Simplifying ASC 606 Compliance with Revenue Recognition Automation
By automating the revenue recognition process, SaaS+ companies can save time and money, in addition to significantly reducing the risk of errors.
- Published by Jeff Sant
on Wednesday, April 14, 2021
Technology across industries is experiencing accelerated growth on a global scale. Enterprise IT spending on Public Cloud offerings such as Software as a Service (SaaS) solutions remain the largest segment and are expected to grow from $101.4 billion in 2020 to $117.7 billion in 2021, according to Gartner research.
Alongside this growth, information today travels at nearly two-thirds the speed of light (about 124,000 miles per second). Approximately 1.7 MB of data was created each second in 2020 alone.
Now think about the volume of data that accountants oversee when recognizing revenue and add in the complexities of ASC 606 compliance. The standards outline a five-step process for revenue recognition. If data used in the five-step process is not naturally integrated into an existing financial system, accountants can spend days tracking down data, verifying accuracy and compliance, making calculations and adjustments, and uploading it into accounting systems.
What is Revenue Recognition Automation?
Revenue recognition automation is the combination of the accounting principle revenue recognition, which outlines the conditions for when revenue is recognized, with automation. This automation is a systemic way to reduce repetitive, manual intervention with technology that can optimize the revenue lifecycle. It is used by revenue recognition professionals to comply with ASC 606, saving them time and reducing the risk of error.
The Challenges of Spreadsheet-based Automation
Many companies address the five-step process by maintaining massive spreadsheets, which are prone to errors that make ASC 606 compliance a challenge. Accountants need to analyze contract details, apply rules, determine recognized revenue, record earned revenue, determine and record commissions to be expensed, track balance sheet accounts, factor the impact of modifications or cancellations, assess the Stand-Alone Selling Price and support year-end audits. Using spreadsheets to manage these interdependent steps inherently becomes more complex and time-consuming with each sales order.
Ultimately, spreadsheets cannot support these tasks alone and are subject to human error. Formulas can be used incorrectly, numbers can be transposed, and reporting capabilities remain limited. These limitations make it difficult for auditors to audit and users to pull meaningful reports. Spreadsheets are also often managed by one person, which means that if that person changes roles or leaves an organization, it can throw the existing team into a frenzy as they scramble to manually collect, gather and verify all the required data on time.
What It Means to Be Fully Automated
Full automation helps to eliminate spreadsheets, mitigate errors, reduce costs, and save time. It’s important to understand what automation capabilities are needed to ensure full automation. Many automated solutions focus only on basic deferred revenue tracking of a simple subscription-based pricing model. This still requires manual input for more complex pricing models (e.g., prepaid credits, variable models), contract modifications, cancellations, and addressing other variable considerations.
A fully automated solution can log, track and update orders, identify obligations, auto-populate data from the Stand-Alone Selling Price Library, allocate revenue as rules are triggered, track and roll-forward deferred revenue, and maintain a near real-time revenue sub-ledger. This information can then be used to generate multi-dimensional reports for management.
How Revenue Recognition Automation Makes ASC 606 Compliance Easier
ASC 606 is challenging. Linking customer contract data with invoicing data with accounting rule configurations for recognizing revenue can all be simplified with RevLock’s revenue recognition automation technology. Here’s how:
- Automatic calculations for the revenue to be recognized for every line item on every contract reduces the risk of error.
- Algorithms automatically identify and update changes in price, contract dates, items included in a contract, and other modifications quickly to save time.
- Open APIs make it easy to pull data from anywhere and eliminate the need for cross-referencing. The software automatically matches information from the pre-populated Stand-Alone Selling Price Library and the Revenue Recognition Methodology.
Whether the software is pulling data from an Excel export or a CRM system, this data integration can quickly transfer to ASC 606 compliance. When the revenue recognition process is effectively managed and the data needed is integrated instead of siloed. SaaS+ companies can stress less about compliance and focus more on delivering meaningful business value. Organizations can strategically overcome the challenges associated with ASC 606 compliance and streamline the processes prone to risk.
Learn more about ASC 606 in our latest White Paper: "The Ultimate Guide to ASC 6060 Compliance."
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