Posted by John Peacock, Senior Product Manager, Software
While there looks to be a slight reprieve on the horizon for those dreading the current timeline for adoption of the Financial Accounting Standards Board (FASB’s) new revenue recognition standard, many companies are beginning to lay the groundwork for the new rules. In fact, judging by the attendance at revenue recognition-related sessions at our SuiteWorld conference, preparations are well underway already.
The new Accounting Standards Update (ASU) 2014-09: Revenue from Contracts with Customers was created jointly by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board with the promise to simplify and create uniformity around the revenue recognition(opens in new tab) process. It is currently scheduled to go into effect in 2017. However, on April 29 the FASB issued a proposed Accounting Standards Update (ASU(opens in new tab)) that would defer the effective date of the new revenue recognition standard by one year for public comment.
That potential delay takes a problem that with a seemingly unmanageable timeline for most companies and makes it manageable – though the significance of the effort remains unchanged.
It was clear from the three standing room only sessions at SuiteWorld around our revenue recognition capabilities that our customers are certainly focused on getting ready. So are we.
Notably, we demonstrated some new functionality to improve how to set up items, specifically the fair value of items. Say, for instance, that you have a support or maintenance SKU associated to a specific product line. That item has no absolute ‘list price’ (and even if it did, that doesn’t necessarily mean anything when it comes to revenue recognition anyway), but rather you charge based on a percentage of the licenses a customer owns within that product line. NetSuite provides the capability to calculate the fair value of that maintenance/support item within the context of any given contract accounting for deal specific discounts, negotiated rates, etc. Revenue will then be allocated appropriately across all of the elements.
Additionally, we’ve built in some flexibility to account for the full revenue contract lifecycles. This is important in software, where a customer might buy a software package but soon thereafter realize they need more licenses, an upmarket version or other changes to be able to use the product. NetSuite provides the capability to account for those two separate orders independently or to combine them and account for the two orders as one single revenue contract.
We’re committed to continue building additional flexibility and enhancements to our next-generation revenue recognition capabilities. It’s one of the great advantages for companies running cloud-based software -- everyone using the new revenue recognition engine will get those updates automatically. NetSuite is ready to help our customers prepare for the new standards, whether they come in 2017 or a year later.
It’s also worth emphasizing that the impacts of 2014-09 are not limited to software companies –industries such as manufacturing, retail and services will see as much or more disruption as revenue reporting for multiple element arrangements expands its reach. Any company that sells physical goods with a service alongside it over a period of time is going to need to be able to recognize that revenue appropriately, and if the Internet of
Things is going to start connecting everything it will inevitably lead to more services and ongoing revenue. Better get prepared now and start thinking about how that might impact your business in the near future.
In the meantime, we’ve drafted a white paper that offers some advice for any company that knows it needs to prepare for the new revenue recognition standards(opens in new tab).