ASC 606 for Software Companies: Common Issues & Tips

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The deadline for private companies to file annual financial statements under revenue recognition standards (ASC 606) can be stressful for any business.

ASC 606 is the biggest development in accounting since The Sarbanes-Oxley Act, and perhaps the biggest change in standards in the last 100 years. It’s been quite a roller coaster for organizations of all sizes.

What is ASC 606 (Accounting Standards Codification)?

ASC 606 is a compliance standard that outlines how public, private and non-profit companies should conduct revenue recognition in regards to entering contracts with customers in exchange for goods or services.

It was created in May 2014 with the goal of reducing the amount of inconsistencies in how different types of businesses track and report revenue for the same product or service.

Why is ASC 606 important for software companies?

For companies who have lagged behind, year-end financials are the last chance to attain ASC 606 compliance under the wire. Many emerging software companies fall into this category — and may already be experiencing a painful start to the year. Non-compliance or errors on those year-end statements will require time-intensive restatements.

Issues like these can create additional pressure both internally and externally, with some of the most severe consequences stemming from non-compliance with GAAP.

It’s time for a long hard look at your progress with adopting the new ASC 606 standards and implementing them into your ERP solution. It might also be time to call for help.

Pain Points for Software Companies Struggling With ASC 606 Adoption

1. ASC 606 changes affect all aspects of the business

The Financial Accounting Standards Board (FASB) has redefined everything from revenue allocation to cost deferral.

That means everyone in finance, accounting, sales, delivery, product management, and marketing has to change the way they think about revenue recognition — and how they work as a result.

2. ASC 606 may force accounting decisions that have ripple effects across the business

For example, when a firm shifts its accounting policy to recognize licensing revenue upfront, financial statements become choppy.

This makes it difficult to compare statements year over year, forecast revenue and plan strategically. As a result, moving to a subscription model may become more attractive and organizations may accelerate those plans.

3. Implementing ASC 606 can get very complicated, very quickly

Organizations may have additional records to configure within their enterprise resource planning (ERP) system.

Software transaction models that are highly variable may require extensive adaptations. Mergers and acquisitions can also increase the complications, as the different entities might have different policies and configurations that must be aligned.

All of this can quickly bog down the revenue team. Meanwhile, the clock keeps ticking.

Everything You Need to Do to Ensure a Successful ASC 606 Implementation

1. Prepare the entire organization for change

Sales, marketing and product teams must have a deeper understanding of your products, how you sell and discount them, and when and how they are delivered.

They also need to understand how their practices may change under ASC 606.

For example, one of Bridgepoint’s clients is a leading mainframe software provider. When we helped this client implement NetSuite in accordance with the new ASC 606 standards, the organization had to reassess its software delivery model — especially around end-of-year sales.

If the sales teams don’t fully grasp a company’s policies under ASC 606, they might close deals that simply don’t fit the parameters configured in ERP. This creates frustrating additional work for the revenue team and poses the risk of error-prone manual recognition.

With our mainframe software client, Bridgepoint engaged many stakeholders to help them understand how the business will recognize revenue going forward and how financial statements will change.

Decision-makers must be brought up to speed, as well as all members of any departments that rely upon revenue numbers for budget, commissions and performance metrics.

2. Review all contracts to determine the accounting policy you’ll follow under ASC 606

Before you can move forward, you have to understand what you’ve got.

All existing sales revenue contracts need to be reviewed by qualified individuals to understand the details of each agreement. This can be especially challenging for growing organizations that may have started out with non-standardized sales practices and acquired other companies over time.

You may have hundreds of contracts, each with a unique set of terms and agreements that must be assessed and addressed. This review may also reveal additional needs, such as fair value pricing studies, that must be completed to attain compliance.

The information gathered in the contract review will help your revenue team, accounting and auditors settle on which ASC 606 revenue recognition methods to adopt in your implementation.

3. Plan your implementation roadmap

In many ways, implementing ASC 606 within your ERP translates to the internal migration of all of your contracts to the new method.

Start by conducting an analysis and modeling to identify the necessary configuration and customization work.

For example, with NetSuite’s Advanced Revenue Module (ARM), the following records may require additions, changes, and updates:

  • Item Revenue Categories
  • Revenue Recognition Rules
  • Forecast Revenue Recognition Rules
  • Fair Value Formulas
  • Fair Value Price Lists

You may also need to make modifications to the item master configuration, transaction dimensions, and any standard or custom fields; as well as any scripts and settings that assist with automation.

With a clear sense of scope, you can then outline a strategic plan that makes the most effective use of the time and resources at hand.

4. Execute your implementation plan

In addition to the ERP configuration and customizations, you may have to make adjustments to other systems.

Be sure to identify and address any necessary work within your:

  • Customer Relationship Management (CRM) platform
  • Configure Price Quote (CPQ) software
  • Services Resource Planning (SRP) solution
  • And more

5. Continue maintaining your configuration and improving practices

As your organization grows and changes, your ERP configuration will have to be tweaked and adjusted.

Any shift in your product mix, customer base or sales model may require configuration maintenance. New acquisitions may not be fully ASC 606 compliant, or they may have approached their ERP configuration differently.

The reality is that the still-developing impact of ASC 606 and the rapid evolution of the software industry both point towards a need for regular NetSuite maintenance from here on out.

Achieving ASC 606 Compliance

Whether or not your organization has fully adopted ASC 606 yet, there will still be plenty of work to do within your ERP for the foreseeable future.

As the deadline for filing financial statements looms, now’s the time to redouble (or triple) your ASC 606 compliance efforts. It may even be time to sound the alarm for help.

Engaging an experienced partner that can guide you — or even handle the work for you — can ease the pressure, so you can focus on running the business.

Need Help With Your ASC 606 Transition?

Bridgepoint has helped numerous public and private companies through their ASC 606 transitions.

We also have deep experience working with software companies on a wide range of technical, operations and finance initiatives.

Contact our expert team to manage the entire transition on your behalf — or handle discrete tasks like contract review, systems analysis or configuration assessments.