The Effects of Recurring Revenue Business Models on Revenue Recognition

The Effects of Recurring Revenue Business Models on Revenue Recognition

SOFTRAX partnered with Aria Systems in the summer of 2021 for the live webinar, “Recurring Revenue Ripples Through Revenue Recognition” to discuss how agility in serving customers with recurring revenue business models and precision and flexibility in revenue recognition go hand in hand. Senior Vice President and General Manager, Tom Zauli of SOFTRAX hosted this one-hour event alongside Director of Product Marketing, Michael Carrell of Aria Systems.

Delving into the importance of the shift in business models and the need for agility, the webinar, “Recurring Revenue Ripples Through Revenue Recognition,” focused on the numerous ripple effects that subscription and consumption-based billing create through back-office infrastructure and processes, including:

  • Variable Consideration
  • Contract Combinations and Modifications
  • The Significant Financing Component
  • Material Rights
  • Application of contingencies, usage, overages

Recurring Revenue Businesses Migration to ASC 606

Tom Zauli discussed the migration of businesses to a single accounting standard under ASC 606 and IFRS 15. While many companies are celebrating the migration to subscription and usage-based business models, Mr. Zauli notes the most complex portions of the guidance can be triggered by these billing models, “a slight change to a business model or a slight change to the contracts could take your revenue recognition from something that’s simple to something that’s become extremely complex.”

The Trigger of Usage-Based Billing to Variable Consideration

Relevant to many companies is the trigger of usage-based billing models to require observance of the variable consideration portion of the ASC 606 guidance. Under the new guidance issued by the Financial Accounting Standards Board (FASB), ASC 606-10-32-5 states, “if the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.”

As noted by Mr. Zauli during the webinar’s broadcast, the necessary steps to remain compliant with the standard need to be done on a contract-by-contract basis so the repercussions, in terms of trying to operationalize all this carries the potential to grow rapidly.

For more information and examples of the ripple effect of usage-based billing on revenue recognition combined with the complexities of the new guidance, access a replay of the webinar.

The Ripple Effect of Subscription Changes on Revenue Recognition

Another ripple effect caused by recurring revenue discussed during the event is the impact of subscription changes on revenue recognition, specifically in terms of the contract modification guidance, ASC 606-10-25-10. This guidance defines what needs to be done in the case of a change within a contract and states “a contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. In some industries and jurisdictions, a contract modification may be described as a change order, a variation, or an amendment….”

To hear the full conversation on the ripple effects caused by subscription changes and the effects they could create for your company, access a webinar replay.

Q&A with the Presenters

Those registered for the event had the opportunity to connect with Mr. Carrell and Mr. Zauli following the event to pose their own questions surrounding the topics.

Viewer A asked the presenters, “how do your respective solutions take in the actual consumption data?”

Mr. Zauli answered the question by explaining that, “each solution exposes APIs to retrieve consumption. Both solutions offer flexibility via the same workflow engine to be able to treat or transform the sales order and subsequent usage data as necessary to be passed into the respective application. Depending on the specifics, this data may have to go to either billing alone or both solutions. Typically, if usage is billed monthly, the value of the bill is determined in Aria based on the usage metric. This calculated value can then be sent to the revenue recognition engine and recognized point-in-time. However, if usage is billed quarterly in-arrears, then usage information will likely have to go to the revenue recognition engine month to month, such that revenue is recognized as the value is transferred to the client (i.e. recognition occurs in months one and two of the quarter in addition to month 3). It will then also have to go to the billing engine for determination of the quarterly bill.”

Viewer B presented the comment, “you mentioned complications if we offer a free trial period – we are about to do this.” They then asked, “what should we expect?”

Mr. Zauli responded, “The devil is in the details. If there is no commitment to continue the contract passed the free trial period, then you may be ok. However, if you are offering a contract that extends over a period of time, has defined payment terms, and cannot be canceled for convenience, then all of this is part of the contract as defined by ASC 606. Though you are offering the free trial, you are still transferring value to the client and therefore should be recognizing the revenue for each period accordingly at an amount based on the total contract value and total length of the agreement. This also means that you are starting recognition ahead of the first billing event, so you are compelled to disclose the Contract Asset position as part of the ASC 606 disclosures. If you are selling other items along with that with the free trial period, things get more complicated as there is an implied discount with the free trial period which means you may have to follow the allocation guidance.”

Learn More About Billing and Revenue Recognition Automation

This webcast can be viewed in its entirety in the SOFTRAX library of on-demand webinars. To join future webinars and discussions surrounding revenue recognition with Tom Zauli, follow SOFTRAX on LinkedIn and join the Revenue Recognition Group.

To learn more about SOFTRAX solutions and how companies with complex revenue recognition requirements benefit from automating billing and revenue recognition processes, contact a SOFTRAX representative or schedule a demo to see SOFTRAX solutions and products in real-time.

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