The New Revenue Recognition Standard: Are You Ready?

If you want to grow your business, you must measure and analyze many different elements. From employee engagement to customer satisfaction and overhead costs, there is seemingly no end to the areas of your business you need to track and tweak in order to succeed and consistently grow. There is one area, however, that is perhaps the most critical when it comes to company health and progress: revenue recognition.

It comes as no surprise that revenue is one of the most important elements used by investors in evaluating a company’s production and future outlook. But while this is no secret, not all companies have a deep understanding of the intricacies of revenue, including the new revenue recognition standard and the complexities of revenue recognition. Many businesses lack the tools and software to automate such processes and keep everything tidy and organized when it comes to revenue tracking and revenue recognition. Failure to implement solutions, like revenue recognition software, results not only in diminished organization, but also in costly man hours spent when revenue recognition tasks are not automated.

With that understanding, what more is there to know about revenue recognition, and what can your company do to ensure that they are functioning well in this area and continually advancing and expanding the business? When it comes to revenue, one of the first things that’s vital to understand is the latest revenue recognition standard. Beyond understanding, you’ll need to ensure you comply with the new revenue recognition standard. But what is revenue recognition and the revenue recognition standard and how can you ensure your company has tied up all the loose ends in these areas? The answers are out there and we’ll take you through them.

The revenue recognition principle is an element of accrual-based accounting. As the name implies, revenue recognition describes when and how a company records (or recognizes) revenue in its accounting records. The revenue recognition principle is the idea that revenue should be recorded when earned, not necessarily when payment is received. Typically revenue is referred to as “earned” once a product or service has been provided to a customer, regardless of when the cash is actually received. As such, the principle of revenue recognition often applies to both deferred revenue (cash paid in advance), and accrued revenue (cash paid after a service is complete or a product is delivered). When someone refers to “GAAP revenue recognition,” they are referencing that it is a generally accepted accounting principle (abbreviated as “GAAP”).

Revenue is one of the biggest key indicators of your company’s financial progress. And in order to correctly understand where your company stands financially, it’s crucial that you understand and accurately track revenue recognition. Contracts with customers is an area that is often involved when revenue recognition is discussed. With so much to keep tabs on, ensuring accurate revenue recognition practices are implemented is no small feat. Add to that the importance of complying with the new revenue recognition standard and the world of revenue recognition can be a bewildering one.

Revenue recognition standards are rules established by major accounting boards, most notably the International Accounting Standards Board (IASB), and the Financial Accounting Standards Board (FASB). The idea of revenue recognition standards is that they regulate reporting in an attempt to ensure uniformity and accuracy so as to ensure, among other things, that revenue is not overstated. Historically, these boards have had industry- and transaction-specific revenue recognition requirements and often, different accounting techniques and practices were used for different industries.

The new revenue recognition standard, often known as ASC 606 in the United Stats and IFRS 15 internationally, deals specifically with recognizing revenue from contracts with customers. While there are some intricacies, essentially it is a principle-based standard meant to unify the way companies across the globe report revenue.

1. Identifying the contract with the customer
2. Specifying the performance obligations in a contract
3. Determining the transaction price be finding the total amount of consideration expected from the customer
4. Allocating the transaction price to include individual performance obligations
5. Recognizing the revenue when or as the entity satisfies the performance obligations

ASC 606 has standardized revenue recognition across countries and industries, leading to a number of positive results. Jim Neeson, from The Connor Group identified just a few of these. First, he said, the new rules allow companies to accelerate revenue. Next, the new structure enables companies to be more innovative in the way they bundle or price their products. Finally, Jim believes that ASC 606 provides all companies a great opportunity to focus on how they can build new processes and systems to help revenue grow and scale.

Understandably, adapting to a new revenue recognition standard has been a challenge for many organizations. While even the process of learning about the implications and intricacies of ASC 606 takes considerable time and energy, often, it’s in the application of the new standard that much time and resources are expended. The tremendous task of ensuring ASC 606 compliance was so demanding on companies, in fact, that one poll found that nearly 70% were still determining the standard’s impact on their business a mere eight months before the January 1, 2018, deadline. Of that number, some had not even started the process of becoming compliant.

ASC 606 caused no shortage of headaches for SaaS companies. As a result of the new revenue recognition standard, many of the semantics changed when it comes to SaaS revenue recognition. Not only that, the actual meaning of many of the main sections and terms in a contract also changed. Additionally, there were a number of changes in the areas of contingent revenue, performance obligations, and upfront fees. Many hours were spent painstakingly combing through contracts and terminology to ensure accuracy under the new standard. Companies that did this process manually found it particularly arduous.

With the recent changes in the revenue recognition standard, more and more companies are realizing the benefits of turning to revenue recognition software and technologies in order to automate processes and ensure compliance. Some of the best technologies in the revenue recognition sphere are CPQ tools, which enable you to configure, price, and quote.

Meredith Schmidt, EVP of Global Revenue Operations at Salesforce, uncovered how Salesforce CPQ can help tidy up a company’s revenue recognition process. “The beauty of Salesforce CPQ,” said Schmidt, “is that it gives businesses a way to enforce all the accounting rules up front. It allows them to determine everything from how they want to sell, to how they plan to recognize revenue and pay commissions. Everything starts with the data gathered on the Salesforce Platform.”

The draw of the Customer 360 Platform is that it can truly drive an end-to-end process. The Customer 360 Platform, when combined with Salesforce CPQ, can become the revenue platform for an entire organization, even bridging the gap between IT and accounting. Time and date stamping enable Salesforce users to neatly track transactions and ensure compliance. It’s also simple to capture data once and then tell it what to do. Users can easily push the data where it needs to go and know that the data is accurate from the very start.

In short, says Meredith Schmidt, “Salesforce CPQ is the technology that can enable companies’ success. It’s where the data starts. It’s where the revenue starts. It is the tool that will get organizations to the future, and it’s the tool that will help them be compliant. It’s the tool that will reduce risk.” Salesforce users also agree that the tools offered are invaluable. In fact, 84% of Salesforce users said they would be likely to recommend the Salesforce CPQ solution.

 

The new revenue recognition standard can be considerably difficult to implement. But while implementation can be difficult, compliance with the new standard is vitally important for companies of all sizes and in all industries. The companies that have been the most successful at implementing these solutions leverage the technologies available to them and find that automating many of their processes frees up their people to formulate strategies and make critical decisions instead of spending time crunching numbers and meticulously monitoring spreadsheets.

The future of revenue recognition is now. Are you ready? Learn more about Salesforce CPQ to see how it can transform the way you handle revenue.