For public and private companies and not-for-profit organizations, the Financial Accounting Standards Board (FASB) establishes financial accounting and reporting standards known as Generally Accepted Accounting Principles (GAAP). One such standard, ASC 606, provides a uniform framework for recognizing revenue from contracts with customers. Adherence to ASC 606 has a direct effect on your processes, data, systems and controls. This means that enterprises need a revenue recognition tool that allows them to accurately report and track financial obligations, comply with the GAAP standards, and provide the flexibility to quickly evolve to meet future standards.
All of this needs to be done efficiently while conforming to your unique business model and strategic initiatives. So, where should you begin? Let’s start by peeling back the layers of revenue recognition.
What Is Revenue Recognition?
At the very heart of your business is the revenue acquired by making a sale. It’s at the center of your financial reporting, and as such needs to be beyond reproach. Revenue recognition determines the specific conditions and when revenue can be realized. Simply put, revenues can only be recognized when realized and earned – not necessarily when services are rendered or payment is received.
Sounds easy enough, right? Not always. Given the combination of contracts involving several performance obligations with different revenue recognition schedules, complications in when to recognize revenue can and do arise. To clarify when revenue can be recognized, we’ve broken it down into three categories.
- Point-in-Time Revenue Recognition: The most basic of revenue recognition processes, it allows companies to recognize revenue as soon as an invoice is sent or when a service is rendered. For example, let’s assume that you own a plumbing company. In this scenario, the customer needs a new water heater, as well as your services to install the new tank. Once installed, an invoice is presented to the customer for immediate payment and revenue recognition.
- Scheduled Revenue Recognition: This revenue recognition process, also known as over time revenue recognition, allows companies to recognize revenue based on a set interval of time. Timing can be daily, weekly, monthly, or a custom time interval and the timing can be different for each contract, customer, or group of customers. For this example, let’s say you’re an over-the-top TV provider that is providing new customers with three months of free viewing. Let’s also assume that the cost per month is $25. Since the company is providing viewing services for 15 months instead of 12, the revenue will need to be recognized over a 15 month period. So, instead of the company recognizing $25 in revenue on a monthly basis, they will only be able to recognize $20 each month.
- Obligations Revenue Recognition: Also referred to as milestone revenue recognition, it’s a unique feature of BillingPlatform that enables companies to recognize revenue based on milestones set in the system. These revenue events can be anything that’s relevant to each individual company or contract, such as the completion of a job, a purchase order, the creation of an invoice, a usage threshold, etc. With obligations revenue recognition, revenue can also be broken down into segments, with each part of the revenue recognized during a different event or timeframe. For instance, let’s say that you own a construction company that specializes in kitchen remodeling. Your pricing model may be one-third upfront, one-third once the cabinets have been installed, and the remainder at the conclusion and acceptance of the job. With this model, you can recognize revenue when each milestone is met.
With the many scenarios that can affect how you can recognize and report revenue, you need a system that’ll do the work for you.
Maximize Your Profitability With Automation
You want and need to recognize revenue as soon as possible while staying within the guidelines of ASC 606. Doing this manually not only puts the burden on your accounting staff, but can put you in jeopardy of non-compliance. Regardless of the business model you operate or the revenue generation method chosen, your finance team requires tools that serve the needs of an entire business.
With BillingPlatform, you can automatically assign financial transactions and execute revenue recognition in real-time as events happen. Our rule-based revenue scheduling gives finance teams the flexibility to automatically allocate transactions to specific GL accounts. Not to mention eliminating error-prone and time-consuming manual processes. They can then specify how and when revenue will be recognized. All of which makes it possible for you to stay compliant and keep your business running profitably regardless of industry, geography, or strategic objective. Contact our team to learn more about how BillingPlatform can help support your revenue recognition needs!