In 2014, the Financial Accounting Standards Board and the International Accounting Standards Board issued two new standards — ASC 606 and IFRS 15 — with the goal of aligning revenue recognition practices globally. As we move deeper into a subscription-based economy, it’s becoming more common for businesses to recognize revenue too quickly, and the FASB decided it was time to provide some additional guidelines to address the issue. They gave businesses around four years to adopt and comply with these new rules. Public companies had until December 15, 2017 and private companies until December 15, 2018.
We all know that complying with a new accounting standard can be a headache. Implementing what some are calling “the most sweeping accounting change in decades” is a whole different ball game, and the stakes for getting it right are high. If you have contracts with customers and haven’t adopted the standards, you’re late to the game. If you’ve already adopted the standards, you may be experiencing bumps in the road as new implementation issues are identified and evolve.
While these new standards are primarily associated with companies that license software, they can impact entities of all sizes and types—even including nonprofits.
The new standards are based on one overarching principle: A company should recognize revenue when it transfers goods or services to a customer. The amount of revenue recognized should represent the consideration to which the company expects to be entitled. As a result, companies had to re-evaluate when and how they recognize revenue. To achieve the core principle of ASC 606, a business needs to take the following five steps:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
Performing revenue recognition in the past used to be simple: you created an invoice that credited a deferred revenue account and recognized revenue through recurring journal entries. However due to volume, these journal entries were most likely created or reconciled using a spreadsheet kept outside of the accounting system. Reconciling deferred revenue eventually became an intensive process that required hiring additional resources.
ASC 606 presents new challenges. If your customer ever wants to add on, change, or drop a service, all of the deliverables’ revenue schedules need to be recalculated based on their respective fair value as a percentage of the new contract price. Complex revenue recognition schedules you had in your Excel spreadsheet will become a nightmare to fix. If your finance team is handling it this way, it will probably become someone’s full-time job to manage this spreadsheet. Thankfully, there are more automated options.
Put it on Autopilot: Sage Intacct Contract and Revenue Management
In response to these major changes to the accounting standards, Sage Intacct released Sage Intacct Contract and Revenue Management. It’s the first solution to address the complexities of ASC 606 and IFRS 15 automatically. With this tool, any updates you make to a contract will automatically update your recognition schedules for you. All of the billing journal entries, revenue recognition entries, and expense journal entries are handled behind the scenes.
For finance teams, this means huge time savings (like, leave work by 2 pm time savings!). The tool’s built-in dual-reporting feature gives executives the ability to view metrics side by side and get a good idea of how rule changes are impacting their bottom line. So, when you need to view performance indicators in real-time such as MRR, CMRR, Customer Churn, or CLV, you can easily see them in a dashboard without having to manually calculate them.
Unlike other accounting solutions, Sage Intacct integrates seamlessly with Salesforce and other CRMs. This is a crucial feature for SaaS companies looking to align their finance and sales functions. So, when a sales team member sells a big subscription deal, all of the different line items in the sales order would be accounted for in Sage Intacct — no rekeying required.
If you want to be as compliant as possible, avoid error, and save tons of time, Sage Intacct Contract and Revenue Management might be for you. If you’re concerned that you might be affected by ASC 606 and unsure whether or not your current processes can handle it, reach out to our team of experts. We’ll run some quick tests to see whether your team could benefit from this module.