Revenue Recognition

The CIO’s Role in the Supporting a New Revenue Recognition Standard

The CIO’s Role in the Supporting a New Revenue Recognition Standard

Excerpts from the article by Mark Davis and David Pierce on Information Week

On January 1, 2019, private companies with calendar-year annual reporting periods will need to comply with Financial Accounting Standard Board (FASB) Accounting Standard Codification (ASC) 606: Revenue from Contracts with Customers (ASC 606 or the New Revenue Standard). The New Revenue Standard replaces the existing revenue recognition guidance (including industry-specific guidance) with a single revenue recognition model intended to reduce complexity and increase financial statement comparability across companies and industries.

While many view the adoption of ASC 606 to be primarily an accounting exercise, the adoption of the new standard has far-reaching impacts within an organization beyond just the accounting function. All functions within an entity, including the chief information officer, should be involved in order to successfully implement the standard.

Why should CIOs care? Because CIOs and their IT departments serve a critical, strategic role in the compliance process. Publicly traded companies with calendar-year ends became subject to the standard in January 2018. In many of those implementations, CIOs and their teams had to significantly retool how their companies collect and process financial data.

Private company CIOs are likely to face similar challenges. Many may need to design new IT systems and data management protocols or implement new financial systems to aggregate, analyze, and extrapolate financial data. This is not only to comply with the new standard, but also to address risk of possible financial impacts and friction with external relationships, such as with vendors, lenders, and investors.

To advance the process of implementation, CIOs may benefit from considering the following:

Five considerations

1. It’s not just about the tool. Some organizations may focus their early efforts on choosing a revenue recognition engine, an important consideration, but not the only one. Companies also need to establish a master data management framework for a broad range of data types. Clarity in product hierarchies and definitions will be important to establish standalone selling prices required by the standard. Data quality issues are ever-present, and incomplete or inaccurate data often results from insufficient controls on existing systems. Staffing the implementation team with IT personnel is also important.

2. Finance and IT aren’t the only players. The New Revenue Standard will impact other parts of the organization, from sales to legal to human resources. For example, sales compensation may need to change. CIOs have a unique opportunity to unite disparate parts of the organization, both to establish IT’s relationship with other teams involved in the implementation and to help those parties understand their own roles.

3. Data and analytics loom large. Two types of issues that can arise around data and analytics are first, integration and preparation of data for the revenue engine itself; the strict interface protocols of revenue recognition engines require that data be loaded in a specific format, and second, the significant reporting and reconciliation requirements under ASC 606. It’s imperative that upstream transactional data, such as from billing systems, makes it into and through the engine.

4. Other upstream system issues warrant attention. Ordering and billing systems may not adequately capture data for compliance with ASC 606. For example, some information required for revenue recognition might be in a quote while other information might be on the order. It’s critical that independent data sets be accurately linked.

5. Opportunities accompany the challenges. Sometimes organizations are not eager to spend money on compliance, but there are potential ways to ease the pain. Automation can streamline existing processes or generate data that can improve pricing, increase profitability, and create new value-added services.

Read the full article on Information Week

Zuora NetSuite Integration - An Overview

Overview

The Zuora NetSuite Integration (aka Connector) is an optional solution that leverages the core capabilities of both the Zuora and NetSuite applications. Zuora manages complex subscriptions and NetSuite is a hosted General Ledger (GL) System.

Features

Zuora NetSuite Connector combines Zuora's subscription billing capabilities with NetSuite's ERP/Financials solution with bi-directional integration across every core application module to seamlessly combine the two applications.

This solution is a pre-defined, out-of-the-box integration that synchronizes transactions between the two applications. Zuora provides NetSuite Connector customers with an integration console in the Zuora Billing user interface which is used to set up the integration, control and monitor the synchronization of data, and view any error or success logs from the synchronization.

Integrating Zuora with NetSuite allows you to use Zuora's applications to:

  • Manage complex pricing and packaging models
  • Align charges with existing subscriptions
  • Consolidate billing
  • Streamline renewal patterns

Advanced Pricing Configuration

Configure any type of subscription pricing, packages and bundles (including one-time, recurring, usage and metering charges, volume tier pricing, and overage pricing) to link Zuora's Product Catalog and NetSuite's Item. For example, simple or complex subscription pricing can be configured in Zuora, such as a cellular phone plan or a data plan with usage, and synchronized to NetSuite's product catalog (e.g. items in the same hierarchical structure).

Customer Account Mirroring

Synchronize Customer Accounts, Billing Accounts, and any customer account hierarchies to provide a single view of all customers whether the data is in Zuora or NetSuite. For example, an address change in Zuora is synchronized with the corresponding account address in NetSuite (and synchronized from NetSuite to Zuora).

