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The Realities of Revenue Recognition for Tech Companies

Jun 24, 2019

While ASC 606 was designed to bring consistency to the way companies recognize revenue from contracts, the long-term simplification comes with short-term complexities. 

Will the standard make life easier for finance professionals a decade from now? Yes. However, the path to updating current procedures and contracts definitely has presented challenges for companies. 

This is especially true for tech companies, who will have to rethink many of their contracts and may have to restate revenues. 

To address this, the Wipfli team presented an informative new webinar titled, The Realities of Revenue Recognition for Tech Companies. In this webinar, expert presenters Brent Neitz, Senior Manager, and Brian Dietz, Partner at Wipfli LLP discussed the new standards and timing and the impacts these standards have on technology companies. Available on-demand here, you can learn more about the topics discussed below.

A Move From Rules-Based Standards to Principles-Based Standards

One of the main reasons this standard is so complicated is that it replaces more than 200 industry-focused standards with one overarching principle-based standard, which aims to: 

  • Remove inconsistencies and weaknesses in revenue requirements
  • Provide a more robust framework for addressing revenue issues
  • Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
  • Increase reliance on estimates and judgments
  • Provide more useful information to users of financial statements through improved disclosure requirements

Long-Term Simplification, Short-Term Complexities

The amount of changes varies from industry to industry — one company may need to rethink the definition of contract, another may need to rethink a transaction price and yet another may need to change processes for timing revenue recognition. 

However, one of the most heavily affected industries is technology, with software companies facing significant changes that need to be addressed throughout the process:

  • Step 1: Identify the contract with a customer 
  • Step 2: Identify the performance obligations in the contract 
  • Step 3: Determine the transaction price 
  • Step 4: Allocate the transaction price 
  • Step 5: Recognize revenue when or as the entity satisfies a performance obligation

The Path to Adoption: How Tech Companies Can Approach Adoption

With ASC 606 now in effect for public and private companies — after nearly five years of warnings and clarification — the time to act is now.

Set to affect management, finance, legal, technology, and the sales department in different ways, the new standard has a ripple effect on the entire business. 

From discussions with the board or investors over changes to revenue to reassessing contracts to making changes to the commission and bonus structure, you need to take steps. 

In this, the webinar discussed a ten-step framework for adoption, with three elements of the plan requiring the most change:

  1. Get Started
  2. Build a Cross-Functional Team of Leaders from Impacted Departments
  3. Enlist the Help of Outside Advisors Who Know What Actions Need to be Taken
  4. Assess Your Technology Platform
  5. Build Controls over Processes
  6. Manage Your Data
  7. Decide When and What to Disclose
  8. Take Time to Ensure Everything is Done Right
  9. Develop Internal Training and Communication Plans
  10. Reassess and Participate in Long-Term Resource Planning

The three bolded steps — assessing your technology platform, building controls over processes and managing your data — are often the hardest and most time consuming for technology companies. Many financial systems are still ill-equipped to handle the transition, making the processes slower, more inaccurate or more painful than it should be. 

If you use spreadsheets for things like billing, accounting, and forecasting, your finance people will have to do at least twice the work, using twice the spreadsheets to handle dual reporting requirements. Each contract will be harder to track, and since spreadsheets are notorious for errors and inaccuracies, your business can be at risk. 

The right solution, however, can deliver financial management that integrates with your CRM to increase accuracy and simplify billing while giving you additional control over your subscription revenues

Ready to Learn More?

The transition to the new revenue recognition standards is welcomed by some and dreaded by others. With many companies still vastly unprepared or underprepared for the changes, our webinar featured two experts discussing even more of the challenges and opportunities that this update presents for tech companies, and is a must watch if you are still in the early stages of the transition. 

In this webinar we discuss these standards and how finance teams can account for transactions under the new guidelines. You will learn about:

  • Revenue recognition timing
  • Bundled and integration services
  • Updates to policies, systems and processes
  • Modifications to legal agreements
  • Selling through distributors
  • Post-contract support
  • And more!

Click here to access our webinar.

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.

Author(s)

Dietz_Brian
Brian Dietz, CPA
Partner
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Brent Neitz
Brent Neitz
Senior Manager
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