Advantage takeaways: tales of ASC 606 compliance with Sage Intacct contracts

We had a fantastic time in Las Vegas last week at our largest-ever annual user conference, Sage Intacct Advantage 2019. As we look back on the event, we’d be remiss if we didn’t share a few highlights with those of you who weren’t able to join us this year. Of the nearly 200 sessions, our favorites are always those led by our customers, so I thought I’d kick things off with a recap of a popular breakout panel on ASC 606.

I had the privilege to moderate this session with Sage Intacct customers Grant Christianson of Code42 (also a 2019 Customer Hero Award winner) and Elliot Goldman of Rapid Ratings International. We were joined on stage by ASC 606 industry expert, advisor, and standards board member, Tony Sondhi, as well as implementer Chris Price of AcctTwo. I hit the jackpot with these panelists, and we covered a lot of ground as each one shared experiences and lessons learned on the road to ASC 606 compliance.

For the purposes of this blog post, I’ll summarize three of their key takeaways.

Takeaway #1: Take the time to understand your contract types

The most significant piece of advice that every speaker reinforced was to start with an in-depth contract review. Grant explained how his team analyzed all of their standard contract clauses across both on-prem and cloud-based subscription revenue streams. In fact, Code42 hired a revenue director who took the time to involve people from across product, professional services, and sales ops, and document revenue recognition decisions and policies in a detailed white paper for future reference.

This helped the company get a firm grip on all of its interdependent software performance obligations—across 12,000 retrospective contracts and 40,000 lines—and determine when to start taking revenue. For Code42’s on-premises software, this happens as soon as their license keys are cut and delivered, while for cloud services, they wait for customers to start receiving benefits from the product. Elliot also noted that at Rapid Ratings, he looked at both average customer lifecycle and average product lifecycle (i.e. how often a major release comes out) in order to determine how long they could keep expenses on their books.

Takeaway #2: To bundle or not to bundle?

The audience had quite a few questions around the concept of multiple performance obligations (MPO), one of the more complicated requirements of ASC 606. An MPO comes into play when you bundle things like professional services, support, software delivery, and other performance agreements. Chris shared his recommendation to lay MPO groundwork first by determining the standalone fair value pricing for each SKU you sell. Then, it’s relatively straightforward to load a full price list into Sage Intacct’s Contracts module, and allocate it appropriately across your bundles.

He also encouraged companies to get their auditors’ input during this first stage of the process, so they can give early sign-off on bundling approaches based on work they’ve done with public companies that have similar revenue scenarios. Finally, Chris mentioned some of the tools available for managing retrospective MPO allocations, including Sage Intacct’s API and an auto-bundler that AcctTwo built to support the MPO bundling process across historical contracts.

Takeaway #3: Prepare for special cases

A variety of advanced requirements came up over the course of our panel session, including commissions expense amortization, variable consideration pricing, contract modifications for revenue schedules or cancellations, and more. Elliot talked about how he uses the Contracts module to manage contract expenses, stating,

“For us, ASC 606 actually added some much-needed structure. We became more disciplined on what products our sales team is using in Salesforce.com and making sure the fields are properly filled out, since we pull that information into Sage Intacct for accurate revenue reporting.”

Chris added that the Contracts module allows customers to amortize customer acquisition or commission costs over whatever schedule they define—both at the contract level and the individual line-item level, and independent of the actual contract term.

Around the topic of variable consideration, Tony shed some light on the requirements, saying,

“If you as a seller have the ability to invoice your customer for the amount of work done, then you don’t have to think about variable consideration. You just recognize the amount that you invoice, even if there’s no way of knowing what the amount will be up front. For sales-based or usage-based pricing, you only recognize revenue at the later date of when the sales or usage occurs, or when the actual performance obligation is satisfied (e.g. software is delivered). So estimating variable consideration up front is really only necessary when you have things like penalties, discounts, or rebates.”

There was plenty to be learned from this session, not only about the challenges of ASC 606, but about its benefits as well, especially when it comes to IPO readiness and adopting mature sales processes. By bifurcating your revenue recognition streams from billing, Sage Intacct’s Contracts module can be a huge help for SaaS companies. Not only does it keep everything linked to simplify GAAP reporting, the system makes it easier to answer questions like, “What’s our unbilled backlog?” or “How much deferred revenue has ben paid?”

If you’d like to dig deeper on this topic, check out our free eBook on “6 Rules for ASC 606 Readiness.