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Planning and Budgeting under ASC 606 and IFRS 15

New rules governing revenue recognition for contracts have gone into effect. The Financial Accounting Standards Board, which administers Generally Accepted Accounting Principles in the U.S. (US-GAAP), has issued ASC 606 and the International Accounting Standards Board, which administers International Financial Reporting Standards used in most other countries, has issued IFRS 15. The new rules materially affect companies that use even moderately complex contracts in their dealings with customers, especially in the case of those that extend past one year. This includes contracts that for example are structured using tiered pricing or volume discounts, routinely involve modifications such as adding or dropping users, or allow seasonal changes to services.

Companies affected by the new standards not only face accounting challenges but also need to examine their planning and budgeting processes. The reason is that revenue (and some corresponding expense) is recognized only when customers are satisfied rather than when internally measurable events occur such as delivery, completion of milestones or the passage of time. In some companies this creates period-to-period variability between when a business event occurs (a contract is signed or an invoice is sent) and when revenue and expense are recognized. This complicates planning and budgeting because it’s now necessary to track business events and accounting events in parallel. Doing so enables executives to sort out actual-vs.-plan variances caused purely by accounting events such as a failure to receive documentation to trigger recognition and those that reflect “real” events such as a shortfall in bookings or greater-than-anticipated labor costs.

 
 

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