The new revenue recognition standards under Accounting Standards Codification (ASC) 606 and International Financial Reporting Standards (IFRS) 15, “Revenue From Contracts With Customers,” are applicable to nonpublic companies and organizations (including not-for-profits) for annual reporting periods beginning after Dec. 15, 2018 (early application was permissible if elected).
As auditors begin fieldwork for 2019 calendar year financial statements, it is important to consider the tax consequences of adopting the new revenue recognition standards and properly account for the tax impact in the income tax provision pursuant to ASC 740, “Income Taxes.” Careful attention should be given to how the revenue recognition rules under ASC 606 might affect the way revenue is recognized for federal income tax purposes given the changes in law under IRC Section 451(b), which was enacted by the Tax Cuts and Jobs Act of 2017.
The core principle driving ASC 606 is that the recognition of revenue derived from the transfer of goods or services should reflect the amount of consideration the transferor expects to receive from the transfer. Based on this principle, revenue is recognized under ASC 606 in accordance with the following five-step process:
- Identify the contract with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue as the entity satisfies a performance obligation.
