The Truth Behind Being Ready for the New ASC 606 Standards

I am sure you heard it all before from a vendor trying to sell you a new ASC 606 complaint solution:

• the new standards are going to shock the world
• finance teams will not be able to keep up
• you better be wary, or you will be caught off-guard
• if your system is ASC 606 compliant, your work is done

The reality is quite a bit different, and it’s dangerous to assume that a new software solution will deliver “compliant” results as advertised. Having spent years working with the complex revenue recognition criteria of the software world I can tell you that the application of revenue recognition is simple mathematics that align with the fundamental principle of how much revenue to recognize and when. The hard part for anyone charged with managing revenue recognition is establishing, managing, and automating the criteria to determine the methodology for the application of revenue recognition. The evolution of this should be documented in your Corporate Revenue Recognition policy.

The new standards will require executive teams to plan how they intend to recognize revenue and determine what impact (if any) it will have on how they have been recognizing revenue under the old rules. Finance teams will need to work with their auditors to develop a plan around how to adopt the new standards, and the Board of Directors will need to determine how to best communicate changes to investors. I have found over the years, that when it comes to revenue recognition or any subjective accounting estimate, everyone has an opinion. It is important to lay the groundwork in a published revenue recognition policy that will give your finance staff clarity regarding how revenue recognition should be approached.

One important fact about the new standards is the tremendous amount of flexibility that will be afforded companies around how revenue recognition should be applied. This is important in today’s digital world. We are starting to see the emergence of “pay as you go” and subscription-based pricing models, and companies that dominated in the 20^th century are being forced to change or be disrupted. Jeff Immelt, the CEO of General Electric, is transforming the 100+ year old business into a platform to support the emergence of the Internet of Things in a move he refers to as “probably the most important thing I have worked on in my career.” The change in business models will require finance leaders to be flexible in ways they may never have anticipated.

While I have argued that the application of revenue recognition is straightforward, you still need to think in advance about how to manage at scale. Any proficient accountant can build out a revenue schedule on an individual transaction, but when transaction volumes begin to scale into the hundreds, thousands or even billions, it becomes a challenge to keep up. Even subtle nuances such as manual work-arounds, one-off journal entries and/or manual edits can impact your ability to scale. That is where most software vendors fail, as they do not provide customers with the flexibility they need.

That is why I am concerned with the recent batch of software vendors that claim their solutions are ASC 606 compliant, as this implies that there is a one-size-fits-all approach. The real question should be “how flexible is the software solution, and can it be tailored to align with my company’s revenue recognition criteria so that we can perform at scale?”

The questions I would ask when evaluating a revenue recognition solution are the following:

1. How does the solution allocate revenue from multiple elements?
2. What “triggers” can be established to manage the recognition of revenue?
3. How does the system handle modifications to existing contracts?
4. How can I apply judgment to make modifications to the revenue schedules?
5. How can I see that the revenue results align with my expectations?

A successful revenue recognition implementation also requires proper planning. A clearly defined revenue recognition policy that aligns with the business processes needs to be established. From there, research should be done to find software vendors with systems flexible enough to satisfying the specific - and often custom - revenue recognition needs. Then both the software vendor and the purchasing company must have knowledgeable implementation teams committed to thoroughly testing specific use cases to ensure the accurate execution of the revenue recognition policy.

Gotransverse meets all the criteria for a highly scalable and flexible system that aligns easily to myriad revenue recognition use cases and needs. Here at Gotransverse, we pride ourselves on not only our platform’s impressive ability to adapt, scale, and be easily configured, but also on our hands-on and highly skilled implementation team’s commitment to ensuring the solution is a perfect fit. You can get your products to market faster, maximizing your revenue opportunities, and make sure that revenue is recognized according to your specific revenue recognition policy.

To learn more about how Gotransverse can help with your monetization and revenue recognition needs, reach out for a free 30-minute consultation.