Challenge Issued: A special request for ASC 606 revenue recognition in Microsoft Dynamics 365 Business Central

Revenue recognition can be a tricky thing, especially if you are unsure how to interpret the FASB ASC 606 Code and don’t have an accountant available to help you. Enter a client that has an interpretation of ASC 606 from their audit firm. Their request is to replace hours of work each month spent on spreadsheets and data dumps from Microsoft Dynamics 365 Business Central (BC) with something more automated and contained entirely within BC.

The Company’s Work

At the company, all work is being tracked using projects (jobs) in BC. Each project is estimated not only for costs, but also for price, so the expected margin is also known. The jobs can take days or even months to complete. Longer jobs are billed incrementally based on predefined milestones agreed upon by the company and the customer. The jobs in question are work being performed to improve items with very specific uses. The items being improved could be returned to the customer at any milestone and the company would be entitled to payment for the work completed to that date.

ASC 606: The Basics

ASC 606 states that an entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (i.e., an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. The FASB issued original guidance in May 2014, and it went into effect in the fiscal year following December 15, 2017. This standard not only addresses revenue recognition but also the costs associated with fulfilling contracts with customers. Details can be found in specific subtopics of the code. 606-10-55 Implementation Guidance and Illustrations (fasb.org)

ASC 606: Satisfying performance obligations over time

It is very easy to find article after article with overviews of the five-step revenue recognition model outlined in ASC 606. However, nowhere could I find the explanation I needed to help me understand one of the more complex applications of ASC 606 – applying performance obligations satisfied over time to cost and revenue recognition. This is my attempt to explain and apply this standard and use it in Business Central.

Examples of this type of obligation can be found in contracting, engineering and professional services organizations. Criteria determining if this standard applies include: