As of December 2017, revenue recognition will switch from rules-based to principles-based accounting standards, and finance professionals working in companies that adhere to U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) need to prepare for this change. The new guidelines are designed to provide investors with a more accurate and consistent view of all the different types of revenue that make up a company’s top line. The changes will apply to most companies—particularly B2B software providers and B2C entertainment networks that enter into contracts to sell services or goods by subscription. So do they affect you? And if so, what do you need to do?
What are the key principles?
The aim is to unbundle the revenues contained in any customer contract and to recognize an appropriate amount of each type of revenue at the specific time a customer assumes ownership of a good or service. For instance, if a technology company sells equipment, software licenses, consulting services, and maintenance support on a single sales contract, then each of the different types of revenue can be recognized only when the customer takes ownership of them.
In practice, revenues for equipment and software usually can be recognized when they are delivered, whereas an appropriate amount of consulting revenue recognized as each stage of the project is signed off. Meanwhile, maintenance revenue is spread equally across 12 months. Needless to say, it can get even more complex for companies that negotiate individual prices with each customer.
Who do the new standards apply to?
The guidelines do not apply to insurance or leasing contracts, which are already covered by other standards. But everyone else that reports to U.S. GAAP and IFRS is impacted, particularly the companies that deliver goods and/or services on a contractual basis over an extended period of time. Instances where contracts with customers are highly standardized, the new requirements can likely be met by amending existing ERP systems to capture the additional data needed to support accounting and disclosures. But if individual customer contracts are more varied, applying the guidelines will require judgment and the use of estimates, and revenue recognition and accrual will probably need to be completed in a more flexible tool.
Many organizations will gravitate towards spreadsheets, which are hardly a suitable solution to support a business critical process that external auditors will scrutinize. However, Anaplan’s Revenue Planning app includes out-of-the-box functionality for all types of revenue modeling and reporting, including unit sales, professional services, and subscriptions. Users can define, apply, and control revenue recognition rules through an intuitive and easy-to-use interface, and planning and reporting revenues by cohort or by individual customer, while keeping a complete and easy-to-audit record of accruals and deferrals.
Check out the video to see just how easy it is to adapt Anaplan’s Revenue Planning app to your specific requirements for planning and reporting all types of revenue.