Revenue recognition changed with the introduction of the ASC 606 / IFRS 15 standard, which provided a system for how companies that follow a generally accepted accounting principle (GAAP) recognize revenue around long-term contracts. ASC 606 draws on a five-step process to recognize revenue in terms of a customer contract. Companies then need to put these steps into the context of business model and industry practices.
Companies that implemented ASC 606 may have found disparities with their previous practices that go beyond the capacity of existing systems. Many of these companies have leveraged spreadsheets and other work-around processes as a result to address the five steps of ASC 606 / IFRS 15.
For example, companies in the SaaS industry, or those using subscription or consumption billing, ASC 606 and IFRS 15 can complicate revenue recognition processes. In fact, the nature of processing for these industries triggers some of the most complex areas of ASC 606 and IFRS 15.
The ways that subscription billing / revenue models can trigger ASC 606 complexity include:
SaaS and subscription-model companies especially need to automate complex processes to ensure accuracy and eliminate reliance on manual entries.
Other examples of where companies may see ASC 606 and IFRS 15 complexities are those offering:
Entities that sell multiple performance obligations in the context of a single contract and offer a discount must allocate proportional to the Stand-alone Selling Price (SSP) of each performance obligation.
A bundle of products and services sold under a single (or limited number of) line items on a contract or order may inherently represent multiple, distinct performance obligations. This requires an “unbundling” or “carve” of that single line item to many performance obligations to properly represent the totality of the goods and services transferred via the contract with the customer. The allocation process then assigns appropriate amounts from the contract total transaction price to each performance obligation (typically based on the SSP values for each obligation).
Contract where products and services are sold with “free” items included, whether it’s maintenance, support, hardware, physical good of some sort, professional services, etc. If it’s determined the free item(s) must be assigned value, the allocation process will do so to properly represent the amount of the transaction price that should be recognized for such performance obligations.
Although ASC 606 / IFRS can be complicated, these four steps can be used by companies in all industries for revenue recognition:
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