Bi-Directional Payment Operations

Manage the Invoice to Cash process in either Zuora or NetSuite with the two-way integration of Zuora Payment Operations with NetSuite's Accounts Receivable module. For example, a customer is issued a refund in Zuora when a subscription is cancelled and the refund is applied to the appropriate payment in NetSuite.

Revenue Recognition Integration

Manage revenue recognition by mapping Zuora's subscription details, including revenue recognition codes, trigger conditions, revenue start dates and revenue end dates to NetSuite's revenue recognition templates and Advanced Revenue Management Module.

Subscription Metrics

Drive key business decisions by using Zuora's subscription metrics, such as Contracted Monthly Recurring Revenue, Total Contract Value, Renewal Rate and Churn.

NetSuite customers can leverage NetSuite's cloud ERP/Financials solution in mixed cloud application environments, including using the Zuora CPQ solution which seamlessly connects Salesforce CRM and Zuora's subscription commerce platform.

Deciding to Use NetSuite Connector

Use NetSuite Connector to solve the following business problems:

  • You have are using NetSuite for one line of your business, but you want to leverage Zuora for subscriptions
  • You have customized NetSuite for subscriptions, but you have reached the limit of the NetSuite customization
  • You are using QuickBooks and want to upgrade your accounting system.
  • You want to have all transactions in your general ledger for a full reporting view in NetSuite.
  • You want NetSuite to handle your revenue recognition.

Recurly for NetSuite Integration at a Glance

Recurly for NetSuite

To optimize your subscription business and get the most out of your customer data and other metrics, you need strong financial reporting that adheres to compliance guidelines. Financial reporting for subscription based-businesses presents unique requirements as these metrics have an emphasis on customer-centric data such as customer renewal rates, churn and lifetime value.

Recurly merchants can seamlessly integrate their billing and subscription data from Recurly with their accounting and financial data through our new integration with NetSuite, a leading cloud-based business software for accounting and ERP. Through this integration, Recurly merchants can effectively and accurately manage recurring revenue data using NetSuite’s best-in-class, automatic, GAAP-compliant revenue recognition and standard financial reporting.

Requirements:
The NetSuite integration is available to merchants who are on the Recurly Enterprise pricing plan.

In order to take advantage of the integration, merchants need the following functionality enabled within NetSuite:

  • NetSuite ERP
  • Revenue Recognition Module
  • Sandbox Account (for testing and verification of data)

Sync Details:
The Recurly/NetSuite integration is a one-way integration which syncs the following records between Recurly and NetSuite:

  • Plans, Add-Ons, and Setup Fees
  • Customer Accounts
  • Invoices
  • Transactions
  • Credits

The process runs every two hours by default, and will sync any records that have not yet been synced between the two systems.

The following diagram details how records are integrated between the two systems:

Plans, Add-Ons, and Setup Fees

Once plans, add-ons, and setup fee records are integrated with NetSuite, they will be Non Inventory Items for Sale in the NetSuite product catalog. From there, merchants can assign Deferred and Recognized Revenue accounts against each product so that when invoices are integrated, revenue will be recognized appropriately.

Customer Accounts

Customer accounts within Recurly are integrated with the Customer and Contact record types within NetSuite. Merchants can utilize NetSuite reporting to aggregate their financial records by customer once this information has been integrated.

Invoices

Invoices in Recurly are integrated with Invoices in NetSuite. The header information will be defined based on the NetSuite configuration of each merchant. The line level information will define revenue recognition rules: the periods that are defined on invoices within Recurly will populate NetSuite revenue recognition schedules that will drive revenue recognition. Merchants have the option to manually edit.

Transactions

Transactions within Recurly are integrated with Payments and Refunds within NetSuite. When a payment is integrated to NetSuite, it will close the accounts receivable on the invoice to which it is associated.

Credits

Credits in Recurly are integrated with Credit Memos within NetSuite. As with invoices, this will utilize the built-in revenue recognition functionality within NetSuite to properly recognize revenue and handle accounts receivable.

Custom Fields

Because every NetSuite implementation is different, Recurly is able to integrate with custom fields that a merchant has in a NetSuite. This customization can be defined during a conversation with the Recurly team.

Setting Up Zuora Connector for NetSuite and NetSuite ARM Module

The intent of this article is to outline the steps associated with setting up Zuora Connector for NetSuite Bundle in NetSuite and the NetSuite Advanced Revenue Management Module.

The assumption is made that you've decided on using NetSuite for Revenue Recognition as opposed to Zuora's RevPro offering. This is generally a finance team choice as to what system to use; do you prefer to see the deferred revenue and downstream reporting in NetSuite or Zuora? If NetSuite, the high-level configuration steps are below.

