Back to Billing Basics: Revenue Recognition

At Gotransverse, we spend a lot of time in the weeds, looking at the nuances of agile billing and all it entails. (We can’t help it; we’re obsessed.) But as we kick off the second quarter, we want to spend some time going back to basics, with overviews of some of the key elements of billing and critical billing platform functionalities.

We’ll kick off revenue recognition. This is needed in the final piece of the quote-to-cash process — the one that enables businesses to claim the money they earn as a result of all their other efforts, so they can reinvest it in talent, product development, marketing, and all those initiatives that continue to grow the business.

What Is Revenue Recognition?

Revenue recognition is the process by which businesses (with regulatory guidance) determine when they can record revenue in the general ledger. The general principle is that revenue should only be recognized when it has been earned — not just when the payment is collected.

This is fairly straightforward when you’re selling individual products, trading your merchandise for your customers’ money right on the spot. The revenue is earned at the same time as the payment is collected, so it can be recognized right away. But as business models get more complicated — as you introduce subscription and usage-based offerings — so does revenue recognition. When customers are paying in advance, whether on an allowance, as a stored value, or any other consumption-based model, that revenue can’t be recognized until you have delivered the goods or services they’ve paid for.

Managing Complex Revenue Recognition

These complex billing practices are becoming realities for more and more businesses as customer demands continue to grow and evolve, making agility a critical driver of success. But with customers operating on consumption-based models, with varied start dates, usage rates, and payment plans in effect, it becomes all but impossible to manage revenue recognition in any sort of manual way. Keeping the general ledger up to date becomes a full-time job (or more), and the risk of errors, delays, and compliance issues grows dramatically.

So, for businesses with high volumes of transactions or any combination of subscription and/or usage-based models, automating the process with a configurable, rules-based revenue recognition engine becomes essential. We recommend looking for a billing platform that offers a native subledger that is capable of applying complex revenue recognition rules specific to your company, aligned with regulatory compliance, and flexible enough to quickly address any changes in business needs or regulatory guidance. These capabilities simplify revenue recognition, minimize the risk of inaccuracies, and lead to better future forecasting, cleaner audit trails, and faster times to close the books — especially for consumption-based offerings.

Ensuring ASC 606 Compliance

Established in 2018, ASC 6060 is a set of rules. From the Financial Accounting Standards Board (FASB) that standardizes revenue recognition methodologies and principles. These guidelines and processes have been organized into five steps:

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the overall transaction price for the contract
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when performance obligations are satisfied

We break down ASC 606 in more detail here, but the biggest takeaway is that these regulations raise the stakes on business’s revenue recognition practices, as compliance failures could lead to significant consequences (beyond inconvenience to customers and the finance team). As such, many companies have had to reevaluate their billing technology to implement systems that that allow for efficient, accurate, and compliant revenue recognition practices on a variety of billing models.

Making Revenue Recognition Second Nature

The Gotransverse platform’s native revenue recognition engine is designed to create accurate general ledger entries for limitless pricing models — on a fully automated basis. The platform expedites the revenue recognition process, provides the flexibility to enable growth through change, and assists customers in maintaining full compliance with ASC 606 and other regulatory practices and standards.

Read more about our revenue recognition capabilities, and when you’re ready, we invite you to request a demo to learn whether Gotransverse is the right billing platform for your organization.