Revenue Recognition

The 5 Steps of Revenue of the Recognition Standard

Revenue

Seamless Reporting for Revenue Recognition Compliance

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.

ASC 606 / IFRS 15 Five-Step Compliance

STEP 1

Identify the contract with the customer

This step includes evaluating whether the contract creates enforceable rights and obligations and whether it has commercial substance. Where contract identification can get tricky under ASC 606 is when upgrades or the chance to buy additional products / services are included.
STEP 1
STEP 2

Identify the performance obligations in the contract

Performance obligations are the promises of a good or service provided to a customer. With complicated contracts, companies need to define performance obligations carefully, ensuring that the good or service can stand on its own performance obligation, for example.
STEP 2
STEP 3

Determine the overall transaction price for the contract

This involves estimating the net revenue expected for each contract term, but this price can be difficult to determine in some industries because of rebates or discounts.
STEP 3
STEP 4

Allocate the transaction price to the performance obligations

The objective is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
STEP 4
STEP 5

Recognize revenue when performance obligations are satisfied

This step determines that a good or service is transferred when the customer obtains control.
STEP 5

ASC 606 / IFRS 15 and Software as a Service (SaaS) and Subscription Billing

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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:

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Discounts

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.

"Free" Items

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.​

Bundles

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).

4 Additional Steps for Revenue Management

Although ASC 606 / IFRS can be complicated, these four steps can be used by companies in all industries for revenue recognition:

Taking a policy-driven approach to revenue recognition

Utilizing this approach eliminates human touch, which contributes to less human error, higher efficiency, and better compliance.

Make sure your measurement and reporting are comprehensive

Companies need to ensure that their systems and processes for measuring and reporting revenue are up-to-date and comply with the requirements of ASC 606. This includes ensuring that they have appropriate controls and procedures in place for identifying performance obligations, determining transaction price, and allocating revenue to each obligation.

Have a long-term view without ad hoc solutions

It's important for companies to take a long-term view and avoid making ad hoc solutions to comply with ASC 606. This means investing in the necessary systems and processes to ensure ongoing compliance with the standard, rather than implementing short-term fixes that may not be sustainable in the long run. These short-term fixes can include doing parts of the record keeping on Excel spreadsheets.

Understand the relationship of billing, revenue recognition, and CRM

Billing is tied to customer relationship management (CRM), because accurate billing is essential to any customer relationship. What has happened with the use of some ERP systems is that billing and revenue recognition have become disconnected. A good approach is to work for transparency between billing and revenue recognition, with revenue management serving as a layer between the ERP system and the CRM function.

The SOFTRAX Answer

The SOFTRAX Revenue Management System (RMS) is the industry’s only system combining billing and revenue recognition in a single application. SOFTRAX RMS is deployed as a layer between CRM/CPQ and ERP, ensuring billing remains close with the customer relationship, while ensuring the proper accounting, security, and controls via a dedicated environment. The result is a sophisticated solution providing a true path to automation and transparency across even the most complex billing and revenue recognition scenarios.

SOFTRAX RMS is fully integrated with a powerful reporting and analytics tool that provides both analytical dashboards and customer-centric drill-down reports for billing accountants, revenue managers, and senior executives alike. SOFTRAX RMS analytics allows users to customize, manage, and share out of the box reports at the summary and detailed account level via simple drag and drop controls. An advanced Workbench keeps revenue accountants focused on the high-priority and high-complexity transactions to ensure policies are correctly applied. SOFTRAX RMS workflow engine simplifies integration with upstream systems, taking on the burden of retries and error-logging.

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