While revenue accounting has always been complex, ASC 606 has introduced new revenue recognition challenges for integrators.
Thanks to the recent changes in FASB’s ASC 606 standard, revenue recognition is increasingly top-of-mind for CFOs and Controllers.
Over the years, as we have worked with hundreds of companies to assess, analyze, and streamline their revenue accounting processes, we have identified five common challenges that can be overcome through the implementation of a robust revenue accounting automation tool.
1. Grouping and Aggregating Data
With an increasing number of systems providing source data for the revenue accounting process, businesses need an easy way to ingest these disparate sources and group them into a common revenue contract. Without automation, they risk spending too much time and effort in manually processing all the data.
An automated system can manage inputs of all types from a variety of sources and correctly group them together, making the management of revenue contracts easier as well as allowing for additional analysis and reporting.
2. Recalculating Revenue for Contract Changes
Companies who allow customers to make regular modifications to their contract agreements–like subscription companies–face this challenge every single day. Customers have the ability and the freedom to change their contract by adding, changing, and deleting items in their next order, or changing terms by putting an account on hold, restarting, etc.
Unlike the old guidance, such changes cannot be accounted for as a “new contract” anymore. Under the new guidance, they need to be analyzed to determine if they are distinct and then be properly allocated. This is not a task that spreadsheets can easily handle. Automation is the answer to not only ensure the process is easier but also more accurate.
3. Event-based Revenue Recognition
Under the new guidance, timing is a critical factor, and the release of deferred revenue revolves around revenue triggers, or events, that allow it to be recognized. Events such as delivery, acceptance, timing or consumption can all be used to release revenue for recognition.
Without an automated system, it becomes nearly impossible to track the various types of events that can trigger revenue recognition and when they are activated. A robust automated solution will let you not only track and report, but provide forecasting in the form of waterfalls, and provide an audit trail throughout the entire process.
4. Standalone Selling Price Calculation and Allocation
Some businesses have their accountants spending up to 3 weeks per quarter just gathering the data necessary to perform this process manually. Under the new guidance, accountants can use various methods of analysis to arrive at an appropriate SSP, then they need to apply it to a contract that may have multiple elements or multiple performance obligations. How does that get allocated across those multiple elements?
Automating this process can be a key time-saver during period-end reporting, as well as provide increased visibility throughout the period by managing large volumes of data and enabling calculations and reallocation as many times as necessary.
5. Costs to Obtain Contracts
Contracts certainly don’t come for free and it is important that companies are properly accounting for any and all revenue-related costs, including COGS, sales commissions, rebates, accruals, etc. Such costs may need to be recognized at a point in time or amortized over a fixed period.
Manually collecting and consolidating all the information and trying to tie it to revenue– even at a portfolio level– is very difficult. We have seen companies running up against the very generous limits in the cells available in their spreadsheets.
The common theme in all these challenges is the increasing time and resources that need to be spent on manually performing revenue recognition processes, especially under the new guidance. It’s time to seriously consider automation to allow the company to grow and expand without impediments. An added benefit is that it allows accountants to spend their time on more skillful tasks rather than spend hours collecting data.
Without an automated solution, companies face a number of risks to their financials including:
- Audit and compliance risks
- Earnings restatements
- Inability to be flexible when accounting guidance changes
- Barriers to scaling business operations
- Delays in IPO or other exit strategies
- Spreadsheet errors
It’s time to thoroughly analyze your revenue accounting policies and practices to see how much time and money you could save by implementing a robust revenue recognition automation tool. We have seen over and over again that forward-looking companies who automate decrease their risk, improve their prospects for growth, and have more time to spend on analysis and reporting than on data collection.
Read the full story here – 5 Revenue Recognition Challenges That Can Be Overcome by Automation
This article was originally published bye Financial Executives International (FEI), and has been republished with their express permission.
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