ASC 606 Compliance & Spreadsheet Risk

In 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (ASC) 606. The International Accounting Standards Board (IASB) issued the international equivalent, International Financial Reporting Standard (IFRS) 15, at the same time. While there are nuances between the two, ASC 606 and IFRS 15 deal specifically with revenue from contracts with customers.

ASC 606 affects both public and private companies and aims to standardize revenue recognition across industries. Prior revenue recognition standards were industry- specific, providing many exceptions to how revenue was reported on a financial statement.

This latest standard provides transparency, allowing closer comparability and consistency when analyzing company income statements over time. It also aims to reduce the potential for fraud and abuse.

ASC 606 Compliance & Enforcement

In 2021, Cornerstone Research found that improper revenue recognition topped enforcement actions by the SEC. Several cases were ASC 606 related. The trend is likely to continue upwards based on comments made by officials at the SEC and Public Company Accounting Oversight Board (PCAOB).

Non-compliance with ASC 606 revenue recognition standards can have a serious impact on companies and individual employees. Negative restatements can result in termination, fines, and reputational impact.

What does ASC 606 have to do with Spreadsheets?

The Big Four offer a detailed look at the five provisions of ASC 606 and how to address each. However, none mention the inherit risk resulting from increased complexity of new revenue recognition rules.

In particular, additional risk comes from unmanaged end user computing (EUC) applications like Microsoft Excel due to the increased complexity resulting from ASC 606. Spreadsheets are often the backbone in financial reporting processes with data being ingested from multiple sources, transformed by multiple parties, and eventually filed. Revenue recognition practices are no exception.

Errors or unauthorized changes, whether accidental or malicious, often corrupt the integrity of accounting spreadsheets. Given the additional complexity and updates companies must make to become ASC 606 compliant, the likelihood of an error increases, as does the need to manage this risk.

Similar errors have been well-documented and can severely harm an organization in the form of inaccurate income statements and other reports. For that reason, identifying and managing critical spreadsheets has become a necessity.

Addressing spreadsheet risk benefits more than revenue recognition. Implementing spreadsheet controls companywide benefits all external reporting & decision-making processes. This fosters a culture of compliance and ensures accuracy and oversight of your most important financial tools.

Summary

Both public and private companies must meet ASC 606 revenue recognition standards. Purchasing a dedicated revenue recognition software will ease and automate compliance. However, inherit risk still exists in organizations that rely heavily on spreadsheets for their complete revenue recognition process. Implementing spreadsheet controls reduces the risk of negative financial restatements, while supporting other important accounting and finance processes.

Getting Help

Apparity is an expert in helping companies implement and automate controls around their critical EUC applications, like Excel spreadsheets. Download our spreadsheet policy guide to learn more about establishing a spreadsheet management program. You will learn how to identify, inventory, and control all high-risk spreadsheets.