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New revenue recognition standards under FASB Accounting Standards Codification (ASC) Topic 606 require companies to adopt new methods to recognize revenue from contracts with customers for book purposes.

The standards require a five-step analysis to be completed for all contracts to transfer goods and services. While many companies have started to complete this analysis for book purposes, few are aware of the potential tax implications.

Many of the changes required for book reporting purposes are either not acceptable accounting methods under the Internal Revenue Code and other guidance issued by the IRS, or will require new adjustments for tax reporting. Of the five-step analysis, tax adjustments will most likely occur due to changes in:

  • step 2: identifying performance obligations;
  • step 4: allocating transaction price to performance obligations; and
  • step 5: considering performance obligations satisfied.

These changes may create additional tax adjustments and possibly tax accounting method changes requiring companies to file a Form 3115 with the IRS.

Changes in financial reporting for certain items including determining the transaction price, uninstalled materials and variable consideration have the potential to create differences in book and tax income. If it is determined during your internal contract review that any of these items are present or if you have any other questions about the tax implications of ASC Topic 606 please contact your RubinBrown adviser.

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