ASC 606 Transition Methods: ASC 606-10-65-1(d)

There are two options when implementing ASC 606:

  • Full Retrospective Method (FRM) or
  • Modified Retrospective Method (MRM)
  • Sorry! … Prospective Transition is Not Permitted

Full Retrospective Method

Restate all periods presented, with a cumulative effect charge to retained earnings as of earliest period presented.

Practical expedients available:

  1. No need to restate contracts that begin and end in same reporting period.
  2. Completed contracts with variable consideration can be based on total end of contract consideration.
  3. For uncompleted contracts as of prior to earliest period presented, no need to disclose the transaction price allocated to remaining performance obligations or when that portion of the transaction price is expected to be recognized as revenue.
  4. Contract modifications before earliest period presented can be considered in the aggregate with the original contract for determining performance obligations, transaction price and allocations of transaction price.

Transition Disclosure:

  1. Make standard change in accounting principle disclosures required by FASB ASC 250-10-50-1 and 250-10-50-2 in the period of adoption (e.g., the nature of and reason for the change, the method of applying the change, the effect of the change).
    Exception: No need to disclose the effect of the changes on the current period
  2. Disclose the effect of the changes on any prior periods that have been retrospectively adjusted.
  3. Disclose practical expedients used and, to the extent reasonably possible, a qualitative assessment of the estimated effects of applying the expedients.

Pros:

  • Better comparability of financial information.
  • More practical expedients available for transition.

Cons:

  • Restating all contracts that span reporting cut-off dates.
  • Time consuming process if significant medium to long-term performance periods.
  • May be difficult to obtain all necessary historical data for prior periods.

Modified Retrospective Method

Restate as of beginning of year of adoption with cumulative effect charge to beginning retained earnings.

Practical expedients available:

  1. May elect to apply guidance only to contracts that were not substantially complete (under legacy GAAP) as of beginning of period of adoption.
    a. Must disclose this election.
  2. Contract modifications before earliest period presented can be considered in the aggregate with the original contract for determining performance obligations, transaction price and allocations of transaction price (same as #4 for FRM).

Transition Disclosure:

  1. Disclose the nature of and reasons for the change.
  2. Disclose the impact on the current reporting period of adoption of the change in accounting principle – in other words, disclose what the financial statement line items would have been under legacy GAAP versus ASC 606.
  3. Disclose an explanation of the reasons for the significant changes.

Pros:

  • Potentially less time consuming to adopt (especially if significant medium to long-term performance periods).

Cons:

  • Fewer practical expedients available for transition.
  • Must account for revenue under legacy GAAP and ASC 606 in year of adoption (for disclosure).
  • Less comparable financial information.
    • Footnotes will provide legacy GAAP comparability.
    • If revenue recognition changes from point in time to over time, change in the face of the financials could be substantial.
  • Potential for vanishing revenue.

What Other Companies Are Doing:

Full Retrospective Method:

  • United Airlines
  • Delta Airlines
  • Lockheed Martin
  • GE
  • Workday – early adopted
  • Target
  • Microsoft – early adopted
  • Apple
  • Boeing
  • Raytheon – early adopted

Modified Retrospective Method:

  • T-Mobile
  • Exxon Mobil
  • Netflix
  • Caterpillar
  • EA Sports – YE 3/31
  • SalesForce
  • Ford – early adopted
  • GM
  • Amazon
  • Walmart
  • UnitedHealth Group – early adopted
  • Alphabet Inc.(Google)
  • Intel
  • Priceline
  • Facebook
  • IBM
  • Cisco
  • Texas Instrument