Steps Outlined:

1. Install the Zuora Z-Suite bundle in NetSuite. Bundle Id (12071)

2. Setup the Z-Suite Bundle according to Zuora's Knowledge Center Steps listed here.

3. Update the NetSuite Revenue Recognition Field Mapping

4. Finish configuring NetSuite Advanced Revenue Management Module

It is as simple as associating the revenue field mappings with the fields that are populated when invoices syncronize from Zuora to NetSuite.

  • Zuora Services Start Date => Start Date
  • Zuora Services End Date => End Date

How do I recognize revenue with Z-Suite and without NetSuite ARM?

Overview

Zuora powers the revenue recognition used for the Z-Suite integration to NetSuite.

Many of the hardest challenges for revenue recognition are managed by Zuora, including the proration and calculation of the revenue recognition start and end dates.

Zuora has robust functionality where you can define a Revenue Recognition Code per Charge in the Zuora Product Catalog.  Each Charge can also have a separate revenue recognition trigger date that can trigger revenue such as a recurring charge to start when the Service is activated.

Z-Suite has extremely powerful revenue recognition capabilities and powers all the information NetSuite needs to build the revenue schedule.

This article explains how you can recognize revenue using Zuora Z-Suite.

Solution

In the Zuora Product Rate Plan Charge, you can define the Revenue Recognition Code, which equates to the name of a Revenue Recognition Template in NetSuite.

You can also define the type of Revenue Template you are using in NetSuite:

  • Standard templates: These templates take the invoice item amount and recognize it over the revenue recognition start and end date.
  • Variable templates: These templates are used for percent complete revenue recognition when you use NetSuite Projects.

Z-Suite supports both standard and variable Revenue Recognition Templates. And since these are on every charge, you can have one charge in a rate plan use a Variable Template and another use a Standard.

Variable Revenue Recognition

Variable Revenue Recognition is primarily used for milestone-based revenue recognition for projects, such as a fixed-price project.

When using Variable Template, the NetSuite Project Code entered on the Zuora Subscription is used as the project. If this field is not populated, the invoice will not be synchronized to NetSuite - so the recommended best practice is to create the project in NetSuite first, which will give you the needed project code.

When Variable is selected as the NetSuite Revenue Recognition Template Type and the NetSuite project is populated on the Zuora Subscription, the invoice will be synchronized to NetSuite using the Revenue Recognition Template and in NetSuite, the Revenue for the Invoice Item amount will be placed on hold.

In NetSuite, you can track the project, enter milestones and take the revenue off hold and recognize it.

Standard Revenue Recognition

Standard Revenue Recognition uses the start and end dates entered on the Product Rate Plan Charge.

You can define the Revenue Start and End Dates when you define your product catalog and automatically populate these dates based on what is entered on each subscription (Contract Effective, Service Activation, Customer Acceptance). 

For the NetSuite Revenue Recognition Start Date, you can select either the Charge Period Start or the Rev Rec Trigger Date.  This means you can use the standard start date from the charge or use one of the delayed dates that you define as your revenue recognition trigger. This is standard Zuora functionality as described in How do the invoice and revenue recognition triggers work in Zuora?.

For the NetSuite Revenue Recognition End Date, you can select Charge Period End or the Subscription End Date. The Subscription End Date is often used when you want to recognize a one time charge over the subscription term.

Examples

If you want to recognize each invoice item using the charge service period, which is common for straightforward recurring revenue, such as quarterly or annual billing, you would set the following:

  • NetSuite Revenue Recognition Start Date=Charge Period Start
  • NetSuite Revenue Recognition End Date=Charge Period End

If you want to use delayed revenue recognition where you invoice on contract effective and trigger revenue on either the Service Activation or the Customer Acceptance, you would set the following:

  • NetSuite Revenue Recognition Start Date=Rev Rec Trigger Date
  • NetSuite Revenue Recognition End Date=Charge Period End
  • Revenue Recognition Trigger=either Service Activation Date or Customer Acceptance Date

Z-Suite will automatically create the invoice in NetSuite on Contract Effective Date and will put revenue on hold in NetSuite if the Service Activation or the Customer Acceptance is not known.  When these dates are entered, Z-Suite will automatically take the revenue off hold in NetSuite.  Pretty cool stuff!

If you want to recognize a charge, such as a one time, using the subscription end date when you have to recognize a one time or professional services fee over the life of the subscription and not the service period, you would set the following:

  • NetSuite Revenue Recognition Start Date=Rev Rec Trigger Date or Charge Period Start
  • NetSuite Revenue Recognition End Date=Subscription End Date
  • Revenue Recognition Trigger=either Service Activation Date or Customer Acceptance Date depending

Z-Suite will use the subscription end date as the revenue recognition end date and you can use this feature with delayed Rev Rec as well.

So, there it is. Z-Suite has extremely powerful revenue recognition capabilities and powers all the information NetSuite needs to build the revenue schedule.