Question

1. what are the Limitations of the ASC605?

2. How the ASC606 overcomes the limitations of ASC605?

Answer 1

1) ASC 605 focus is on the satisfaction of obligations prescribed instead of control transfer. It does not includes additional disclosure obligations for customer contracts such as program rules and performance obligations; contract assets and liabilities; recognized revenue from customer contracts and significant judgements.

2) Recently FASB amended the rules for revenue recognition and added ASC 606 in the Accounting Standards Codification (ASC). ASC-606, Revenue from Contracts with Customers is a replacement of ASC 605 and it's weaknesses. It is principles-based framework that is one of the most profound amendments in ASC. It introduces more judgement into the process of revenue recognition and core principles are primarily concerned on the nature of the promises in a contract. It focuses on the control transfer instead of the satisfaction of obligations prescribed by ASC 605.

ASC 606 requires more detailed and comprehensive disclosures compared to what is currently needed under ASC 605. The requirements in new disclosure aim to provide information which is easier for users of financial statements in understanding the nature, timing, amount, and uncertainty of cash flows and revenue.

The entities will be required for a disclosure of quantitative information; and these required disclosures are more robust compared to ASC 605, and will likely take effort, time, and possibly even need the implementation of new systems to make it compliant