Subscription-based businesses and changes to rev rec
For businesses, something similar has happened with SaaS. The SaaS market is rapidly expanding: In 2015, IDC estimated that by 2019, $1 out of every $4.59 spent on software would be on these cloud applications that are billed month-to-month.
Convenient as they are for customers, subscriptions can be challenging to manage for vendors. Witness the sweeping changes to revenue recognition requirements in ASC 606 (part of ASU 2014-09) and IFRS 15:
- A new five-step process replaces the many disparate rules and standards from before.
- This shift makes ASC 606 align better with the older model of IFRS 15.
- There is particular emphasis on "performance obligations," i.e. promises in contracts made to customers about transfers of goods/services.
- Single contracts are also a bigger focus area with the new standards.
- Changes to collectability mean that revenue recognition is no longer done on cash receipt.
These updated rules, which will take effect at different points between now and the end of 2018, could raise the risk of compliance mistakes and audits for any SMBs that are unprepared. Starting the shift early and utilizing cloud accounting software like Intacct is a must for SaaS providers looking to make a smooth transition.
Getting up to speed with ASC 606/IFRS 15 by using cloud financial software
One of the most important steps in adjusting to ASC 606 and IFRS 15 is being able to manage your contracts and revenue under both the old and new standards. Right now, in late 2016, it is too early to switch entirely to the updated rules, but past time to have started at least considering a transition strategy.
Cloud software simplifies insights into financial performance.
Fortunately, a solution such as Intacct makes the move easier thanks to its sophisticated revenue accounting. You can maintain multiple books and see detailed results side-by-side. This setup gives you insight into key metrics such as billed and unbilled revenue, expenses and expected revenue, along with insight into churn, lifetime customer value and acquisition costs – all with reference to new and old rule sets.
"Dual reporting makes it easy to monitor your allocations and amortizations."
Deep automation also helps perform operations on such allocations multiple times for a given contract. For example, a change in a contract can even instantly trigger updates across numerous revenue recognition schedules. Dual reporting lets you make well-informed forecasts and monitor your amortizations as well as these allocations.
Cloud accounting for tomorrow – and for the long run
The changes codified in ASC 606 and IFRS 15 have ripple effects across your entire business. For example, sales will need to understand how the rules will affect pricing, while management will have to know what to look for in reports made under the new standards.
Coping with the transition is difficult if you stick with the same old tools such as Excel and QuickBooks, neither of which can scale for the challenge. There is too much risk of spreadsheet sprawl and of making errors during manual data entry.
Intacct, which you can easily implement with the guidance of Arxis as your partner, automates even the most complex operations, such as subscription-based billing and dual treatment at the transaction level. Learn more about how Arxis can help you draw up a unique strategy for making a solid transition to the new rev rec world.
