Revenue Recognition

Navigating ASC 606 (or IFRS 15): From contract complexity to audit confidence

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If you’re preparing for an audit, providing a new revenue offering, or entering into a new nonstandard revenue arrangement, chances are your auditors will scrutinize how you recognize revenue. What seems straightforward in practice often becomes complex when applying ASC 606’s five-step model to your actual customer contracts. 

The Revenue Recognition Challenge 

Many companies assume their revenue recognition is simple – product ships, invoice goes out, revenue is recognized. But ASC 606 requires detailed analysis of every contract type through the following 5 step model: 

  1. Identify the contract with a customer – Determine whether an enforceable agreement exists and the term of enforceability. 
  2. Identify the performance obligations – Assess the promised goods and services in the contract to determine which are distinct and should be accounted for separately. 
  1. Determine the transaction price – Evaluate all consideration, including fixed, variable, contingent, or usage‑based components. 
  1. Allocate the transaction price – Allocate the consideration to performance obligations based on their standalone selling prices. 
  1. Recognize revenue – Recognize revenue as performance obligations are satisfied, either at a point in time or over time based on the company’s performance pattern. 

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Common Complexity Factors 

Revenue arrangements become complex when contracts introduce features that require deeper judgment under ASC 606. Examples include: 

  • Bundled or interdependent deliverables that make it challenging to determine what is “distinct.” 
  • Pricing structures that vary based on usage, milestones, or performance outcomes. 
  • Rights or obligations that extend beyond delivery—such as updates, support, or ongoing access. 
  • Situations where determining the pattern of transfer requires evaluating whether revenue should be recognized over time or at a point in time. 
  • Estimating performance completed to date for over time arrangements 
  • Allocating transaction prices to services offered for “free” 
  • Determining whether revenue should be presented gross or net in arrangements involving more than two parties 

The Documentation Gap 

Without documented revenue recognition policies that withstand audit scrutiny, you risk significant delays when auditors begin substantive testing. We frequently work with companies that have never documented their ASC 606 analysis, or whose documentation falls short of audit requirements. 

How BPM Approaches Revenue Recognition 

We begin by analyzing your various contract types through ASC 606’s five-step framework. This involves detailed review of customer agreements, questions about your performance obligations, and research into applicable guidance. We help you identify where your current practices diverge from GAAP requirements. 

For contracts with multiple performance obligations, we develop allocation methodologies based on standalone selling prices. This may require analyzing your sales history, evaluating competitor pricing, or applying appropriate estimation techniques. We document these conclusions in technical memorandums that support your positions. 

We also help you determine appropriate revenue recognition timing—whether at a point in time or over time—and if over time, the appropriate measure of progress. For companies using basic tools or spreadsheets to track revenue, we can help you implement more sophisticated tracking mechanisms. 

Deliverables You Can Count On

Each engagement is customized to your needs. We provide technical accounting memorandums documenting your conclusions, calculation workbooks or implementing software showing revenue allocations and recognition patterns, and policy documentation suitable for audit purposes. We also prepare journal entries needed to bring historical periods into compliance with GAAP. 

Importantly, revenue recognition isn’t a one-time exercise. As your contracts evolve and you enter new arrangements, we provide ongoing consultation to keep your accounting current. 

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