With the implementation of the ASC 606 revenue standard for public and private companies, it is more essential than ever for sales and finance to work together. Additionally, Finance will need to collaborate with the legal department and the back-office teams overseeing shipping and invoicing, as increased effort will be required to properly comply with ASC 606.
As we look at ASC 606 revenue from contracts with customers, here are the basic steps and the responsible departments:
- Identify the Contract (Legal, Sales and Finance)
- Identify the Performance Obligation (Legal, Sales and Finance)
- Determine the Transaction Price (Legal, Sales and Finance)
- Allocation of the Transaction Price (Finance)
- Recognition of Revenue (Finance)
Let’s examine how to use your CRM or sales pipeline management software to ensure timely billing. For simplicity, throughout this post, we’ll refer to Salesforce, but these tips can be applied to most CRMs.
1. Focus on Deal Point Inputs
Salesforce empowers the sales department to track leads, opportunities, and an eventual sale, but it also offers functionality that allows the Finance department to get involved without any costly customization.
As an opportunity is converted into a sale, Finance should input or review the following deal point inputs within Salesforce:
- Commencement Date
- Contract Period
- Payment Dates
- Progress Billing
- Final Billing
- Delivery of Finished Good or Service
Creating an audit step that notifies you of any changes to these inputs in Salesforce will allow you to track the first 3 steps of revenue recognition. The SOW (Statement of Work) and/or signed contract should all be saved in Salesforce.
“Scientia potential est. (Knowledge is power.)”
– Sir Francis Bacon
2. Be Aware of Changes
Know that your data will change. Document any changes in the contract or progress in the deliverables within Salesforce. Be on the lookout for changes that may initiate a new contract according to ASC 606.
After inputting the “master” data in Salesforce, know your sources of subsequent information and transactional data. These can be in the form of email, phone calls, order entry input, change order, shipping documents and conversations with the operations department and salespersons.
3. Share Documentation
Establish a document to be shared with other stakeholders with a description of your company’s revenue streams and (at a high level) how you will officially recognize revenue according to GAAP. It is important to communicate this clearly with the sales team as revenue, according to 606, may be recorded in different accounting periods. (A good example of a revenue recognition write-up can be found in the 2018 Twitter Annual Report on pages 69-71).
Separate from public company SOX documentation and implementation memos, you should establish a plain-English document with a clear set of rules on when and how to prepare invoices, cross-check against Salesforce, prepare adjustment journal entries and other peculiarities covered by ASC 606. This document should take your revenue recognition write-up and clearly layout the rules you have established for your company for 606 recognition. A checklist for each revenue stream is a must during initial implementation.
4. Know When a Milestone Will Be Triggered for Invoicing
Within Salesforce, you have already input the contractual dates for delivery and invoicing. Salesforce will allow you to manually set up contract dates and generate automated email notifications. Most of the time, both dates are the same. For instances where delivery is made before the contractual invoicing or payment was made by the customer before delivery, a journal entry may be appropriate, but no revenue recognized.
A journal entry may be appropriate when either of the following occur:
- Delivery is made before the contractual invoicing (revenue recognition)
- Payment was made by the customer before delivery (deferred revenue)
Refer to your checklist if a performance obligation has been met.
To help illustrate how ASC 606 will work, let’s look at the revenue recognition process for a fictional advertising agency. For this exercise, we will treat delivery as satisfying a performance obligation and invoicing/revenue recognition is appropriate. The contract states that there is a commencement payment at the beginning of the engagement, and there are four deliverables that initiate invoicing. The fourth deliverable, according to the contract, states “right to payment” is established when the good or service is delivered, and the customer has signed off on the acceptance. In this instance, delivery with sign-off is necessary for invoicing.
There are multiple triggers for invoicing in this exercise. The triggers represent “inputs” in Salesforce that elicit an action from the Company. An example of a trigger is the date of commencement or date of first, second & third delivery of goods/services. As stated at the beginning of this article, it will take an interdepartmental effort to properly recognize revenue in a timely manner.
The commencement date is when Legal receives the final contract and this expected date has been input in Salesforce. Even with an automated email notification set up, best practice is for Finance to check in on Salesforce daily with an eye on the commencement date. As the commencement date draws near, communication is made with Legal to determine if the final contract has been received. The Legal department receives a contract that is signed and dated by both the company and customer. Legal informs Finance and a final copy of the contract is uploaded in Salesforce. An invoice is generated by Finance, but no revenue is recognized.
Even though contractually, the company is entitled to payment, ASC 606 considers the commencement payment as deferred revenue. It is up to the company to determine how to recognize the commencement payment. It may be based on an amortization of the contract period or upon a percentage method based on the 4 deliverables. Upon invoicing, the company must determine if the customer will require a purchase order in order to accept the invoice.
Trigger #2 – 4
Salesforce has the expected date of the deliverables. Finance cross-checks in Salesforce and with operations to ascertain timing of the deliverables. Being copied on an email to the client indicating delivery of goods/services to the client is enough to initiate invoicing. Deliverables 1, 2, & 3 are recognized to revenue immediately at the point of invoicing. We are assuming that the performance obligation has been met.
Salesforce has the final delivery date and the stipulation that a signed acceptance form must be in hand to generate the final invoice. Again, Finance cross-checks in Salesforce and with operations to ascertain the timing of the deliverable and the return receipt of a signed acceptance form. Finance will receive an email notification for the final deliverable from Salesforce but cannot invoice until the signed acceptance form is received. Once the company receives the acceptance form, the customer has officially and legally accepted the good/service. The company can recognize revenue at this point including any amortization remaining on the commencement payment.
ASC 606 Revenue Recognition changes accounting for revenue so that information is standard across most industries. Your company may be able to fully comply with ASC 606 utilizing your existing CRM or sales pipeline management software to help with revenue recognition. If your company doesn’t have a CRM or sales pipeline management software in place, you may want to consider implementing one of these systems or other potential solutions that will allow full compliance with ASC 606 Revenue Recognition.
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About the Author
Manny is a CPA with 20+ years of diverse finance and accounting experience across a variety of industries including food manufacturing, alcohol manufacturing and distribution, fulfillment, advertising and entertainment. He is a Deloitte alumnus with a broad range of experience in both public and private companies including Controllership, M&A transaction support, due diligence, S-1 filing support, managing internal and external financial reporting, and system implementations. These companies have included Nestle, DreamWorks, Imax and Vision Media among others. Prior to 8020, Manny worked as Controller at Troika Media Group, an entertainment marketing and design agency, which he assisted in taking public. Manny holds a Bachelor of Science in Accounting from California State University Los Angeles.
Categorized in: Financial Reporting & Accounting