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

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.

Revenue Recognition Standard, ASC 606

Revenue Recognition Standard, ASC 606

The FASB and IASB issued their converged standard on revenue recognition in May 2014. The standard provides a comprehensive, industry-neutral revenue recognition model intended to increase financial statement comparability across companies and industries and significantly reduce the complexity inherent in today's revenue recognition guidance.