June 29, 2017 | Authored by: Michael Isaacs
Revving up for the new revenue recognition guidelines
With the widely publicized new revenue recognition guidelines going into effect already at the end of 2017, subscription businesses are asking who can help them get ready.
Why new rev rec guidelines?
First some background. Why are new guidelines needed? Well, the current rev rec guidelines are complex and inconsistent, and prevent comparability across verticals. Just one example of this inconsistency: A telco and cable operator both offering a service that charges a set-up fee and monthly installments recognize their revenue differently.
It was precisely to address these types of inconsistencies that the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) cooperated to jointly issue new guidelines (known as ASC 606 or IFRS 15) that apply to all companies that follow US GAAP and the international IFRS.
The new guiding principles of rev rec and the five steps
The new standards defined a clear guiding principle: “Companies should recognize revenue as they fulfill their promises to provide goods or services to their customers.” Five steps were defined to help implement this principle:
- STEP 1: Identify if there is a contract with a customer
- STEP 2: Identify separate performance obligations in the contract
- STEP 3: Determine transaction price. Understand on day 1 the full consideration of the contract, taking into account rebates, discounts, penalties, bonuses, etc.
- STEP 4: Allocate transaction price to individual performance obligations in the contract
- STEP 5: Recognize revenue when or as the entity satisfies performance obligations
Implementing the new guidelines will require changes in accounting processes, policies and systems. For example, companies will need to include more estimates and judgments on revenues, rather than wait until the revenue is received before recognizing it. They will have to recognize more items, and will need the flexibility to update estimates and judgments as they are realized.
Who can help?
Consultants and ERP companies are touting their offerings to aid the transition. But a crucial player is the subscription solution provider. Vindicia not only provides the data needed to feed downstream systems and processes, but also partners with specialist revenue management software vendors to help ensure that our clients are ready on time.
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