More Information About ASC 606
What is ASC 606?
ASC 606 will have a major accounting impact for any entity which receives contingent commissions or “Retros”. In general, you will be required to recognize any estimated future commissions or retrospective payments as revenue at contract inception.
In 2014, the Financial Accounting Standards Board (FASB) released Accounting Standards Update 2014-09: Revenue from Contracts with Customers and created Accounting Standards Codification (ASC) Section 606. For private companies, this standard is effective for annual reporting periods beginning this year.
Who does this impact?
It will impact any entity reporting under GAAP accounting standards which is not an insurance company. For example, if you are an administrator and have a contractual liability reimbursement policy, the underlying loss experience might be reinsured into a controlled reinsurance company. This would be exempt. However, if you receive a retrospective commission or hold the funds under an excess contractual liability policy, you would be subject to this guidance.
When is this effective and what about my existing contracts?
For private companies, this standard is effective for annual reporting periods after December 15, 2018. Therefore, if your fiscal year-end is December 31, 2019, it would be effective for this annual reporting period. There are transition rules which provide different options for contracts which originated under the prior standard.
Why is this happening and how is this different?
Under US GAAP accounting standards, revenue recognition was often complex and there were different rules for different industries. ASC 606 is more “in-line” with international standards and provides a principles-based approach for revenue recognition across various industries.
In general, most companies simply recognized this type of revenue when received.
How can Kerper and Bowron LLC help me with this?
We can provide support in identifying which contracts are subject to this rule. We can also provide an actuarial best estimate of the future claims under relevant contracts. This support can be used to implement a plan to accrue revenue for these contracts and provide auditors and other interested parties with an independent valuation of the expected profit from these contracts.