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Choose an ASC 606 Adoption Method: Modified or Full Retrospective

by Clancy Fossum - October 2017 6 min read

If you have any friends or family that are teachers, you've probably heard most of their stories, both good and bad, a thousand times. Whether they teach grade school, middle school or high school, however, there seems to be one adage that always remains true: every teacher spends 80 percent of their time on 20 percent of the students.

In other words, it's the troublemakers in the class that monopolize most of the time, effort and sanity of any given teacher. While your colleagues at Embark think we would make great teachers, excelling in unpredictable situations and the chaos of the unforeseen, other folks of the accounting ilk might shy away from the untethered directions a teacher’s day can go.


One thing we can collectively agree on, however, is that most accountants absolutely loathe the thought of being troublemakers. While Embark takes pride in the disruptive, forward-thinking manner with which we approach our work, our special brand of disruption is far different from being out of compliance and falling under the judgmental gaze of regulators.

Knowing full well the vast majority of accountants are equally as weary of that troublesome gaze, we once again want to take this opportunity to mention our handy and informative e-book regarding ASC 606. Of course, you can always choose to bury your head in the sand and continue your work in the status quo. In this particular case, however, ignorance is anything but bliss, and the overwhelming need to avoid being the troublemaker in class should prompt you to give our e-book a very thorough once-over.

Until that time, we're providing you a quick primer on the ASC 606 adoption methods available to you in hopes it will lend you a better sense of direction as deadlines approach. Just remember another old adage that you might've heard from a teacher or two over the years - the best decision isn't necessarily the path of least resistance.

Download eBook: Quick Guide to Changes in Rev Rec ASC 606

Take the time to evaluate your own unique circumstances and seek the insights of your stakeholders, auditors and management to find the most suitable solution for your company.

Full Retrospective

Adopting the full retrospective method is exactly how it sounds. It is comprehensive in nature and requires restatements under the new standards for 2016 and 2017. Although it is indeed the most thorough and resource-consuming, you may still elect any of the following expedients:

  1. You do not have to restate completed contracts that begin and end within the same annual
    reporting period.
  2. You may use the transactional price at the date when contracts with variable consideration were completed. If elected, this would replace estimating variable consideration amounts in the comparative reporting periods.
  3. You do not have to disclose the amount of the transaction price allocated to remaining performance obligations for all reporting periods before the date of initial application. Likewise, you would not need to explain when the entity expects to recognize that amount as revenue.

There are some distinct advantages of using the full retrospective method. P&L for all years presented is comparable. Also, if you expect revenue acceleration, revenue will not be "lost" through an equity adjustment. From a transparency perspective, full retrospective provides additional visibility for financial statement users as well.

This isn't to say, however, that this method is without drawbacks. You are required to restate all contracts outstanding for years presented. Full retrospective may also require significant effort to implement. Lastly, the historical data might be difficult to obtain for older contracts.

Modified Retrospective

Modified retrospective is certainly the least consuming of the two, only requiring you to record the cumulative impact of the new standard of the previous two years in beginning equity of the current year.

If you elect to use modified retrospective, you should also provide the additional disclosures in reporting periods, including the date of initial application of:

  • The impact this update has on each financial statement line item relative to the previous guidance in effect before the change
  • An explanation of the reasons for significant changes

The benefits to using the modified retrospective are somewhat obvious. It only obligates you to restate outstanding contracts on the date of the transition, year-end 2018. Also, you're only recognizing equity for the current year; you don't have to restate all of the years presented. Of course, this method may also require significantly less effort given the smaller amounts of data required needing restatement.

Simpler as it might be, this method still requires additional disclosures that will involve maintaining records in both old and new standards in order to disclose the impact on each line item along with the corresponding explanations. Performance measurements might also be skewed, as the P&L will not be directly comparable for all the years presented. Lastly, you still might need historical data for comparison's sake which may not be prepared using the modified method. Your stakeholders might very well demand you use full retrospective because of such circumstances.

You're In Good Company,
No Matter What You Choose

Whether you choose the full or modified recognition method, you're certainly not alone. Many of our largest companies were early adopters, including Alphabet, Ford and UnitedHealth, all of which opted for modified retrospective. However, contract-heavy companies like General Dynamics, Raytheon and Microsoft all chose the full retrospective method, in part to take advantage of the expedients.

In general, at least according to a recent survey, roughly two-thirds of companies are still assessing their options, with over half still not yet leaning in a discernible direction. Large industrial, technology and financial companies were the main respondents, indicating that there is still a sizable amount of hesitation, even among our largest and most well-established companies.

That said, no matter which method you choose for ASC 606 compliance, you'll be in good company. If you are still on the fence about which method is most suitable for your particular needs, spend some time with Embark’s e-book on the matter, roll up your sleeves and get ready to go to work.


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