Is Your Accounting System Contract Aware? The Clock Is Ticking Fast for ASC 606 Compliance
Although you may think you have plenty of time, the reality is the contracts you are writing today that extend into the 2018/2019 adoption date must be accounted for under ASC 606. Therefore, it’s essential to get ASC 606 compliant – right now!
The revenue rule – ASC 606 – was initially supposed to go into effect last year, but companies lobbied FASB for a one-year delay. Still, according to the Wall Street Journal, nearly third of 300 finance and technology executives surveyed recently by Ernst & Young reported they are at risk of falling behind in their drive to comply with the new revenue recognition rules. In fact, more than a fifth were troubled that their measures to upgrade financial practices and IT would not be finalized by the end of 2017 – leaving them open to compliance concerns.
Their concerns are valid. The revenue recognition standard prescribes accounting for an individual contract with a customer, but allows for application of the guidance to a portfolio of contracts with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Under ASC 606, your accounting system now needs to be contract aware, ideally with contract management capabilities built into it. You’ll need to be able to look at the group of contracts pertinent to a customer and have clear transparency when the need arises.
Is Your Accounting System Contract Aware?
Under ASC 606, subscription-based companies will recognize revenue over time as the performance obligation is delivered to the customer. According to Accounting Today, the new standards will impact both historical and future periods and transactions, potentially impacting a company’s financial statements. Therefore, it is vital that finance organizations work closely with auditing firms to evaluate the best strategy and approach for closing the books and issuing financial statements.
The new standard specifies that an entity transferring control of its service over time must recognize revenue when one of the following criteria is met, according to FASB:
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- The entity’s performance creates or enhances an asset – for example, work in process – that the customer controls as the asset is created or enhanced.
- The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.
Intacct’s Contract and Revenue Management is designed to make companies audit-ready, while delivering the continuous insights needed to make their financial future predictable. The new software enables companies to simultaneously manage revenue using both the current and new accounting guidelines—allowing them to operate under current guidelines and the new standards, simultaneously.
For joint Intacct and Salesforce customers, Intacct Contract and Revenue Management also enables companies to structure workflows to capture and edit contracts natively in Salesforce. There is no need to import contracts using additional integration software or by rekeying them into Intacct—streamlining processes and eliminating potential errors.
Key Benefits of Intacct Contract and Revenue Management include automation of complex process of complying with ASC 606 and built-in dual-reporting and forecasting, allowing real-time visibility to how ASC 606 changes are impacting revenue management – predicting metrics such as cash, billing, churn, customer lifetime value, and more.
According to Dan Miller, VP of Product Management for Intacct, it will be near impossible to do all of the revenue reallocation manually due to the sheer volume of contracts and adjustments that will be required for subscription-based businesses. With Intacct Contract and Revenue Management, companies will be able to manage their transition to the new accounting standards.
This content was originally posted here.
In business since 1971, CompuData is an award-winning business technology solution provider. Headquartered in Philadelphia, PA, CompuData has helped thousands of small to midsize clients nationally and in the Philadelphia metro region (PA, NJ, DE, NY) optimize their business with technology.