Last month Tensoft hosted a CPE eligible webcast on “
What’s changed from ASC 605?
We are all aware that the goal of ASC 606 was two-fold - to converge IFRS and FASB as well as bring the different pieces of guidance into one comprehensive standard. Jason provided a thorough understanding of what’s changed from the old guidance starting with the new transfer of control model.
“There’s this new transfer of control model. So, when does the revenue gets recognized- over point in time or a period of time and that’s when you transfer control of an asset to a customer which essentially means the ability for that customer to use or obtain those benefits. Whereas, in the old model it was transfer of risks and rewards - transfer of title - and now it’s more about is the contract legally enforceable? That could mean there is essentially no paper, no signature. Its whatever it determines that contract becomes legally enforceable due to business practices and such.”
Other changes discussed include recognizing revenue over time or at a point in time, variable consideration, significant financing component, licenses, multiple-element arrangements and contract costs.
How the guidance prescribes dealing with contract modification and variable consideration?
Compared to ASC 605, there is more guidance on contract modification in ASC 606. Jason walked through the different types of contract modifications (separate contract, prospective and cumulative) and provided example scenarios for a better understanding.
“Contract modification is essentially a change in scope of a contract where you can add or remove obligations. It can be a change in price, or anything that would impact the overall transaction value. It has a similar impact as variable consideration. Variable consideration doesn’t really fall into contract modification, but it does have the same impact that changes the overall estimated transaction price. The contract modification has to be approved. It doesn’t necessarily have to be in writing. It could be in writing - as an amendment or purchase order - or it can be oral or any other way that your business customarily accepts changes. And definitely judgement is required in how you account for modifications.”
How Tensoft Revenue Lens apply the five-step model?
Jason provided a quick overview of the five-step model and then dived deep into how Tensoft’s revenue recognition solution – Tensoft Revenue Lens –
“We have got several different ways you can create a contract in Tensoft Revenue Lens. If you are using our contract module, you might have sort of a contract-based revenue recognition to control billing and look at all the performance obligations as a whole with multiple invoices combined to determine what your overall performance obligations are for the entire contract and which then drive a revenue contract. You can have an ERP system that sends an invoice, each of your contracts might be identified at the invoice level. Each invoice is a separate contract. So, you can integrate with an ERP system to Tensoft Revenue Lens or a website CRM integration or just directly in Revenue Lens itself. You can create MEAs (Master Enterprise Agreements) or revenue agreement directly into Revenue Lens. So, several ways to create a contract.”