There’s been a lot of questions and uncertainty around how revenue is recognized under the new ASC 606 standard that was first released in May 2014 but finally being required to implement effectively beginning after Dec 15, 2017 for public entities and certain non-profits and for private entities with a 2019 fiscal year. This change will have a substantial impact on all accounting and ERP systems but for the purpose of this blog we’ll focus on existing and future NetSuite customers.
First, what is Revenue Recognition?
In essence, the revenue recognition principle is the foundation of accrual accounting and the matching principle. Revenue should be posted as it is earned, not when services are invoiced or paid for.
A simple illustration:
- An agreement to provide landscaping services for building complex for 6 month period in return for a one-time upfront payment of $600.
- $600 is recorded as a liability on balance sheet.
- $100 is recognized per month over the service period (6 months)
The ASC 606 rule is designed to replace a slew of industry-specific guidelines with a single standard. The core principle of this rule is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Historically rev rec primarily impacted software and service industries. Moving forward all industries will really need to evaluate the impact of this new accounting standard will have on their business.
So now you may be asking "how will this change impact current and future NetSuite customers?"
For Future NetSuite Customers
For new NetSuite customers that license the Revenue Recognition module you will automatically receive the new Revenue Recognition engine known as “Advanced Revenue Management” also referred to as ARM. Advanced Revenue Management automates revenue forecasting, recognition, reclassification and auditing through a rule-based event handling framework and is compliant with the ASC 606 revenue standard.
With advanced revenue management you can defer revenue for recognition across future periods according to the rules you configure. It supports fair values based on vendor-specific objective evidence (VSOE), best estimate of selling price (ESP), third party evidence (TPE), and other fair value methods your company uses. These fair values are used to determine the revenue allocation ratios for multi-element transactions.
Here are the Key Features of ARM
- Real Time Visibility and Drill-ability
- Set it Up, Follow Regular Sales Processes, Manage Revenue Recognition by Exception
- Compliant with Relevant Standards: ASC 606/ASU 14-09, SOP 97-2, 98-9, EITF 08-01, 09-03
- Flexible and Dynamic Fair Value Pricing Engine
- Ratable and Event Based Revenue Recognition Rules
- Full support for Complex Multi-Element Arrangements spanning multiple sales transactions:
- Relative Fair Value Allocations
- Residual Method Allocations
- Dual Allocation
- Support for “Linked Orders” and Contract Modifications
- Revenue Plans can easily be amended, put “On Hold”, and “Caught Up” to a particular period
- Comprehensive Audit Trails on all key Objects
- Real Time Revenue Reporting and Disclosures
- Per Book Fair Value Pricing, Allocation, Revenue Planning, Recognition, Reclassification, and Reporting
- Contract Acquisition Cost Amortization
For Existing NetSuite Customers
For existing NetSuite customers that license Revenue Recognition Module, you can continue to use the former rev rec engine since it will not be discontinued for the foreseeable future, assuming the new ASC 606 standards does not require you to migrate to the new rev rec engine. If you are not sure, I’d suggest working with your accounting firm and a high quality NetSuite Partner in making the determination of what rev rec engine you will require to satisfy the ASC 606 standard.
If it is determine you will require the new rev rec engine (ARM) there is a qualification/discovery process you will need to go through to determine if you will require a professional service engagement to potential reimplement the new rev rec engine and the potential cost associated with this migration both in terms of licensing and services. Unfortunately your existing settings and ongoing recognitions will not port over to the new module and will most likely require a fairly complex migration process.
If it is determined you will require the new rec rev module (ARM) there are many enhancements that will make life easier for accountants using NetSuite. Here are just a few.
First, amending a revenue plan (“On Hold” and “Caught Up”) couldn’t be easier. With ARM for example, any changes made during the recognition period or if the value of the project changes, the system fully supports posting revenue adjustments back in time retroactively.
Second, many of ARM records are exposed and available to SuiteScript to allow for custom business rules on top of standard NetSuite workflows.
Lastly, you can combine revenue arrangements, for example, you issue an initial contract, then perhaps issue a change and then a cancellation, you can wrap all those individual revenue elements into a single arrangement, therefore no longer layering multiple Sales Orders/Revenue Commitments and Return Authorizations and trying to make sense of it all.
If you need help understanding your options or learning more about ARM leave a comment below and we’ll answer your questions.