BTerrell Group Blog

Clearing the Fog around ASC 606 for SaaS Companies

Posted by Brian Terrell on Tue, Oct 04, 2016

The new Revenue from Contracts with Customers (ASC 606) accounting guidance impacts companies across many industries, but companies that sell software and related products or services will likely experience some of the biggest changes. In our ongoing attempt to help businesses make sense of this complex topic, we’ll look at the ways in which ASC 606 may change the way software and cloud services companies do business. Clearing_Fog.jpg
There are a number of changes, and we’ll cover just two of those areas in this article, with upcoming articles continuing the coverage.

Post Contract Support – What is it Really?

Under current GAAP guidelines, there is no accounting distinction between the various types of Post Contract Support (PCS) activities that software companies provide to their customers. Things like phone support, bug fixes, and delivery of product updates are all lumped together, with the portion of the contract fee allocated to PCS recognized monthly over the period that the services are supplied.

The new revenue rules require you to more closely analyze the various activities that comprise PCS. It is possible that you should consider some of these activities as distinct deliverables, which would change when you recognize the associated revenue.

For example, say your company sells a software license bundled with support services and the promise of routine updates to the product. Under ASC 606, you likely have three distinct performance obligations with three potentially separate approaches to recognizing revenue. The revenue allocated to the software license would be recognized when control is transferred to the client, while the support and maintenance components would likely each be recognized over time.

But here’s a twist. What if you promised your customer that an upcoming release would include significant specific functionality? In this situation, you might need to allocate a portion of the software license transaction price to this feature release and wait to record revenues from it until the specified upgrade is delivered.

Vendor-Specific Objective Evidence – Who Needs Evidence?

Vendor-Specific Objective Evidence or VSOE sounds imposing and confusing (and it is!), but since it’s all about to go out the window with the new revenue recognition principles, we won’t have to worry about it much longer. Essentially, VSOE comes into play for software vendors that sell bundled software and related products and services. Currently, there are industry-specific rules that prescribe when elements of the bundle can be accounted for as separate accounting units. If they are separated, the fees are to be allocated based on VSOE. These and other industry-specific accounting rules are precisely what ASC 606 sets out to change.

Under the new guidance, regardless of the industry you are in, you must determine whether the deliverables in your engagement are distinct or a bundle, and then allocate a portion of the engagement to each element. For many software firms, this represents a significant change in the terms and conditions of your engagements, and when and how you recognize revenue.

Principles over rules

Generally speaking, under ASC 606, it’s out with industry specific rules and in with broader principles. Yes, principles require more judgment, so it’s always good to seek out your professional accounting advisors when navigating the ASC 606 waters. Especially since some professionals argue that once the new guidance kicks in, companies will be judged guilty of mis-recognizing revenue until they prove themselves innocent.

BTerrell Group works with software and cloud services companies to help them obtain and retain compliance and grow their success. Contact brian.terrell@bterrell.com for a free consultation.

By BTerrell Group, Texas- based Intacct Partner

 

Tags: revenue recognition

Got Revenue Recognition Questions?

Posted by Brian Terrell on Thu, Sep 15, 2016

We’ve got answers.

ASC 606, Revenue from Contracts with Customers, represents the most sweeping accounting change to hit companies in decades. Whenever there are changes this significant, there are bound to be questions. In our continuing look at the new revenue recognition standards, we attempt to Got_Revenue_Recognition.jpganswer some of the most common questions we are hearing from our clients and prospects.

1.        When do I have to make the switch?

The new rules take effect starting in 2018 for public companies and 2019 for private companies. Before you take a deep breath and relax, consider that you need to take action now, as some of the preparation can take significant time and resources, and any customer contract initiated now that extends beyond the start date will be affected.

Note for the overachievers out there – entities are allowed to adopt the new standards as of annual reporting periods beginning after December 15, 2016. There are a few caveats, though, so do your research before taking the early dive.

2.        How can I obtain and retain compliance?

An automated financial management solution and consistent, meticulous record keeping will be your allies here. And be aware that your existing ERP may not be up to the challenge. Among the challenges your financial system will need to effectively handle are:

  • Reallocating revenue when a contract is changed.
  • Dual reporting so that you can see the impact of the changes on your firm’s bottom line.
  • Detailed forecast reports, again based on both the old and the new guidelines, to show your expected revenues, expenses, billed and unbilled revenues and cash.

3.        What are the impacts to my business likely to be?

The changes are sweeping, and will likely affect multiple aspects of your operation. We’ll cover the impacts with the biggest punch in an upcoming post, but below are a few that may not be immediately apparent:

  • Discretion: You’ll be called upon to make more judgment calls and estimates surrounding the hows and whens of revenue recognition.
  • Compensation: You may want to consider possible changes to compensation packages, if the compensation is based on revenue recognition.
  • Taxes: The changes in timing of revenue recognition may result in changes in current taxable income since many entities use U.S. GAAP to determine revenue recognition for income tax purposes. We recommend our clients speak with a tax authority on this matter.
  • Loans: Loans agreements that are impacted by or based on revenue may need to be adjusted.

4.        In a nutshell, what are the changes?

The new revenue standard’s core principle is built on the contract between you and your customer for the delivery of goods and services. The standard requires five basic steps:

1. identify the contract with the customer,
2. identify the performance obligations in the contract,
3. determine the transaction price,
4. allocate the transaction price to the performance obligations in the contract, and
5. recognize revenue when you satisfy a performance obligation.

Throughout this blog series, we’ve been looking more closely at the changes. And (again for you overachievers) you can always review the full text of ASC 606 here.

