Software Companies Still Navigating the New ASC 606 Standards

Mapping the Unchartered path of New ASC 606 Standards

Software companies are treading softly the unchartered path of new ASC 606 Standards. Most organizations are still using the old technology and find themselves inadequate support ASC 606 compliance.

Considered a major accounting change, ASC 606 is often seen to be in the league of Sarbanes-Oxley as far accounting is considered. This all new revenue-recognition standard is envisaged harmonize US and international revenue recognition standards under a new principals-based model, simplifying revenue recognition to a great extent.

Easier said than done, the transition is getting on the nerves of many. The transition has thrown up scenarios where complicated revenue-recognition policies are becoming a hindrance for software companies who find themselves in a spot as their ability is being questioned. They are trying their best to fully comply with the new standard.

Though the deadline for implementation (Jan 2019) is long past, the truth remains that many are still trying to go in through the transition. While some see the process to take few more weeks, others feel that they may require the whole year to get into act. Adapting to internal policies and operations before end-of-year audits is the target now. And for all such companies, an insight of challenges and opportunities presented by ASC 606 is imperative.

To begin with:

1. Need a comprehensive view of the impact of ASC606 on existing revenue policy.

2. Re-present revenue for past fiscal periods

3. Know to switch on the new 606 revenue policy

And to switch on the new ASC606 policy means more bottlenecks. Software companies are challenged by three hurdles in the process.

Revenue Allocation.

Though not a new feature, the revenue allocation rules of ASC 606 are a wee bit different from ASC 605. The grey areas are gone and each and every allocation has to be reported in detail. This is seen as a major shift in revenue management.

Performance Obligations.

The standard by which performance obligations are defined and recorded changes in the new ASC 606. Unlike its predecessor, ASC605 which used the satisfaction of contractual terms to identify performance obligations, ASC 606 considers the transfer of control of goods or services as defining a performance obligation.

To put it simply, take the case of a software being deployed in an organization. While ASC 605 would consider deployment as performance obligation met while ASC 606 would like to know whether further customisation was requisite for it to be integrated with existing system and be used.

Contract Cost Deferral.

ASC 606 matches parameters like contract costs, such as sales commissions, with contract revenue – the extent of this factor can have far reaching impact, much beyond the internal conversations. Therefore, the revenue policy must be exact and correct on all these. An error in any of these will show up later and get questioning glances from auditors. As such, companies must be equipped to face such situations in a professional manner.

NetSuite is a perfect partner for smooth transition to ASC606. NetSuite has focussed on the main hurdle’s companies face and has come up with reliable solutions.

Revenue Allocation.

NetSuite’s robust allocation engine addresses and supports the common practices of companies to maintain different bands of customers which in turn affects the Standalone Selling Price (SSP) for each. NetSuite can allocate appropriate SSP t properly allocate revenue and even accommodate further purchases under the aegis of existing contract. This identifying and linking of purchases for revenue allocation is an advantage of NetSuite.

Performance Obligations.

The flexibility of NetSuite allows it to support and present a bundled offering to the customer while calculating and handling the revenue in such a manner as befits the company’s policy.

Contract Cost Deferral.

The best part is that NetSuite automatically matches contract costs with contract revenue.

Several companies are enjoying the benefit of using NetSuite while several other ERP platforms are finding it hard to be ASC 606 compatible. The foresight and sustained development have given the customers the advantage of fast deployment with maximum flexibility.