Contracts with Customers is an accounting standard under ASC 606 that provides guidance on how to account for costs incurred in fulfilling a contract with a customer, such as sales commissions.
The standard helps companies accurately account for their costs and ensures that they are not overstating their revenue. By providing guidance on how to account for costs incurred in fulfilling a contract with a customer, ASC 340-40 can help companies to improve the quality and consistency of their financial reporting.
Here are some of the key provisions of ASC 340-40:
- Incremental costs of obtaining a contract with a customer. These are costs that are incurred in order to obtain a contract with a customer, and they are capitalized as an asset.
- Costs incurred in fulfilling a contract with a customer. These are costs that are incurred in order to fulfill a contract with a customer, and they are either capitalized or expensed depending on the specific facts and circumstances.
- Required subscriptions. These are subscriptions that are required by a contract with a customer, and they are capitalized as an asset.
- ASC 340-40 is a complex standard, and there are a number of different ways that it can be applied. Companies that are subject to ASC 340-40 will need to carefully consider the specific requirements of the standard in order to ensure that they are in compliance.
Here are some of the benefits of complying with ASC 340-40:
- Improved financial reporting. By providing guidance on how to account for costs incurred in fulfilling a contract with a customer, ASC 340-40 can help companies to improve the quality of their financial reporting.
- Reduced risk of earnings management. By providing more transparency in the way that costs are accounted for, ASC 340-40 can help to reduce the risk of earnings management.
- Improved comparability of financial statements. By providing a common set of rules for accounting for costs incurred in fulfilling a contract with a customer, ASC 340-40 can help to improve the comparability of financial statements.
Overall, ASC 340-40 is an important standard that can help companies to improve the quality of their financial reporting and to reduce the risk of earnings management.