including lenders, investors, etc. will expect increased transparency and visibility into all leasing obligations from their partner companies.