October 25 by Michael Carrell
We were excited to see so many people attend our recent webinar, Automating End-to-End for ASC 606 / IFRS 15 Compliance, as well as hear such good interaction about the upcoming standards.
Most of the audience came from a Finance background, so they know full well that deadline for compliance with ASC 606 / IFRS 15 is coming soon: December 15th, 2017 / Jan 1st, 2018 for public companies. They know that these GAAP guidelines will synchronize how United States and International standards handle revenue from contracts with customers. They know that more than 70% of all revenue earned by businesses is covered by a contract of some sort. Particularly so for large enterprises, who offer a complex blend of products (both physical and digital), subscription services, professional services, and milestone-based services.
Real ASC 606 Change Comes from Within
Halfway through 2017, PricewaterhouseCoopers surveyed companies how they planned to comply with the new standards: 75% of public companies were assessing the impact but had not started implementing; half had not chosen a method of adoption. Now as the deadline draws near, our in-session survey showed that 38% were still planning how to handle this, 29% had not started planning. The number reporting readiness and automation? Zero.
Digging into the details, specifically what was still unknown to them was how to automate so that mid-cycle changes to contracts or assets purchased didn’t wreak havoc on the manual processes and spreadsheets holding the delicate balance to comply with ASC 606 / IFRS 15.
All Five ASC 606 Compliance Steps in the Same Transactional System
Identifying the contract with the customer, whether it’s an activated agreement in Contract Management or a proposal of goods/services from a Configure Price Quote is the first step. Second is identifying the performance obligations of products and services sold. Third, determining the transaction price coming from the contract terms and discounts applied at time of sale, along with commissions, rebates, and promotions as a part of cost of sale, all of which affect the expected consideration. Fourth, revenue allocation rules contained in the product catalog, proportion the transaction prices by stand-alone selling price. And finally, the fifth step, recognizing revenue as obligations are fulfilled and according to rules set up in Quote-to-Cash.
The point is this: All of these transactional steps happen in Apttus Quote-to-Cash. It’s pretty plain to see that having the schedule of revenue recognition in the same system where transactions occur (and on the same data model) is an advantage over having a separate standalone system for revenue recognition. A separate revenue recognition system may be the solution from some narrow-focused vendors: subscription-only billing vendors, or incentive compensation management vendors, or CPQ-lite vendors, for example. Apttus is taking a complete Quote-to-Cash approach to revenue recognition and ASC 606 / IFRS 15 compliance.
Automating for Mid-cycle Changes
When manual efforts or spreadsheets are the mechanism for ASC 606 / IFRS 15 compliance, the first time to set up a contract with a customer, may be manual, but it works, and it’s the familiar way. Why spreadsheets at all? Yes, Excel spreadsheets are the go-to tool for finance and accounting teams. They’re great for reporting and analysis, but not ideal as a transactional system. When companies ventured into new business models like subscriptions, professional services, or usage-based services the new business models diverged from existing ERP or financial accounting systems capabilities. So they created complex, custom spreadsheets to handle transactions. Then along comes CHANGE.
“The only thing that is constant is CHANGE.” – Heraclitus
What is a mid-cycle change? The original contract (identified obligation) might be for 1 year, but sometime during that year, before the contract ends, your customer wants new or different products/services.
Sales, CSMs, distributors, channel partners, and customers themselves access information in a Quote-to-Cash system. They transact! For example, they upgrade, purchase add-on products, swap 5 of these for 3 of those, draw down quantities of physical goods, provision licenses of digital services, enter change orders to SOWs, or decide to add a 2 year warranty. Things change, all the time.
When session attendees were asked: “What are the challenges you foresee in ASC 606 / IFRS 15 compliance?” Nearly 40% responded that it’s difficult to handle mid-cycle changes to contracts/assets.
It’s key to have all the information about contract obligations, contract pricing, obligations and entitlements, discounts, on a single data model. And the information comes directly from the Quote-to-Cash application your customer-facing team members use to accomplish their jobs: CPQ, Contracts, E-Commerce. We showed how the moment a change to an asset occurs, the inherent process automation handles the following:
• Entitlements/Assets-owned are adjusted
• Digital services are automatically provisioned/de-provisioned
• Contract termination dates are adjusted, co-terminus
• Renewal opportunities are created, when appropriate
• Invoicing schedules are adjusted for new fees owed and credits due
• New transaction prices are calculated for ASC 606 compliance
• Transaction prices are proportioned
• Revenue recognition schedules are updated for clear reporting
Automation for mid-cycle changes means dramatically less manual effort for the Finance Team at quarter end. And more accurate reporting for smoother compliance audits.
Check out the recording!
Want a Second Chance to See the Session?
Check out the recording of the presentation and demo Countdown to Compliance ASC 606 / IFRS 15.
• You’ll see a recording of session, demo of the flow, how information flows from Contracts/Quotes through Orders/Invoices and into Revenue Recognition working in lock step inside one Quote-to-Cash system.
• Discover the effect of mid-cycle customer upgrades & how Apttus automates for mid-cycle changes!
• See a demo of Apttus Intelligent Quote-to-Cash