Revenue may be one of the most common terms in business, but when it comes to financial reporting, it’s anything but simple. In Episode 6 of The Beehive, our host William sits down with accounting experts, Junel Mamaril and Gliezel David, to shed light on the complexities of revenue recognition under ASC 606.
Understanding when and how to recognize revenue is critical to ensuring financial transparency and compliance. In this discussion, we break down the five-step model, common challenges, and what businesses need to watch out for.
Why Revenue Recognition Remains a Top Risk Area
Despite being essential, revenue recognition continues to appear frequently in SEC comment letters due to the significant use of judgment and estimation throughout the process.
You really have to look into the contract itself and the type of business that you have, and I think that’s why it continues to be in the top areas that are being scrutinized because it’s very judgmental
Junel Mamaril
Whether it’s determining if a contract even exists, identifying performance obligations in a bundle of goods or services, or deciding whether to use expected value or most likely amount for variable consideration, the potential for error is high.
Understanding Revenue Recognition and ASC 606
At the heart of the discussion is ASC 606, the U.S. GAAP revenue standard that outlines how companies should recognize revenue. While many assume it’s straightforward, the reality is that it’s often a source of confusion. In fact, Junel says that they have seen many companies struggle with complying with the ASC 606.
Tax Complexities for SBC in Remote Work
With the growing popularity of SBC, it’s not surprising that more and more companies are adopting this type of pay structure, including those that operate remotely. However, this can lead to complex tax and regulatory challenges. As JM explained, “When you work in different countries, different states for that matter, you’re now under different tax regimes.”
One of the best ways to navigate this challenge is by working closely with legal and tax advisors to ensure compliance while also maintaining employee flexibility. He further notes that organizations should update their policies and invest in technology to track mobility risks.
The Five-Step Revenue Recognition Model
The ASC 606 introduces a five-step model to help companies recognize revenue more consistently. Those steps include:
- Identifying the contract
- Determining the performance obligations
- Determining the price
- Allocating the price based on the obligations
- Recognizing revenue itself
While the steps themselves are direct to the point, applying them to real-world situations often requires professional judgment and context that can cause confusion. In fact, Junel notes that in recent SEC comment letters, the most common concerns revolve around identifying performance obligations and identifying variable considerations, among others.
Gliezel further highlights that problems arise when companies oversimplify the process or skip the nuance of each step. “Sometimes companies think that it’s straightforward, so they seldom consult…But when there’s a trigger and the clients ask us and we check, then definitely we identify different accounting.”
Principal vs. Agent Considerations
Another area that causes confusion under ASC 606 is when determining whether a company is acting as a principal or an agent in a transaction. This distinction directly affects how much revenue is recognized, gross if you’re the principal and net if you’re the agent, and can result in significant misstatements.
In situations where there are multiple parties involved in a transaction, determining who controls the goods or services can directly impact how revenue is recognized. “Let’s say in an online marketplace,” Gliezel explains, “the intermediary is the agent… and the seller is the principal. That determines who recognizes what revenue.”
This issue is particularly common among online platforms, third-party sellers, and distribution-heavy industries, which is a frequent target of SEC scrutiny.
Common Pitfalls and SEC Findings
Despite ASC 606’s structured five-step model, many companies still struggle with proper revenue recognition. This is often due to overlooked judgment calls and assumptions that go unchallenged until it’s too late. Unfortunately, mistakes in revenue recognition often have significant consequences, ranging from delayed financial filings to increased scrutiny during audits and acquisitions.
Disclosure is another critical area that often gets missed. As Gliezel points out, “Disclosure is [a] critical part of the financial statement reporting, as well as… common SEC findings.” But it’s not a one-size-fits-all process. She further emphasizes that it’s crucial for companies to perform a detailed review and analysis of their contracts, paying close attention to areas involving estimates and judgment.
To make sure they get it right the first time, they encourage companies to consult their technical accountants. As Junel puts it, “There are so many complexities… from the first step, identifying [the] contract until we recognize revenues. And it’s not as straightforward as it seems.”
Why Listen to Episode 6
This episode of the Beehive offers clear and engaging insights into revenue recognition and helps the listener:
- Understand what ASC 606 really requires
- Learn why revenue recognition isn’t as simple as it sounds
- Know what red flags the SEC looks for in your financial statements
- Get tips on how to handle bundled services and financing terms
- Learn how judgment and estimates can affect your financial reporting
