If contract management and subscription billing are central to your organization, then the updated revenue recognition standards from the FASB and IASB are game changers. The newest set of rules is meant to consolidate the numerous industry-specific guidelines previously included under GAAP.
The complexities of ASC 606 and the new rev rec standards
On the surface, the shift would seem to make life easier for organizations such as SaaS providers that live and die with their subscription revenues. However, this is not necessarily the case:
- First off, a rule such as ASC 606 has ripple effects across the entire business. For finance, it requires a reassessment of existing systems and processes, especially accounting solutions and the extent to which they are propped up by Excel sheets. Meanwhile, sales has to account for possible changes to contracts, product pricing, commissions and bonus plans.
- The traditional coping mechanisms for managing contracts, such as utilizing a bevy of spreadsheets to track all of them, are not scalable for life under the new rules. Data entry becomes time-consuming, while errors become more common and processes get increasingly delayed due to the difficulty of sharing information and running timely reports.
- Many of the specific rule changes will be tough to adjust to without upgrading to modern financial software. For example, ASC 606, ASU 2014-9 and IFRS 15 all place more emphasis on single contracts, including performance obligations and contract liability. Revenue deferrals also become more common, and there is the need for dual reporting throughout the transition period.
Add all of these changes together and you have a recipe for significant challenges in contract management unless appropriate tools (i.e., modern cloud-based software) are in place. Many organizations have not prepared for the transition to new rev rec standards, though.
"Many organizations have not assessed the impact of ASC 606 yet."
According to the 2015 Revenue Recognition Survey from PricewaterhouseCoopers and the Financial Executives Research Foundation, almost half (48 percent) of respondents had not completed an initial impact assessment related to ASC 606. Twenty-seven percent had not even started, and a mere 5 percent had actually implemented the relevant systems and processes.
What to do to get on the right track with contract management
Such assessment is an important first step for navigating the shift to ASC 606. After that, changes to critical systems may need to be considered. Over half (53 percent) of PwC's survey takers thought their enterprise resource planning solutions would require adjustments to ensure compliance with the updated guidelines.
Rules for revenue recognition are changing.
Indeed, contract management is best handled by a system that is built on true automation, sophisticated reporting and easy access to consolidated data. Cloud accounting software such as Intacct fits the bill.
Intacct offers advanced revenue recognition accounting with the ability to perform the side-by-side reporting required for a full retrospective approach during the transition, which requires keeping a dual set of books. Details from subscription contracts can be captured and managed under the applicable rules. Plus, there is the ability to get forecasting for both old and new books based on revenue, billing and expenses.
Cloud financial software makes it possible to make a smooth transition to the new rev rec standards, which take effect near the end of this decade. An experienced implementation partner such as Arxis can help you set up a solution that meets all of your particular requirements and gets you on the right track for project success.
