June 30 by Michael Carrell
A recent Gartner report titled “New Revenue Recognition Rules Will Impact Finance, Business and Technology” identifies the far-reaching impact on revenue recognition standards on finance, contracts, delivery, and compensation from the new Financial Accounting Standards Board (FASB) Codification – Revenue from Contracts with Customers (Topic 606), otherwise known as ASC 606, and its worldwide counterpart from International Financial Reporting Standards, IFRS 15. Companies in the subscription economy need to pay close attention to the details to ensure compliance.
New Rules, New Impacts
According to the report, non-compliance with the standards can result in a range of material impacts to your business, including:
● Highly visible audits and restatements, in addition to significant penalties
● Inaccurate valuations, credit ratings, and borrowing costs
● Believing you have more money to spend or invest than you actually do
● Leaving money on the table and not investing money that is rightfully yours
The report highlights three primary areas of impact:
● Failure to comply with new financial reporting requirements could trigger audits, restatements, penalties, valuations, borrowing costs and misunderstandings about cash availability.
● While the primary impact will be on financial systems and processes, the ripple effect of ASC 606 will extend into every corner of your business.
● Current technology solutions may be challenged or unable to support new compliance regulations and future business plans.
Plan for Tomorrow, Today
For many businesses in today’s subscription economy, their existing processes and systems may hinder them to comply with new regulations and may obstruct future business plans. Gartner notes that “relying on spreadsheets or manual calculations or trying to reconcile information across multiple systems is often error-prone and less-than-adequate, causing later restatements.”
“By 2022, 70% of mid-to-large enterprise businesses will be using an automated revenue management solution to support complex billing and revenue recognition compliance.” – Gartner, Inc.
According to Gartner, more than two-thirds of mid-to-large enterprise businesses will use an automated revenue management solution to support complex billing and revenue recognition compliance by 2022. Apttus Revenue Recognition is a great example of this type of solution, as Apttus helps companies of all sizes automate their revenue recognition processes and comply with the new guidelines.
Apttus’ revenue allocation rules manage list price, standalone sales price, best estimated sales prices, and residual value, all easily computed leveraging the product catalog and price list shared with Apttus CPQ, the world’s leading CPQ solution. Additionally, revenue split rules make it a breeze to distribute revenue across ERP accounting dimensions. Apttus’ revenue recognition rules allow Finance to control how revenue is recognized for the full blend of products and services, whether it’s recognized at a single point in time, ratably, deferred, or non-deferred.
New Reasons to Automate End-to-End
However, compliance is about more than just revenue recognition and contracts. Compliance affects processes across the entire enterprise, and the automation of end-to-end processes is key. When changes to contracts and assets owned happen mid-cycle, it has a ripple effect on obligations and revenue recognition schedules, as well as the transactional operations of invoice adjustments, billing schedules, credits, and entitlements. The Apttus Solution for ASC 606 Revenue Recognition Compliance is the only solution that allows you to manage all five ASC 606 compliance steps in the same transactional system, leveraging the same shared revenue data model to reduce the cost of revenue recognition and eliminate reliance on manual efforts and spreadsheets.
Gartner offers the following recommendations for application leaders responsible for modernizing finance applications:
● Act immediately if you haven’t already. New standards will impact all types of businesses before 2020, so review and evaluate their applicability to your business. Noncompliance is not an option.
● Perform a company-wide, cross-functional impact assessment and review of current and future business models and plans to reduce business risk and deliver improved solutions to customers.
● Review existing technology to understand the impact of becoming compliant on existing systems and processes. Consider upgrading or replacing legacy financial management systems (FMSs), or embracing specialized solutions that reduce the impact of new requirements, accelerate compliance, and support future business innovation and growth.
According to the report, “over time, even more sectors will be impacted as digital business drives the evolution of new business models in which more businesses will sell services alongside physical goods and embrace usage-based and subscription billing.” These include companies beyond the simple subscription economy who operate in the broader Digital Service Economy, offering a full spectrum blended business models like subscription services, usage-based services, milestone services, after market services, professional services, and complex products.
Gartner subscribers can download the entire report here.