In an earlier post, I discussed many of the key challenges in accounting for revenue under ASC 606. In my last column, I detailed the four key system requirements you should look for in any kind of automated revenue recognition solution.
Beyond those basics, any technology solution will also need to have the functionality to handle dual reporting capabilities, provide flexibility for customization of complex revenue streams and to produce essential reporting necessary to comply with the enhanced disclosure requirements under ASC 606.
1. Dual reporting capabilities
ASC 606 provides a choice of transition methods: full retrospective adoption (essentially a restatement of each prior period presented) or modified retrospective adoption (cumulative effect of adopting the standard recorded to the opening balance of retained earnings). Regardless of the approach selected, a period of “parallel reporting” will exist in which the accounting records will need to be maintained under both the current and new revenue recognition rules. This is likely to create data, process and system challenges. A technology tool must have a solution to accommodate dual reporting needs.
2. Flexibility to customize
Notwithstanding the specific requirements of ASC 606, every company is different and no two companies’ revenue streams are identical. Thus, a technology solution must provide for customization of any out of the box solutions to address your specific revenue transactions. Don’t underestimate the complexity of your revenue contracts. Recognizing revenue gets even trickier under ASC 606 so customization will likely be necessary for many companies.
3. Enhanced reporting
You will need more data to comply with the new reporting and disclosure standards. Disclosures must contain enough depth for users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Some of this information has not previously been captured or required, such as revenue recognized during the period that is not the result of new sales during the period. Some of the data may have been included in qualitative disclosures previously but now must be quantified. You will also need sufficient data to record journal entries, especially to identify contract assets, liabilities and any related accounts receivable at an aggregate level, not just at the contract level. This sounds easier than it really is. Identify what reporting and disclosure needs you will have (maybe draft mock reports) and then ensure that the technology solution you select can provide that reporting easily.
ASC 606 will likely impact how revenue is recognized and accounted for at your company. If you have a significant volume of contracts with customers or your contracts are complex, you are probably considering an automated solution for revenue recognition. Select the right system for you that can handle your ASC 606 accounting, reporting and disclosure needs – as well as integrate revenue recognition with invoicing and collections, but also have the functionality to disassociate those processes.
You will need a flexible system and anticipate customization if you have more complex revenue arrangements. Rather than looking at this as a cash outlay for an accounting system, look at this as an opportunity to improve all revenue-related processes for longer term efficiency and profitability.