Accounting as a Start-Up Part I: Revenue Recognition Realities for Tech Companies

ASC 606 — a phrase that has struck fear into the hearts of leaders and accountants at companies of all sizes. The new revenue recognition standard has presented new challenges in transitioning from old industry-based standards to the common guidance that exists today — and it is now a reality. While publicly traded companies have been reporting under the guidance for a year now, private companies will be completing their first reporting periods under the new standards this year.

Many Are Still Unprepared for ASC 606

This change is arguably one of the most challenging for companies in the software, technology and service as a software (SaaS) industry, for whom the new standard has required a change in systems, processes, controls and documentation to become compliant. 

For some companies, the change has been slow. Even though the implementation deadline has passed, many private companies are still working to update their internal policies and operations, and to complete the official transition before the end-of-the-year audits. This slow adoption means that companies like yours have little room for error, as there is no “testing period” or transition methodology to ensure that you are doing things right. 

While private companies won’t face the same scrutiny from stockholders that public companies do during an earnings call, the change in standards could affect a funding round or valuation, as well as present challenges during audit season. This creates a challenging reality for companies, especially those that haven’t committed the time, effort or resources to preparing.

The New Reality: Stumbling Blocks on the Road to Compliance

While you may have been slow to make the transition and are currently working to catch up, you can now see the challenges that other companies like yours have faced. Among the top challenges you may see, the following have presented the largest pain points:

1. Revenue Allocations

Part of ASC 605 but less stringently regulated, ASC 606 presents significant changes to the way revenue allocations are completed. Under ASC 606, you now must report revenue allocations and do so in much greater detail than under the previous standard.

Subscription revenue, contract and license renewals, and options by a customer to acquire an additional copy of a delivered license present their own challenges in allocation and tracking.

This means that if you manage contracts in your CRM and accounting in your ERP, these two solutions can’t operate in silos. With varying levels of contract complexity and pricing, contract modifications and details need to flow seamlessly between accounting and CRM.

A process involving manually entering or reconciling contracts between solutions won’t scale — especially if you’re handling hundreds or thousands of new and existing contracts. 

For more information on connecting CRM and ERP, we invite you to read our blog on the importance of the quote-to-cash process at tech companies.

2. Performance Obligations

One of the toughest changes software companies have faced is that of performance obligations. With the move from “satisfaction of contractual terms” to “transfer of control of goods or services,” the new standard could change the timing of revenue, especially if your technology requires customization.

Under the new standard, you need to be able to bundle products and services for billing, giving you more control over when and how you recognize revenue.

3. Matching Contract Costs to Contracts

Paired with the complexities of recognizing revenue, companies face challenges in deferring the costs of contracts as well. Whether there is consideration paid to secure the contract, sales commissions, or anything else of the like, you need to be able to match these to the contract. Reporting of royalties “on a lag” is no longer permitted, and the process of matching contract costs to contracts over a year is another issue.

With complex subscription billing — especially usage-based billing — having an accounting system that supports full order-to-cash data integration will save loads of time. To make this happen, businesses need to find a solution that delivers connectivity across all elements of the business, giving technology companies the ability to see a clear picture across billing, revenue and expenses.

Bracing for the Reality: It’s Time to Act

At Wipfli, we have helped public and private companies in a wide range of industries prepare for their transition. Knowing how hard many companies have had it in making the switch to the new standards, you can’t afford to wait any longer. 

For all organizations, the impact of the new ASC 606 standard extends well beyond basic accounting policy. To prepare for what is considered the largest accounting shift since Sarbanes-Oxley, you will need to scrutinize many aspects of your business and its accounting technology. There is significant risk in delaying implementation any further.

With the right ERP solution and the assistance of one of the leading accounting firms in the nation, you can implement the technologies, policies and processes you need to maintain compliance. Get to know more about our work with Sage Intacct; download the free guide, Six Rules for ASC 606 Readiness; and contact us to learn more.