The laws for revenue recognition and expense allocation for contracts have changed. Do you have the right system to help your organization accurately report revenue and contract terms?
Full Legal Names of these Laws
Accounting Standards Codification® (ASC) Revenue from Contracts with Customers (Topic 606)
IFRS 15 revenue management guidelines from the Federal Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)
How do ASC 606 and IFRS 15 affect your business?
Both ASC 606 and IFRS 15 require several changes to revenue and expense recognition. To ensure compliance, several new business and accounting practices must be put in place.
The new guidelines went into effect January 1, 2018 for public companies and will apply to privately held companies January 1, 2019.
Consider any existing service contracts that extend past these effective dates. For example, if a public company has a 2-year contract in place that began after January 1, 2016, then it falls under the new requirements and was impacted the first day of 2018.
Sage Intacct’s Contract and Revenue Management Module
To make the process fo more smoothly, Sage Intacct offers the first-ever, automated ASC 606 solution in an ERP through the Contract and Revenue Management module. It allows you to easily implement new requirements as well as provide the mandatory dual reporting to show your fulfillment of both the ASC 605 and ASC 606 contract reporting policies. Journals are automatically created under both methods in a multi-book environment. This means you won’t have to track this information separately or perform extra steps in your accounting processes.
Automated Forecasted Financial Statements
This module can help you provide forecasted financial statements to investors, which must be compliant with the new rulings. You can choose to manage these numbers in Excel spreadsheets, but why put your staff through all the time-intensive work when Sage Intacct has an automated solution already in place that will make your life easier?
The new Contract module allows for revenue recognition in both the straight-line and usage-based methods as well as multiple element arrangement (MEA) reallocation. The ASC 606 guidelines implement a new procedure. When you modify a contract that meets specific performance obligations, the revenue may need to be reallocated (potentially across financial periods). Sage Intacct handles this automatically. It also provides an audit trail in real-time, and the reporting functionality to view reports under both the legacy and ASC 606 guidelines—side-by-side.
Choose to recognize expenses based on billing schedules (similar to the revenue schedules) or usage. Also, you may include add-ons any time throughout the life of the contract. Accounting for add-ons, as well as contract renewals, are handled automatically per ASC 606 guidelines.
Since the contract becomes a dimension, you can use it throughout the financial system and for reporting. This provides visibility of the profitability and performance of each contract.
Contact MicroAccounting to learn more about how Sage Intacct can make it easier to manage your subscription-based business.
Note: This article was originally published June 3, 2016. We updated the content March 14, 2018.