Accounting Today calls ASC 606 as the “biggest change to the accounting standards in the last 100 years”. Jointly developed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the ASC 606 went through many revisions issuing multiple Accounting Standards Updates (ASU) which refined it to recognize revenue more consistently.
This new revenue standard affects all existing contracts with customers as part of a private company or a public company.
Public companies were required to adapt to these standards for reporting periods beginning December 15, 2017, interim periods and annual reporting periods thereafter. For private companies, the policy’s effective date was from December 15, 2019, interim periods within annual reporting periods beginning after December 15, 2019.
ASC 606 defines flexible and robust guidance to accommodate the entire gamut of revenue recognition changes that would affect the financial statements of a company. Additionally, the new guidance would also improve the comparability of revenue recognition practices across different companies and industries.
ASC 606 takes into account the lifecycle of a customer in SaaS businesses and the costs incurred by them at each of these stages such as implementation costs, training, adds ons, discounts, upgrades, downgrades, and so on.
Top 20 Accounting Interview Questions and Answers
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Part 1 – Core Accounting Questions
Question #1- What are the pre-requisites of revenue recognition?
Revenue can be recognized when the following criteria are fulfilled:
Delivery of product can be determined easily with the help of the Goods / Material Receipt Note or the Lorry Receipt. But in the case of delivery of services, this seems to be a bit tricky because there might not be a physical transfer of property/goods in this case. So to ensure services have been delivered, timesheets of people who have worked on the project, the final design, or such deliverables can be used as a reference.
Question #2 – How important is documentation when it comes to accounting?
If you can prepare a list of all critical/vital documents for the sector you are going to an accounting interview, it will help you win very good brownie points with the interviewer.
Question #3 – What are Accounting Standards?
Question #4- What is a FIXED ASSET register?
A summarized form of a Fixed Asset Register which will form a part of the Financial Statements, is as follows:
Physical verification of fixed assets should be done regularly, and comments from these verifications should be updated accordingly. There are times when the asset is recorded in the books, but there is no such asset physically.
Question #5- Which accounting software / ERP, according to you, should be used for maintaining the Accounts of an MNC?
Accounting software sets the foundation of accounting in any organization, and it is crucial to choose software that suits the organization’s needs.
However, the cost of SAP is on the higher side. It is the trade-off between risk and returns, which justifies the high cost of the ERP given the volume and scale of the business.
It is important to make yourself clear about the organization’s size and then correlate the usage of the ERP with the size. This is required because if you are interviewing for a start-up where survival is the focus rather than the effectiveness of controls, they will prefer Tally, which will be very cost-efficient.
Question #7 – Explain the procurement process in brief
Goods will be delivered at the warehouse/place of delivery, and a material receipt note will be created. Purchase can thus be accounted for in the books if everything is in line with the PO or contract. Payment will then be released as per the payment terms.
Some of the key documents which should be thoroughly verified during the accounting process are:
Question #8 – What, according to you, is the importance of budget in any organization?
The budget sets the tone for the organization, i.e., what is the approach to the management for the coming year? Is the management planning to be aggressive with its sales targets or planning to cut down costs, or wants to maintain a steady pace just like last year? It is also very important to check expenses and create a culture where employees start taking responsibility. Employees tend to be careful with their approach as they know that all current year numbers will be tracked and then compared to the budgets allotted to them and their team.
Question #9 – What are the expense provisions? Is it important to book these provisions?
Very put, provision is an amount of profit put aside on the books to cover an expected / potential expense in the foreseeable future. In day-to-day accounting, there is a high chance that expenses already incurred in the given period may not be booked. The reasons for this could vary, e.g., the vendor is yet to raise an invoice, or let’s say that the invoice is raised once in 6 months only, and at the year-end, we have already availed services of 3 months. A provision should be created in the books for these expenses, which we have already availed. Expenses incurred in a given financial year should be booked in the same year to maintain the true and fair view of the financial statements. But it can’t book expenses for any reason; then, the provision is the next best thing to do.
Accountants are prudent, and thus the effect of losses/expenses is taken into the books even if there is a potential expense. Still, on the other hand, potential revenue is not taken into the books. Keep this in mind because there is a trick question about the provision of income that you expect to incur in the future.
Is your accounting software sophisticated enough to record revenue in the way required by ASC 606?
Your accounting software may not be sophisticated enough to record transactions in a way that makes it easy to integrate with ASC 606 reporting requirements. For example, the accounting software may not have the capability to allocate the transaction price for a transaction encompassing multiple performance obligations as determined by your contracts. It’s possible it is unable to monitor performance obligations that are satisfied over time – such as hosting or software support.
Not properly recording revenue from the start could potentially turn into a record-keeping nightmare. You should have a candid conversation with your accounting department and decide whether any updates are needed to comply with new requirements.
With less than 2 months until the public company deadline to comply with ASC 606, revenue recognition is top of mind for most finance and accounting professionals. The new standard could be one of the most important pieces of accounting guidance over the next decade and companies need to be prepared for the range of opportunities and challenges it will present. Both public and private companies are asking questions about ASC 606 and Connor Group and Salesforce have teamed up to address the top 7 most pressing questions and concerns.
Have more questions or ones different than those presented here? Contact Connor Group at [email protected] to learn more about how we can help you with your toughest accounting challenges!
Jim’s career highlights include 2 IPO’s in industry (Affymetrix and Fluidigm), entrepreneurship founding 2 companies and 25+ years in industry / public accounting in increasing position of responsibility. He is an Angel Investor in companies with IPO / M&A potential and a member of Stanford Angels and Entrepreneurs. Jim has been a guest lecturer at the Stanford GSB for 8 years and serves as a mentor to many CEO’s through the Stanford Latino Entrepreneur initiative. He is also a Fellow at Cambridge University at the Judge Business School where he is supporting the curriculum development for the Masters Accounting program.
If you have any of these questions or concerns, watch the videos to gain insights from Connor Group Managing Partner Jim Neesen.
Jim Neesen is Managing Partner at Connor Group, an elite Accounting and IPO services firm. Connor Group has worked on 54% of the IPOs in Silicon Valley in the past 5 years with 500+ global clients in technology and high growth. Clients include Facebook, Tesla, Snap, Uber, Twitter, GoPro, Spotify, SurveyMonkey and WhatsApp to name a few. Jim joined Connor Group as CFO after the GSB 2009 and has led growth in revenue from $3M and 20 employees to over $65M and 200 employees. The firm has offices in 9 tech premier tech centers including Silicon Valley, San Francisco, New York, Boston, Salt Lake and Europe.
FAQ
What are the 5 steps of ASC 606?
- Identify the contract with a customer. …
- Identify the performance obligations in the contract. …
- Determine the transaction price. …
- Allocate the transaction price. …
- Recognize revenue when or as the entity satisfies a performance obligation.
How does ASC 606 affect revenue recognition?
What revenue is subject to ASC 606?
What are the five steps to revenue recognition?
- Step 1 – Identify the Contract. In previous standards this was pretty straight forward. …
- Step 2 – Identify Performance Obligations. …
- Step 3 – Determine the Transaction Price. …
- Step 4 – Allocate the Transaction Price. …
- Step 5 – Recognize Revenue.
