ASC 606: Impact on Asset Managers
The new revenue recognition standard, ASC 606 Revenues from Contracts with Customers, is effective for the December 31, 2019 audits of nonpublic entities, including asset managers. The AICPA has published guidance for asset managers in chapter 4, “Asset Management,” of the AICPA Audit and Accounting Guide for Revenue Recognition (“the Guide”). The Guide lays out the accounting implementation issues and is a source of non-authoritative accounting guidance.
Revenue Recognition Reminders
The five-step model is discussed, and includes:
Step 1 ‒ “Identify the contract with a customer”
Step 2 ‒ “Identify the performance obligations in the contract”
Step 3 ‒ “Determine the transaction price”
Step 4 ‒ “Allocate the transaction price to the performance obligations in the contract”
Step 5 ‒ “Recognize revenue when (or as) the entity satisfies a performance obligation”
The Guide also discusses various revenue streams, variable consideration, principal vs. agent, as well as other considerations and topics.
As asset managers head into their audit period and final December NAVs are produced, it is imperative that entities have formal, written documentation readily available for external auditors, memorializing the entity’s assessment and implementation of the new standard – including how the five-step model was applied to each relevant revenue stream. Management should also have policies and procedures to ensure that the additional financial statement disclosure requirements have been addressed and documented, preferably through some sort of checklist with references to the respective literature.
Note on Broker-Dealers
The standard became effective for broker-dealers for 2018 fiscal years. Most broker-dealers will be heading into their second audit period during 2020. One of the most significant challenges that we saw in broker-dealers’ adoption of ASC 606 during 2019 surrounded retainer fees — in particular those which were non-refundable. By now the industry has accepted the fact that such fees would be deferred under the new standard. Therefore, it is imperative that broker-dealers have an adequate process in place to assess if there is a distinct performance obligation associated with retainer fees, and a reasonable mechanism exists to enable the broker-dealer to estimate and document the assessment of the satisfaction of the respective performance obligations in order to adequately meet the revenue recognition criteria.
We are available to answer your questions on how you have implemented this new standard and the related documentation requirements.
Mike Provini, CPA
Victor Peña, CPA, CGMA
Anthony Sebastiani, CPA, MBA