In late 1999, businesses around the globe worried about the Y2K issue. Many computer applications of that era only updated the last two digits of a 4-digit year number come January 1, so, for example, going from December 31, 1998, to January 1, 1999, was as simple as changing a "98" to a "99." But on January 1, 2000, the change would be from "99" to "00" – a year that to a computer would be indistinguishable from 1900!
There were some problems with electronic test results, slot machines and alarm systems on New Year's Day 2000. However, organizations everywhere invested heavily in IT upgrades (like networks and software) that helped avert problems in the near term and shore up their operations over the long haul. Is there any Y2K equivalent for companies in 2016?
Revenue recognition: The Y2K 2.0 for SaaS companies
Yes. Beginning in mid-December 2017 for public companies and a year later for private ones, accounting teams will have to adjust to a fresh set of revenue recognition standards created by the Financial Accounting Standards Board. New standards such as ASU 2014-9 "Revenue from Contracts with Customers," will take effect.
At that point, it will be like it was when businesses first moved from punched cards to computers decades ago: Almost everything will be different. Expense deferrals will have to be done more frequently, single contracts will become more important and revenue won't be recognized on cash receipt.
Many fundamental aspects of accounting will change forever after the key dates, and accountants will have to take on some additional workloads. One of the most challenging new tasks will be transitioning away from the old way of handling contracts.
Revenue recognition rules are changing, creating many questions for companies everywhere.
Making the transition to new revenue recognition standards
If you have ever upgraded from an old PC or phone to a new one, you have probably dealt with the hassles of making sure all of your files, settings, etc. are moved over. When it comes to revenue recognition, something similar will unfold with any contracts created during the transition period:
- A contract ending on or after the two deadlines mentioned above has to be accounted for under both the old and new rules in 2016.
- ASU 2014-9 must be applied to virtually all customer contracts, with only a few exceptions for items such as financial instrument contracts and guarantees.
- A new five-step process governs revenue recognition, beginning with identification of the customer contract and ending with recognition after a performance obligation is met.
What finance teams need is a way to perform comparative reporting on their contracts as they shift to the new guidance. Cloud-based software such as Intacct makes this requirement into a very straightforward process.
"Multi-book accounting can handle both current and future revrec guidance."
With such a solution, organizations don't have to settle for managing the new standards after the fact, but can instead be proactive about their contracts. For example, they can take advantage of:
- Multi-book accounting that can handle current and future revenue recognition rules at the same time.
- The ability to perform revenue allocation more than once during a contract.
- Flexible features for managing expense schedules and amortizations.
- Automatic creation of dashboards containing charts, cards, reports and graphs that SaaS companies can show to their respective boards of directors.
- Versatility for adapting to many different, variable scenarios during and after the transition.
Overall, cloud accounting software helps SaaS organizations make the move from old to new rules for revenue recognition. They can easily perform comparative reporting during the upcoming transition period, keep track of critical metrics and get a cost-effective, user-friendly experience when handling their customer contracts. Software such as Intacct is like a Swiss Army Knife for handling the many changes that finance teams have to account for in the near future.
