Revenue Accounting Solutions
Reach out to revenue accounting aces to hold down the fort, streamline your process, make sure you’re doing it right and help others in the company get on board.
Understanding Revenue Accounting
Revenue figures are often looked at with a skeptical eye by stakeholders, auditors and regulators, and it’s not hard to understand why: Figuring out revenue for fast-moving, complex companies is not a clear-cut endeavor, and specialized skills and expertise are required to do the job right. Timing and the details of contracts matter. As does consistency – different aspects of the company view revenue in different ways.
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The sales team has a different view of revenue than the finance team, and the executive team may talk about it differently as well. To keep up with the company’s growth and the rapid pace of transactions, companies need to know where to turn to ensure their revenue is properly recognized.
This work entails adopting policies and procedures that are practical and tailored to the way the company runs. It also may require some education, in order for finance and the sales team to be on the same page when it comes to revenue recognition. And, of course, it requires an understanding of what documentation is needed so that the auditors can understand the reasoning behind the company’s revenue accounting decisions.
ASC 606, the Revenue Recognition Accounting Standard
The Financial Accounting Standards Board upended an already complicated endeavor when it issued “Revenue from Contracts with Customers” (ASC 606), which did away with industry-specific guidance for recognizing revenue. In some ways, the new standard simplified things, but recognizing revenue properly will never be easy. ASC 606 requires companies across industries to follow one standard using general principles (vs. bright line rules) that are applicable to any company that enters into contracts with customers, including long-term contracts and licenses.
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The changeover involved more work than companies anticipated, earlier recognition of revenue in some situations, and a significant shift in mindset and focus: Companies should recognize revenue when control transfers to the customer. ASC 606 allows for more judgment and estimates than previous guidance. At the same time every judgment made has to be auditable, so companies need to document why they make the decisions they make when it comes to recognizing revenue. Extensive disclosures were another change that companies have had to become accustomed to when implementing the revenue recognition accounting standard.
To be sure, revenue recognition is not just about accounting. It’s a complex task that can affect how deals are made and contracts are set up. Finance teams equipped with the knowledge and expertise to fully understand revenue recognition look beyond their immediate responsibility to also consider the full effects on the company. They work across departments to ensure that everyone is making informed decisions when it comes to sales and contracts.
Revenue Accounting Tips
Understand when control transfers to the customer
For most goods and services, this is obvious. Physical products are transferred to the customer’s control when shipping terms are met. When Amazon delivers a box at your doorstep, it is yours. Orders for multiple units (like a newspaper delivered on the doorstep every morning) may be transferred over a series of points in time.
As for services, they are transferred to the customer’s control and benefit as they are being performed. When you sign up for a hosted software solution, you receive the benefit of the software solution over the time that the hosted solution is available to you.
Know when the transfer of control is not obvious
Let’s say you’re constructing a building on a customer’s property. The contract ceases but some work is already done (the foundation, framing, wiring, plumbing) and remains on the property. Under the new revenue recognition standard, control is transferred during construction. The performance obligation is not a completed building but rather the construction services that are transferred over time.
Find metrics that are meaningful and the easiest for you to track
R&D services, for example, often involve labor, contract services, materials—these are input measures of costs. Or for consulting services, you’d measure in hours input. A prepaid cell phone service could be measured by the minutes used—an output measure. Training services could be measured by the number of attendees (another output measure).
Accept the nuances of the revenue recognition accounting standard
The judgment you make for one contract may be different than the next. It all depends on the specific facts and circumstances, the understanding between the parties, and the level of importance of the items. Your product and its interdependence with other services may be different from your peers’ products and services and their interdependence. So while peer examples can be helpful, they are not necessarily the same. Don’t assume that their judgments are appropriate for you. And your determinations may change from contract to contract.
What Do Revenue Accountants Do?
Revenue accountants not only possess deep technical expertise; they also have the ability to problem-solve, take a holistic view of business needs and get others around them (including non-accountants) to understand revenue recognition. They are subject matter experts in ASC 606, revenue documents, and contracts. They use their knowledge to draft technical memos, train and mentor others in the finance team, and ensure compliance with ASC 606.
Where to Find Revenue Accounting Expertise
When bringing in revenue accounting expertise for an ongoing or one-time need, you will want to prioritize deep experience with ASC 606 and also finance pros who are adaptable to the needs of their clients. Revenue accounting experts who have worked with different companies as they become accustomed to the standard are prepared to train and mentor others on the finance team and make the entire process as practical as possible.
They can also help you spot and pursue strategic business opportunities under ASC 606. At RoseRyan, our technical accounting experts were on top of the changes from the very beginning and have helped both public and private companies adopt the standard. With RoseRyan’s guidance and technical accounting expertise, your finance team can become stronger when it comes to revenue recognition.
“With that knowledge and experience, RoseRyan provides us with a unique perspective my time-strapped team now relies on. With RoseRyan, I get on-demand expertise, with the ability to lean on a savvy finance pro who truly knows his stuff and our business.”
Acing complex rev rec for high tech on a growth path
A fast-growing high tech company wanting to ace its first audit had hired outside help with revenue recognition, but the accounting treatment raised some big questions.
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