ASU 606 focuses on enhancing the understanding of the direct flow of benefits between
transacting parties. The new rules give companies a guideline on how to allocate the revenue
earned through exchange transaction, to the services/goods they are providing. The new rules
derived from prior practice issues. For example, two NFP’s that received revenue through
contracts that had similar terms, were classifying the revenue differently. By implementing the 5
step revenue recognition process, all NFP’s will classify the same contracts the same way.
More specifically NFP’s were having issues with, classifying grants and similar contracts with
government agencies and other members as reciprocal transactions or nonreciprocal
transactions. As well as distinguishing the difference between condition and unconditional
contributions.
As a result to the new terms, companies may be recording less revenue this year compared to
last year even if they had the same exact transactions. For example, when recording an entry
for an entity that is less than likely to pay off the NFP’s accounts receivable. The NFP provided
a service for $10,000 and has determined the entity is probably only going to pay $6,000, so the
NFP will record $6,000 based on the changes, but last year they would have recorded $10,000.
