FASB ASC 606

FASB ASC 606
Name	FASB ASC 606
Issued by	Financial Accounting Standards Board
Effective date	2018-12-15
Topics	Revenue recognition, contracts, accounting standards

FASB ASC 606 FASB ASC 606 is an accounting standard addressing revenue recognition issued by the Financial Accounting Standards Board, intended to harmonize practices across various jurisdictions and industries. It replaces prior US GAAP revenue guidance and aligns with international standards promulgated by the International Accounting Standards Board and related bodies. Major preparers, auditors, investors, regulators, and standards-setters adjusted accounting policies and systems to comply with this framework.

Overview

The standard was published by the Financial Accounting Standards Board and coordinated with the International Accounting Standards Board and relevant organizations like the Securities and Exchange Commission, the Public Company Accounting Oversight Board, and major accounting firms including Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG. Preparers such as Apple, General Electric, Microsoft, Amazon, and Tesla reviewed contracts influenced by guidance from the American Institute of Certified Public Accountants, the Center for Audit Quality, and industry groups like the American Hospital Association and the National Association of Manufacturers. Standard-setter debates involved participants from the Federal Reserve, the Department of the Treasury, the European Commission, the Financial Conduct Authority, and the International Monetary Fund. Academic commentary and case studies appeared in journals affiliated with Harvard Business School, Stanford Graduate School of Business, Columbia Business School, and the University of Chicago Booth School of Business.

Core Principles and Five-Step Model

The model establishes a five-step process rooted in principles developed by the Financial Accounting Standards Board, explained through examples involving contracts with technology vendors such as IBM, Cisco, Oracle, SAP, and Intel; media companies like Disney, Netflix, Warner Bros., Comcast, and Viacom; and telecom providers including AT&T, Verizon, Vodafone, Deutsche Telekom, and Telefónica. First, entities identify contracts reflecting arrangements under agreements similar to those used by Pfizer, Johnson & Johnson, Merck, Novartis, and GlaxoSmithKline. Second, performance obligations are identified with analogies to services sold by Accenture, Capgemini, Cognizant, Infosys, and Tata Consultancy Services. Third, the transaction price is determined considering variable consideration seen in contracts of Ford, General Motors, Toyota, Honda, and Nissan. Fourth, allocation of the transaction price to performance obligations uses estimation techniques familiar to investment banks like Goldman Sachs, Morgan Stanley, JPMorgan Chase, Barclays, and Credit Suisse. Fifth, revenue recognition upon satisfaction of obligations mirrors revenue patterns observed at retailers such as Walmart, Target, Home Depot, Lowe's, and Best Buy.

Scope and Application

The scope clarifies applicability excluding areas governed by separate pronouncements from bodies like the Governmental Accounting Standards Board, the Federal Accounting Standards Advisory Board, the International Accounting Standards Board's IFRS Interpretations Committee, and regulatory regimes administered by the Internal Revenue Service and the Department of Labor. It addresses industries from construction undertaken by Bechtel, Fluor, Kiewit, Skanska, and ACS to software licensing practiced by Microsoft, Adobe, Salesforce, Intuit, and VMware; it also considers pharmaceutical licensing models used by Roche, AstraZeneca, Bayer, Eli Lilly, and Bristol-Myers Squibb. Financial institutions including Bank of America, Citigroup, Wells Fargo, HSBC, and BNP Paribas follow specialized guidance where this standard interacts with banking standards and insurance companies such as Allianz, Prudential, AIG, MetLife, and Zurich apply carve-outs or supplementary rules.

Implementation Guidance and Transition Methods

Implementation involved outreach by standard-setters and practitioners including the Financial Accounting Standards Board, International Accounting Standards Board, Deloitte, PwC, EY, and KPMG with materials tailored for multinational corporations like Alphabet, Samsung, Huawei, Tencent, and Alibaba. Transition methods permitted full retrospective approaches or modified retrospective approaches comparable to those adopted by Fortune 500 preparers and required system changes from enterprise resource planning vendors such as SAP, Oracle, Workday, Microsoft Dynamics, and Infor. Auditors affiliated with the Public Company Accounting Oversight Board, the American Institute of Certified Public Accountants, and professional services organizations provided readiness checklists, internal control updates influenced by COSO, and disclosures prepared for filing with the Securities and Exchange Commission, stock exchanges like NYSE and NASDAQ, and regulators including the Financial Services Authority and the Prudential Regulation Authority.

Impact on Financial Reporting and Industries

The standard affected recognition patterns and key performance indicators reported by conglomerates like Berkshire Hathaway, Siemens, Honeywell, 3M, and Unilever and transformed revenue presentation in sectors spanning technology, healthcare, construction, telecommunications, and media. Analysts at Morgan Stanley, Barclays, UBS, Credit Suisse, and Goldman Sachs reassessed metrics such as backlog, deferred revenue, and subscription revenue for companies including Spotify, Salesforce, Adobe, Netflix, and Dropbox. Ratings agencies like Moody's, Standard & Poor's, and Fitch evaluated effects on covenant calculations for issuers including ExxonMobil, Chevron, BP, Shell, and TotalEnergies. Academic studies from MIT, London School of Economics, Yale School of Management, and INSEAD examined capital markets responses and disclosure quality.

Criticisms and Controversies

Critics from law firms, academic commentators, and industry trade groups including the American Bar Association, Chamber of Commerce, National Association of Insurance Commissioners, and consumer advocates raised concerns similar to debates involving Sarbanes–Oxley, Dodd–Frank, and Basel frameworks about complexity, comparability, and implementation costs. Some commentators cited litigation risks observed in SEC enforcement actions, shareholder derivative suits involving companies such as Valeant, Enron, WorldCom, and Lehman Brothers, and challenges for small and medium-sized enterprises represented by the National Federation of Independent Business. Standard-setters and regulators debated interpretations in pronouncements and updates circulated with input from bodies such as the Financial Accounting Standards Board, the International Accounting Standards Board, and national competent authorities.

Category:Accounting standards