In my last article on upcoming ASC 606 changes, I covered compliance timing for public and private companies and highlighted the impact it will have on your software or services business. You likely came away with a clear picture that surviving this change requires technology intervention. Let’s look deeper into what you need to consider as you make the adjustments in your business and how Intacct can help you tackle these looming changes.
The FASB and IASB guidelines detail five steps to achieve compliance. I’ll touch on each of these steps and point out how the Intacct solution turns daunting and seemingly impossible chores into the possible and easy tasks.
1. Identify contracts with customers
As a software or services company, you likely enter into multiple contracts with clients. Where contracts have inter-related “performance obligations,” the new standard will typically require you to treat multiple contracts with a customer effectively as one contract for the purpose of revenue recognition. In other words, if contracts have been written in quick succession or have co-dependent obligations, perhaps around services, penalties, or delivery, they should be treated as one.
Intacct’s answer to the contract issue
Intacct has taken the approach of making the financial system “contract aware.” Rather than putting the burden on you to search around linking up revenue and expenses related to a contract, Intacct created the contract object that pulls all the relevant information about a contract into one place. You can look at the group of contracts pertinent for a customer, understand performance obligations between them, and have clear transparency when the need arises. By tying the front office (Salesforce) to the back office (Intacct), we help ensure your opportunity management and financial management system are working in unison around the contract—otherwise it’s easy for creative, non-standard deals to fall through the cracks and end up causing downstream revenue recognition issues.
2. Manage performance obligations
Think of a performance obligation as basically a set of goods or services the customer can benefit from without depending on other goods, services, or promises. With the new rules, performance obligations can open a can of worms for companies. For example, a services component that is part of your delivery that also requires significant modification to the product turns the service and product into one arrangement, even though they seem like two line items on the invoice. And those never ending add-ons to your product—they get rolled in as one performance obligation as well.
Renewal terms are another area that you will see an impact, especially where sales people get creative to close deals. Inconsistent renewal terms, if not properly spun off to additional performance obligations in a way that can be categorized and managed at renewal time can become another headache. Can you imagine having to renegotiate renewals with a customer just because your financial software can’t handle it?
Intacct’s approach to the ever-shifting performance obligation
Intacct handles this issue by taking your add-ons, upgrades, or discounts and rolling them into the contract. We then take care of the hard part—we re-allocate the revenue and re-amortize the expenses to keep you in compliance. We also let you create a variety of templates to help you flexibly handle a variety of terms as those renewals start to roll in. Try doing that with spreadsheets over and over and over.
3. Determine the transaction price
Under the new rules, the transaction price isn’t necessarily set at the time of the transaction. You have to work in other concerns. Can the customer reverse the transaction? Do you offer incentives or penalties based on delivery? Essentially, what’s baked into your SLA that can affect revenue recognition? And are these standardized or handled on a contract-by-contract basis? These price issues, including things like discounts and financing, all fall under variable consideration and need to be dealt with in your revenue allocation. To properly handle variable consideration, you need a clear picture of historical pricing and discounts across an array of contract types. You then need to bake that intelligence into future contracts.
Intacct adds visibility and flexibility to establishing price
From VSOE to fair pricing, Intacct has a long history of helping companies get to the right transaction price and variable consideration is no different. We’ve built these capabilities into Intacct Contract and Revenue Management from the start. We automate the tasks of applying variable consideration for standard contracts and help you quickly identify outliers, so you can handle them with minimal effort. Using templates, you set standards in terms and pricing that you need to ensure collectability of the contract. The goal is to keep you scalable so you can keep moving forward.
4. Allocate the transaction price
Getting to the transaction price is only half the battle. You then need to properly allocate for each performance obligation across the delivery terms of the contract. If you’ve ever tried to do this with spreadsheets outside the system of record, then you know that it can quickly spiral out of control. Even without the added concerns of shifting performance obligations, you simply can’t manually maintain the demonstrable standardization to survive an audit.
Intacct gives you repeatable allocation
Intacct’s revenue recognition templates and schedules allow you to set controls on how revenue gets recognized for each performance obligation. You stay in control with configuration options that let you determine the methods of allocation. On a day-to-day basis, you don’t need to worry whether each element has been properly accounted for as part of the whole. The system just handles it, and you enjoy the freedom of focusing on high-value work instead of managing spreadsheets.
5. Recognize revenue when or as obligations are satisfied
Establishing “when or as performance obligations are satisfied” has often been a tricky point for companies. The new rule provides specific guidance on measuring progress toward completion. It’s vital to setting both revenue recognition and expense amortization. With the new rules, you not only allocate revenue, but you amortize expenses over the term of the contract. This doesn’t mean the two have to follow the same terms, but it does mean that you have to make sure that both of them align in a logical way with the delivery of the performance obligations.
Intacct puts you in control
With everything tied together in the contract, including revenue and expense templates, you get a clear picture of how the two are aligned and how they match up with delivery of the performance obligation. Even billing flows into the contract—a big bonus for companies with complexities like usage-based billing. You don’t have to bring accounting to a halt at period close to reconcile billing, revenue, and expenses to ensure compliance. It’s done for you in real time. This beginning-to-end automation of the revenue process ensures that accounting is never the bottle neck.
As you may have gathered from the five steps, Intacct has created an elegant solution to some complex issues. At each point, you can engage a technological solution to automate and standardize your processes. In our next article on contracts and ASC 606, we’ll dive into the before, after, and how Intacct helps you manage the change.
The new ASC 606 and IFRS 15 accounting standards—some of the most far-reaching changes to accounting since Sarbanes-Oxley—are only a few quarters away. Get ASC 606 Resources such as news, assets, and learn about the advantages Intacct provides in helping you address these changing rules with Intacct Contract Revenue Management and Contract and Subscription Billing.