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Will You Have Lost or Vaporized Revenue?

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Posted by Graham Hulme on Jul 13, 2018 8:45:00 AM
Who cares what you call it?  Either way, it’s gone! 

Many companies elected to adopt ASC 606 using a modified retrospective method per a review of recent public filings.   

A core topic that’s rarely discussed is the concept of “lost” or “vaporized” revenue when companies adopt ASC 606 using the modified retrospective method.  As a result, an article titled, “Do You Have a Debt Covenant Violation in Your Future?” caught my attention.  

As introduced in the article, “lost” or “vaporized” revenue is defined as revenue that gets recognized faster under ASC 606 than under ASC 605.  Stated differently, there could be situations where a company’s revenue recognition is accelerated under ASC 606 versus ASC 605.  As such, deferred revenue that existed on a company’s balance sheet under ASC 605 prior to adoption would be recognized earlier under ASC 606.  In the opening balance sheet for ASC 606, this deferred revenue would no longer exist; it will be removed and offset into retained earnings based on its accelerated recognition schedule. 

The key point of “lost” or “vaporized” revenue is that deferred revenue that was originally scheduled for recognition in future periods will not occur, which will lead to lower revenue in the year of adoption.  Lower revenues in a company’s year of ASC 606 adoption could detrimentally impact adherence to covenants based on EBITDA (earnings before interest, taxes, depreciation, and amortization) or net income ratios/performance.   

It’s imperative that companies assess whether this situation will arise as part of their ASC 606 adoption.  Otherwise, the surprise could become a nightmare.   

SOFTRAX Revenue Manager is a purpose-built application that will allow your company to test and validate whether “lost” or “vaporized” revenue scenarios will occur.   Additionally, SOFTRAX Revenue Manager can be used to drill into the exact impact so that a clear before and after picture can be presented to avoid surprises, set expectations, and adhere to ASC 606’s requirements without headaches at best or material financial impacts at worst. 

 

What do you think?  Have you seen this issue?  Your input is highly valued so we would appreciate hearing from you! 

 SOFTRAX provides superior experience, knowledge, products, and services to address your company’s ASC 606 needs.  We encourage you to visit http://www.softrax.com/about/contact-us to learn more about SOFTRAX and the value we can provide for your company’s ASC 606 adoption and revenue recognition management needs.   

 

 

 

Topics: Revenue RecognitionFinancial ReportingASC606SEC Comments