Key Considerations for Simplifying the Complexity of the new Revenue Recognition Rules

Tom Kelly, Product Marketing Sr. Director

December 29, 2016

Anyone planning to try and account for revenue recognition(opens in new tab) (RevRec) under the new accounting standards ASC 605 and ASC 606/IFRS 15 using a spreadsheet, needs to be aware that this is going to introduce more complexity not less. It’s a significant consideration. As finance contends with the new rules, interpretation of the regulatory landscape can be tricky and misstatements can have devastating consequences.

But there is hope. New software business applications(opens in new tab) and enhancements to existing solutions are offering ways to simplify the complexities associated with the coming RevRec mandates and in some cases making it almost as easy as accounting for fixed assets.

To achieve systematic compliance with the coming standards for RevRec, the CFO needs to be the one to lead the way in establishing the proper controls and selecting the appropriate application. Choosing the right application to automate the RevRec process can help a company efficiently and effectively manage revenue amidst today’s complexities. For example, NetSuite’s advanced revenue management can systematically automate compliance with industry standards when you configure the system to specific RevRec requirements.

Requirements under the new rules generally fall under four categories with specific functionality that can meet those needs:

  • General Requirements. Companies offering single or multiple products or services in varying amounts recognized at fixed or different intervals need rule-based planning automation, capturing the multi-currency impacts each period and balance sheets that are automatically adjusted.
  • Industry-specific Requirements. Companies required to follow industry-specific guidance for revenue generating activities require a method of calculating the percentage of completion and recognizing event-driven revenue.
  • Performance Obligations. Companies with multiple products or services where revenue can be met at different periods over different intervals of time require formulas that leverage dynamic, fair-value pricing, the ability to auto-allocate fair value pricing over multiple elements and flexible revenue contracts through attributes.
  • Multiple Standards. Businesses performing multi-book accounting require specific fair value prices and rules that are posted in real-time, visibility into foreign currency losses or gains at the transaction level and visibility into real-time revenue management for any book.

CFOs need to carefully consider each of these functional requirements not only for how their business operates now, but new business models that could trigger different RevRec requirements as the company evolves.

Yet, automating complex revenue processes is not the only factor to consider. Businesses need to engage key functions across the enterprise in order to successfully addressing the new mandates. Some aspects of the new rules require those closest to a particular business process or product/service offering to provide their input. For example, companies that bundle upfront payments, subscription payments, services, discounts, rebates, etc., with new AND existing contracts require strong collaboration between finance, sales, marketing and legal. NetSuite’s single platform and user-based roles simplify managing the workflow required as well as the need to balance compliance and efficiency with customer requirements, which are essential to retention and growth. Companies that need to provide these sorts of upfront payments and discounts for customers will need a modern ERP that balances compliance with efficiency to remain competitive or they will face ever increasing administrative costs and the risk of non-compliant RevRec.

IP Licensing, Unusual Transaction Types Adds Complexity

The new regulations introduce additional challenges for companies that license their intellectual property (IP). Under the new rules, companies must specify whether their existing agreements fall into one of two categories – symbolic or functional. Each category has its unique requirements for RevRec. Finance, development, operations, legal and other functions will need to come together to ensure that the appropriate designation of each IP agreement is achieved and that revenue is properly accounted for. NetSuite has designed the system to ensure these new requirements can be managed easily and efficiently. Once the rules and requirements are defined, the new IP contracts can be quickly entered into NetSuite with the previously defined parameters. NetSuite automates the entire process, helping to ensure that the current IP contracts are accounted for and revenue is accurately captured

The new rulings also specify guidance on transaction types that are not considered mainstream, including but not limited to: noncash consideration, rights of return, supplier repurchase, warranties, nonrefundable upfront fees, consignment and bill-and-hold arrangements. In all cases, a company that can define the parameters and then integrate them into NetSuite, will benefit from streamlined and automated RevRec accounting - not unlike what is done for the purchase, addition and depreciation of fixed assets.

While compliance is the objective for the new and evolving RevRec rules and standards, servicing the customer remains paramount. Using traditional systems make BOTH compliance and maximizing the customer experience very difficult to do. There are RevRec offerings on the market today, but they are stand alone and require integration with the financial and operational systems which increases complexity and massively reduces efficiency. The essence of NetSuite is that all aspects of a business exist on a single platform – allowing any company to ensure RevRec compliance while increasing efficiencies and most importantly maintaining customer satisfaction.

NetSuite has packaged the experience gained from tens of thousands of worldwide deployments over two decades into a set of leading practices that pave a clear path to success and are proven to deliver rapid business value. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there's continuity from sales to services to support.

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