Navigating ASC 605: Revenue Recognition Compliance in Legacy Contracts With Accounting Software


This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Evaluating the proper accounting for your company’s fact pattern will involve judgment. Most general and administrative costs will be expensed as incurred, as well as the costs of wasted materials, labor, and other resources that were not considered as part of the original contract. You can set the default content filter to expand search across territories.

Navigating ASC 605 compliance for legacy contracts can be a complex and challenging task. By leveraging accounting software, businesses can ensure they stay compliant while also streamlining their financial processes. Automation, integration, real-time reporting, and scalability are just a few of the benefits that accounting software can provide to organizations still managing legacy contracts under ASC 605. Investing in the right tools and technology can help businesses maintain compliance and be better prepared for any future regulatory changes.

Your organization could see an increase in bill-and-hold arrangements for your products due to supply chain or production delays across industries, or from lack of physical storage space as you or your customers’ businesses grow and transform. And lastly, remember that you are not alone in navigating the maze of requirements within the new standards. GAAP Dynamics has published a series of posts walking you through each step of the new 5-step model.

  1. Storage service is a performance obligation if the customer benefits from the service separately and it is distinct from other promises.
  2. Another area that will be significantly impacted by the issuance of the new standards is income taxes.
  3. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.
  4. This post is published to spread the love of GAAP and provided for informational purposes only.
  5. This is not an all-inclusive list and an entity may determine that specific facts and circumstances enable the conclusion that control has passed to the customer.

PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Accounting software provides real-time reporting and analysis, giving companies the ability to monitor revenue recognition and identify any discrepancies or potential compliance issues.

Array also does not have the ability to sell the solar panels to any other companies as the materials are bundled in their warehouses and are marked as belonging to the client. The solar industry has a test called the “Five Percent Safe Harbor” test in order to qualify for the Federal Solar ITC. The customer has to purchase material prior to the start of construction in order to qualify under this test, and that gives rise to the situation where the client does not have the space to accept the goods but has already paid for the goods. This test is an industry specific guideline, so it cannot be broadly applied (10-K for the fiscal year ended December 31, 2021). Determining whether a contractual right or obligation is enforceable is a question to be considered within the context of the relevant legal framework that exists to ensure that the parties’ rights and obligations are upheld. The factors that determine enforceability might differ between jurisdictions.

One example would be a contractor constructing a building on land owned by its customer. Here as the building is erected the customer receives and controls the benefit, such that if the entity failed to complete the job, another entity would most likely not need to re-perform the work already provided. Bill-and-hold transactions should be accounted for consistently and analyzed against your company’s formal revenue recognition policy.

Examples of ASC 605 in a sentence

One of those retail customers entered into an agreement with the company to produce a million units of their private label snack so the product stays available and well stocked in its stores throughout the coming year. Another area that will be significantly impacted by the issuance of the new standards is income taxes. The biggest reason is the potential for additional differences between financial reporting and tax reporting, resulting in an increase in the number of temporary differences. These four questions give great guidance on what the SEC is looking for if a company decided to use bill-and-hold arrangements and what questions the company has to have answered. Array responded by indicating that the customer holds the legal title to the solar panels as it bears all of the risk of loss.


Under IFRS 15 and ASC Topic 606, companies are required to consider their estimates of returns as part of determining the transaction price (Step 3), which is relatively similar to current practice. However, the expected returns will be recognized as a separate refund liability and the right to recover the related goods from your customers will be recognized as a separate recovery asset (with an offset to cost of sales). Subsequent to the initial recognition of these amounts, the refund liability and recovery asset will be updated for any estimated changes.

Accounting Considerations for Bill-and-Hold Transactions Under Topic 606

Bluth Company is currently developing a multi-unit residential complex in Phoenix, Ariz. The property is currently under construction, and it will have both residential rental units and condominium units. The units have similar floor plans and are similar sizes, but other attributes are different (for example, certain units are closer to the complex clubhouse and other amenities). These examples are not all inclusive and each indicator is not necessarily meant to indicate control transfer by itself. Determining this enforceable right to payment will be complex and subject to significant judgments.

The guidance in the release is only applicable to the vaccine stockpile programs discussed in the release and is not applicable to any other transactions. In the foregoing example, the entity concluded that including the costs to procure the elevators in the measure of progress would overstate the extent of the entity’s performance. Consequently, the entity adjusted its measure of progress to exclude the costs to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognizes revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (that is, at a zero margin).

The third criterion would be applicable to many entities that provide customized products or services. As stated in the criterion description above, (i) the entity’s performance does not create an asset with an alternative use to the entity; and asc 605 bill and hold (ii) the entity has an enforceable right to payment for performance to date. This is not an all-inclusive list and an entity may determine that specific facts and circumstances enable the conclusion that control has passed to the customer.

5 Bill-and-hold arrangements

Before a registrant adopts ASC 606, current SEC guidance related to revenue recognition remains applicable. Accounting software can be easily scaled and adapted to accommodate changes in a company’s operations or the regulatory environment. This flexibility allows businesses to stay compliant with ASC 605 while also preparing for future transitions to other accounting standards.

Contracts can be written, oral or implied by an entity’s customary business practices. Consequently, Bluth would identify a performance obligation that it satisfies over time. To recognize revenue, Bluth would measure its progress toward complete satisfaction of the performance obligation using the method (i.e., input or output) that best depicts this progression. The process towards recognizing revenue through applying the five elements is now completed. During these last five articles, we have demonstrated that most entities will encounter significantly more complexities in recognizing revenue than under current GAAP.

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