By BTerrell Group, Texas- based Intacct Partner

Tags: revenue recognition

Have Fun with Intacct’s Revenue Recognition!

Posted by Binbin Zhai on Wed, Feb 04, 2015

Some things in accounting are very frustrating, which make me sometimes doubt my career. Revenue Recognition is definitely tops the list; the multiple recognition methods, slow and complicated spreadsheets, and constant manual maintenance. I feel stressed even thinking about this. Even worse, is when I spot a mistake from a few months earlier.

As a business grows, more revenue schedules are added to the spreadsheet and then, you have to look for a new accounting employee. The cruel fact is that it is hard to find a competent candidate, even if you offer a very good salary.

With the Revenue Recognition feature of Intacct Order Entry, the pain goes away in a snap! It only requires some simple steps.

1)      Create a Revenue Recognition Template for the specific method you need.

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Intacct offers multiple methods including straight-line, milestone, and percent completed. Don’t see anything you like? Use the custom option and create your own method.

2)      Add the Revenue Recognition template to the GL group if the method is required for specific items. The revenue of the items automatically defers when you invoice it.

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3)      If you only need the template on some transactions, add the template to the transaction line on the Invoice detail line.

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4)      If you are brave enough to make it more complicated, such as combining it with the billing template, you can create a custom order entry transaction.

5)      If you set up a manual post schedule, the deferred revenue posts individually or by group with Revenue Recognition schedules.

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6)      If you have project accounting, create a template with Project Accounting as the source. The update on projects triggers the revenue schedule automatically.

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7)      Intacct also offers two out-of-the-box reports, Deferred Revenue Forecast and Deferred Revenue, to help you track or review the deferred revenue status and future post.

This great feature reduces 70% of my time on deferred revenue and lets me play with complicated methods. If you’d like to have some fun on revenue recognition, you must try this!

Tags: revenue recognition

Revenue Recognition: No Need to Wait!

Posted by Info Info on Thu, Aug 07, 2014

by Sing Wang

For contract and subscription-based businesses, revenue recognition can be a headache for their accountants. To stay on top of revenue recognition, accountants are challenged to keep pace with the fast-changing regulations and track revenue through incredibly complex transactions. Frankly speaking, it’s really a frustrating and time-consuming task.

If revenue recognition is an accounting issue for your company, and you wait too long to see your revenue reports, maybe it’s time to rethink your outdated accounting solution instead of blaming your financial team. 

Intacct accounting

As an accountant, I know how troublesome the revenue recognition process is. However, with Intacct Revenue Management, things become much easier.

Automate end-to-end revenue recognition process.

CPAs and accountants who report for project contracts and service licenses struggle with the complicated revenue models. The staff works hard, but still make mistakes because of countless calculations. Sometimes, things are even worse when you need to adjust a revenue recognition schedule because of some unavoidable events, such as client non-payment or breaking contracts. With Intacct, the accounting team doesn’t worry about these frustrations. Intacct increases your productivity and decreases errors by automating end-to-end billing, revenue recognitions, and renewal processes. No matter what services you offer, Intacct allows you to flexibly choose the specific revenue templates for each service. Also, Intacct helps you to automatically recalculate recognized and deferred revenue if you need to adjust scheduled revenue recognitions.

Eliminate the need for tons of spreadsheets and worries of non-compliance

Complex spreadsheets and error concerns are common in many, if not most accounting departments. However, we have been able to help several clients with those very issues. By integrating Intacct, the controller not simply needs to review the scheduled entries each month, because Intacct generates the entries directly from sales transactions, based on revenue recognition templates. In addition, cloud-based Intacct always keeps pace with the fast-changing recognition models and significantly reduces the risk of non-compliance with evolving regulations.

Gain anytime, anywhere access to all your financials.

Today’s CFOs requires timely, clean financial data. However, with traditional accounting solutions, it’s not possible to look at your financials, especially the deferred revenue, revenue recognition information in real time. Intacct enables anytime, anywhere access to all your revenue management reports, dashboards, and graphs. The visibility of Intacct revenue recognition helps you easily understand your revenue picture at any point in past, present or future and provides essential support for decision making.

If you are frustrated by the revenue recognition process and want to keep pace with changing standards, please feel free to contact us. We are happy to help you find an effective and efficient way. Revenue Recognition: No excuses to wait!

 

Sing is an intern working at BTerrell this summer. She is working on her accounting masters degree at UT Dallas.

 

 

Tags: Intacct, revenue recognition

Intacct: Separating Invoicing from Revenue Recognition

Posted by Susan Liles on Fri, Aug 09, 2013

BTerrell Group is now billing our company’s projects through Intacct, and are excited to see the new financial reports by project in the coming month. 

A great feature of billing with Intacct’s Project Accounting is that we can set up billing templates separate from revenue recognition templates.  Thus we can create invoices based on the milestones we set in the project, but recognize revenue on another standard.

In this instance, we apply a Billing Template for invoicing the following milestones:

  • 30% upon project acceptance
  • another 40% upon project delivery, and
  • the final 30% upon project signoff. 

On the same billing document, a different Revenue Recognition Template has been applied which has been designed to recognize 10% of project revenue every time the actual hours booked on the project reach the next 10% level of estimated hours on the project.

Intacct: Invoicing and Revenue Recognition

These settings help us to easily reach our billing and revenue recognition goals, with no further effort after the initial setup. 

Would your staff time decrease by having a similar system?  Contact us for a consultation!

Free Consultation

Tags: Intacct, revenue recognition, invoicing, separating invoicing and revenue recognition