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September 26, 2017

How Companies Are Dangerously Underestimating the Impact of ASC 606 Disclosure Rules

Posted by Armanino Financial Advisory Team

How Companies Are Dangerously Underestimating the Impact of ASC 606 Disclosure Rules (Man typing with glasses nearby)As they prepare to implement the new FASB revenue recognition standard (ASC 606), many companies are focusing on the revenue and measurement aspects of the requirements and ignoring the new ASC 606 disclosure rules. They do this to their detriment.

We’ve seen numerous organizations that mistakenly believe that there is no material impact in transitioning to the new rules. This includes public companies that are not disclosing that they will, in fact, be impacted materially by the new rules because the disclosures required represent significant changes to their data collection, systems and processes.

A red flag from the SEC

Here’s what Sylvia Alicea from the Office of the Chief Accountant at the Securities and Exchange Commission (SEC) had to say about the situation at a recent Bloomberg BNA conference on revenue recognition:

“I observe that some companies indicate that the impact of the new revenue standard is not expected to be material. The changes in the new revenue standard will impact nearly all companies. Even if the extent of change on the balance sheet or income statement is not deemed to be material, the related disclosures may be material.”

The SEC is warning companies not to underestimate the time and effort needed to implement the new disclosures. This should be a red flag for both public and private companies that believe that they will be ready in time to implement the new standards.

The impact of the new disclosure requirements

While the new revenue recognition rules may not materially impact your company’s balance sheet, they do significantly increase the amount of information your company is required to disclose about revenue activities and related transactions. The new disclosures mean that your company must revise processes, systems and controls to:

  • Gather additional data for reporting and disclosure
  • Identify applicable disclosures
  • Prepare and review disclosures

For instance, under the new ASC 606 disclosure rules, companies must disclose the portion of the transaction price allocated to unsatisfied performance obligations, and then explain when in the future the company expects to recognize the revenue.

Companies must also disclose information about the methods, inputs and assumptions they use to estimate the amount of variable consideration included in the transaction price. They also need to estimate and disclose the likelihood of significant revenue reversals when the uncertainty is resolved.

Develop your disclosure strategy now

Given the ASC 606 January 2018 implementation date for public companies, the burden of creating new disclosures will start in the first quarter. That doesn’t leave much time for companies to put everything into place to support creation of the new disclosures. While private companies have an additional year, they shouldn’t underestimate the impact of the disclosure rules on their implementation of the new revenue recognition standard.

Now is the time to develop a comprehensive disclosure strategy, so that you don’t miss financial reporting deadlines once the regulations take effect.

Learn more about how you can prepare a solid strategy for managing the impact of ASC 606 disclosure requirements.

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