Revenue recognition is a pair of words that used to traditionally strike fear and anxiety in the hearts of accountants at the end of a financial period. Now it’s hard to have a conversation about billing and back-office operations without talking about rev rec (that’s what the cool kids call it), and there’s a reason for that: ASC 606 (or IFRS 15 if you’re outside the USA). It’s a change in the accounting standard that modifies the way businesses are allowed to.. well, recognize revenue. We’ll get into the mechanics of that later, but for now, know that it changed the way businesses report on revenue, changing what their income statement and balance sheet ultimately reflected. That is very important to any business. Not everyone was affected by the transition, and many companies were able to continue to account for revenue the same as always. But for those that it applied to, they are forced to rethink the way they run their business from quoting and pricing all the way to contract structures and invoicing. The sheer magnitude of the reach for those that it affects has vaulted a once unrecognized accounting principle (rimshot please) into the spotlight.
So before we dive into the kinds of challenges that ASC 606 can create for a company, let’s take a second to establish some basics. Rev rec should not be confused with billing if you use accrual basis accounting. It has nothing to do with how or when you book your accounts receivable, but the offset to that entry is usually to a revenue account, and that is where we are concerned. The principle of revenue recognition asserts that regardless of what you charge or bill someone, you haven’t earned that revenue until you complete or deliver whatever it is you billed or will be billing them for. So if I sold you a lawnmower, then the minute I give you that lawnmower, I have earned that revenue, regardless of if you paid me or not. If I promised to mow your lawn, then I haven’t made that revenue until I mow your lawn. If I tell you I can give you access to a website that will provide you with real-time stats on that lawnmower whenever you want for a monthly fee, then I earn that revenue evenly over every day of that month that you have access to. Simple enough, right? Not so fast!
This is where ASC 606 steps in and says hold up, wait a minute! Let’s take the three examples from earlier, where I sell you a lawnmower, mow your lawn and give you access to the website, and I sweeten the deal by offering you all three as a bundle for one low discounted price! Is this scenario starting to look familiar? Most companies can provide you with a better price and steeper discounts overall if you purchase multiple items/services at once by ‘borrowing’ from individual items with a higher margin to guarantee a certain margin on the overall deal. The 606 regulation says you need to recognize that revenue based on the components of the agreement and the percentage of the revenue those components would represent to the total if sold at their stand-alone prices. Huh? Well, let me simplify that, and I mean simplify.
Let’s say if I sold you all of those services (the lawnmower, actually mowing your lawn, and the website) individually, your total would be $600, with the mower costing $400, and the other two items being $100 each. So the mower is generating two-thirds of the revenue, and the other two services each makeup one-sixth of the total. However, when I sell it to you as a bundle, and since I’m that nice a guy, I’ll cut the whole thing down to $400. That’s an excellent deal, right? Well, here’s what happens on the back end thanks to 606: when I deliver that lawnmower to you, I can only recognize two-thirds of that $400, even if it cost me $300 to acquire it. I’ll give you a minute to grab a calculator and do the math, but by now, I hope you are beginning to see how this can start to get complicated, and trust me, it gets a lot more complicated! Until this change, many companies were able to get by handling their rev rec in siloed spreadsheets hidden away from the view of everyone except a select few chosen individuals, like the Lord of the Rings. The introduction of ACS 606 touches so many parts of the business that many are struggling to capture this in a spreadsheet alone accurately, and this has prompted many companies to look for a solution that can integrate with their current system.
Ok, so now that we all can understand, at least at a high level, why people are suddenly obsessed with rev rec, let’s talk about what can be done to address this in Salesforce. The Force.com platform offers a robust set of functionality that can be leveraged to meet the needs of customers. Utilizing the ability to create and configure everything from objects and fields down to the permissions around those items, a construct can be created and coupled with the Salesforce rev rec tool to capture all the necessary data points for a customer’s requirements. Additionally, an experienced partner can integrate that into the existing financial system of record with ease and elegance. A5 has the tools and depth of knowledge to handle the technical setup and integration to ensure success. Beyond that, and more importantly, we understand revenue recognition and the full spectrum of complexity it can bring, and are prepared to be your trusted partner and guide. Though most companies may have similarities, and the change in standard applies to everyone, we know that the application of 606 will vary based on the specific business model. Our advanced knowledge of revenue recognition and our vast domain knowledge across multiple industries allows us to quickly and expertly deliver basic data structures and integrations, leaving us the time to understand and focus on each customer’s rev rec specific needs. Our goal is not just to implement a product, but to deliver a thoughtful solution that can scale with your business and add value to your operations.
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