Take the guesswork out of revenue recognition with Transverse | Gotransverse

Observe due measure, for right timing is in all things the most important factor.
- Hesiod.

hesiod

Timing has always been a big deal, even in ancient Greece. With today’s complex subscription-based products and services, revenue-recognition timing—and the specific details of what happened—are getting to be an especially big deal. Timing errors can lead to massive write-downs or even prison. Even when you fully trust your accounting team, the SEC filing process is nerve wracking. If you talk to three different auditors about how you should recognize revenue for a complex subscription-based product or service, you’re likely to get three different answers, depending on their interpretation of when the service occurred or when customers received the benefit of their purchase. And no matter when you recognize the revenue, you also have to be able to show the SEC specifically what happened and when. In short, “We don’t know” is not a good answer.

That’s why revenue recognition in the General Ledger (GL) doesn’t cut it for complex subscription-based businesses. It simply lacks the detail needed to satisfy SEC requirements. At the same time, the data entry associated with most traditional accounting processes are time intensive and error prone—challenges that are especially problematic as the number of customers and transactions continue to grow.

Why the GL falls short in the new world order

Most GL systems are based on a standard, relatively straightforward business model in which revenue is recognized as soon as the customer buys a good or service. That’s fine, if your offerings and services are fairly static and don’t require special accounting considerations. For everyone else, it’s a serious problem. Take a company selling content downloads, for example. If the company charges $10 for 10 downloads, the revenue may need to be recognized as the individual downloads happen. If the service is purchased on a “use-it-or-lose-it” model any unused portion may need to be recognized as of the date it is “lost”.

Or consider a company that provides a product subscription for a set monthly rate, but then sells a training package. The training may need to be recognized as the service is used. Recognition could happen on an hourly basis, daily, once the training has been fully delivered, or even over the expected lifetime of the customer (as they will get the benefit of the training as they continue to use the service).

For some types of offerings where customer behavior is fairly predictable, schedules may work to some extent, but they include potentially costly assumptions. If your service is provided on an on-demand basis or if the service is dynamically scalable then your customers’ usage of that service may not be predictable. In these types of situations, to ensure accuracy and cost efficiency, you need a better solution than the GL and the morass of manual processes associated with tracking usage for revenue recognition.

Move revenue recognition in the subledger for needed detail and efficiency

At Transverse, we believe that revenue recognition belongs in the subledger rather than the GL. The difference is in the details. The TRACT subledger tracks the minutiae of customer interactions, including details like when they purchased something, when they use it (or parts of it), whether or not they return it and other information that is important for accurate audits. This allows companies to use the GL for summary information about revenue and taxes, knowing they have the necessary details in the subledger to prove compliance with revenue recognition rules without having to make assumptions.

Moving from manual spreadsheet-based processes to automated revenue recognition processes not only helps with accurately tracking key transaction details; it can also significantly increase the efficiency of day-to-day accounting processes. For example, it can eliminate the need for rekeying data and multiple review processes. And the reduction in associated errors may just translate into a better nights’ sleep after an SEC filing. Imagine that.

To learn how TRACT by Transverse can benefit your business, please contact us at sales@gotransverse.com.