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What is a Revenue Recognition Policy?

May 12, 2021

With ASC 606 in place, it has never been more important to ensure that your business is in compliance with revenue recognition regulations. Put forth by the Financial Accounting Standards Board (FASB), ASC 606 is a set of requirements that companies must satisfy before they can recognize revenue. To this end, companies are increasingly developing a revenue recognition policy to ensure consistent application of ASC 606.

A little background before we jump in, consisting of five steps, the purpose of the ASC 606 framework is to:

  • Remove inconsistencies and weaknesses in existing revenue requirements
  • Provide a more robust framework for addressing revenue issues
  • Improve comparability of revenue recognition across entities, industries, jurisdictions, and capital markets
  • Provide more useful information to users of financial statements through improved disclosure requirements
  • Simplify the preparation of financial statements by reducing the number of requirements to which an organization must refer

What You Need to Know About a Revenue Recognition Policy

Let’s first start with a description of a revenue recognition policy. Essentially, it’s a document that recaps your revenue recognition processes and methodologies. Your next question may be – why should I create a revenue recognition policy? We’ll answer this question with a question. Did you know that the most common type of fraud is improper revenue recognition, and that technology services companies are charged more frequently for fraudulence than companies in other industries? Should your financial statements come under scrutiny, a well-prepared revenue recognition policy can save you a lot of time and effort in producing contracts to account for certain line items in your financial statements. In addition, a revenue recognition policy will help your accounting team in preparing financial statement disclosures.

Creating a revenue recognition policy isn’t easy, however there are eight key performance obligations that should be part of your document.

  1. Description of the performance obligation
  2. Contract arrangement for the performance obligation
  3. Timing of the transfer of performance obligation to the customer
  4. Information about economic factors that affect the nature, amount, timing, and uncertainty of revenue and cash flows of a performance obligation
  5. Payment terms for a performance obligation
  6. How the timing of satisfaction of the performance obligation relates to the typical payment timing
  7. Obligations for returns, refunds or types of warranties
  8. Determine whether the company is a principal or agent for the performance obligation, and how that determination was made

To get an idea of what a revenue recognition policy looks like, let’s take a look at one created by Harvard University. A quick scan reveals their revenue recognition policy documents when revenue is to be recorded and recognized. It also contains the reason the policy was developed, who must be in compliance, financial procedures, definitions, related resources, revision history, and appendices.

Once your revenue recognition policy is developed, make sure it’s reviewed and approved by the appropriate levels of management. While a revenue recognition policy helps to ensure that you’re in compliance with ASC 606, there’s more you can do. Not only to remain in compliance but streamline your revenue recognition processes.

Take the Complexities Out of Revenue Recognition

With the numerous ways revenue can be recognized such as point-in-time revenue recognition, milestone revenue recognition, triggering event revenue recognition, and recognition over time, recognizing and reporting revenue can get tricky. This is where a billing system built to handle the complexities of revenue recognition can automate the process of recognizing revenue, as well as simplify revenue recognition compliance.

BillingPlatform provides a robust billing solution built to manage the entire revenue recognition process. With BillingPlatform you’re able to automatically assign financial transactions and execute revenue recognition as events take place. Our rules-based revenue scheduling provides the flexibility needed to automatically allocate transactions to specific GL accounts, eliminating error-prone manual efforts. With our software, you can easily configure every aspect of revenue recognition – without IT intervention or custom coding.

Doing business on an international level? If so, BillingPlatform has you covered. With us as your partner, you’re able to align billing processes with global regulatory standards, as well as country-specific legislation. Our solution lets you establish tailored billing practices across all national and international business units according to current accounting standards, ensuring you’re always compliant with ASC 606 or IFRS 15. And that’s not all! We also help our domestic and global customers achieve billing compliance through our System and Organization Controls (SOC) 1 & 2 audit process.

Don’t Leave Revenue Recognition Compliance to Chance

When selecting a billing solution, you need a company you can trust. One that enables you to streamline revenue recognition activities. Unlike other cloud and legacy billing solutions, BillingPlatform provides a complete solution that fulfills 100% of your business requirements.

Our cloud-based billing platform enables you to adhere to today’s strict compliance and security standards. That way you get everything you need to run your business with greater financial control and accuracy – and speed financial closing processes. Sound like a fit for your business? Get in touch with our experts today to talk more.

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