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Revenue Recognition Criteria Compliance and ASC 606

revenue recognition criteriaAfter years of anticipation—and hopefully of preparation—the ASC 606 guidelines are finally in effect. What if you aren’t prepared, though? What if, despite your best efforts, your people and processes are not equipped to meet the revenue recognition criteria?

It’s a hard truth that you may be feeling the pain of noncompliance, particularly if you have a subscription-based business that derives revenue from complex contracts with customers. ASC 606 requires your company to capture and report on this information, which your current accounting system may not currently track. As a result, you need to identify and remedy critical data gaps.

Preparing your business for the shift is a time-consuming process—especially if your accounting system lacks built-in readiness. It requires significant time and resource contributions on the part of your management, accounting, and IT teams. If you haven’t made the requisite sacrifice of time and resources, chances are you’re feeling pain across every step of the revenue recognition process:

  1. Identify contracts and thresholds. Under ASC 606, organizations are required to treat multiple, related contracts with customers effectively as one contract. Plus, you need to track the likelihood that the revenue in a contract will actually be collected. Your accounting system needs to be “contract aware,” with contract management capabilities built in—a feature that spreadsheets and QuickBooks lack.
  2. Manage performance obligations and renewals. A “performance obligation” is a promise to deliver a good or service. Identifying a performance obligation according to ASC 606 criteria has an important impact on when and how much revenue will be recognized. You need to establish uniformity in how you handle performance obligations and renewals. Once again, contract intelligence and automation in your accounting system is essential, so those revenue recognition terms can be flagged, separated if necessary, and allocated accordingly.
  3. Determine the transaction price. In most cases, a transaction price is basically what a business expects to be paid in exchange for its goods or services. For companies with complex contracts and terms (like subscription companies), matters become more difficult under ASC 606. Establishing processes and controls around valuation methods is critical. Common variables such as refunds, credits, bundling discounts, and flexible financing all affect the transaction price. You need to automate transactions by applying variable consideration using consistent methods and flagging contracts that have non-standard terms.
  4. Allocate the transaction price. The next step is to allocate a portion of the transaction price (step three) to each performance obligation (step two), based on the relative standalone sales price. This takes a complex, rules-based approach that is beyond the scope of most accounting solutions. Attempting to allocate on a per-arrangement basis using spreadsheets exposes your business to risk.
  5. Recognize the revenue. Under ASC 606, subscription-based companies must recognize revenue over time as the performance obligation is delivered to the customer. In addition, companies need to consider how they amortize expenses over the term of a contract. For organizations operating under complex billing arrangements, like usage-based billing, it’s incredibly important that billing and revenue recognition systems work in sync, so that when the customer consumes the benefits of the performance obligations, your organization can recognize it.

RKL eSolutions and Sage Intacct take the sting out of ASC 606 noncompliance

As you may already know, businesses unable to handle complex contracts within their ERP/accounting system—or by tightly integrating with their CRM—quickly get overwhelmed with spreadsheets and subjective decisions. To maintain efficiency, and not increase risk from noncompliance, you need the experts at RKL eSolutions. We’ll help you implement a solution, such as Sage Intacct best-in-class cloud financial management software, that helps you meet the new revenue recognition criteria and puts you on the road to compliance.

You can’t afford to delay another second ...

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