REINVENTING REVENUE RECOGNITION... · ASC 606 Affects Every Company Understanding ASC 606 / IFRS 15...

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APTTUS | 1 REINVENTING REVENUE RECOGNITION AUTOMATING FOR ASC 606 / IFRS 15 COMPLIANCE

Transcript of REINVENTING REVENUE RECOGNITION... · ASC 606 Affects Every Company Understanding ASC 606 / IFRS 15...

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REINVENTING REVENUE RECOGNITIONA U T O M A T I N G F O R A S C 6 0 6 / I F R S 1 5 C O M P L I A N C E

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CONTENTSTABLE OF

Introduction

ASC 606 Affects Every Company

Understanding ASC 606 / IFRS 15

Reinventing Revenue Recognition

Adapting to a Subscription Economy

Applying the New Five-Step Revenue Recognition Process

The Practical Impact of ASC 606 / IFRS 15

1. Impact Across Industries

2. Impact Across Job Functions

Leveraging Quote-to-Cash Technology to Gain a Competitive Advantage

ASC 606 / IFRS 15 Compliance is in the Details of Quote-to-Cash

Looking Ahead

Apttus Intelligent Quote-to-Cash Solves ASC 606 Compliance

Why Apttus?

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INTRODUCTION

In the Fall of 1987, the Financial Accounting Standards Board (FASB) issued a rule update that required every publicly held company to produce a new financial statement in a 10Q/10K filing.

The ruling caused a great deal of anxiety and forced accountants to recast income statements into sources of cash and uses of cash. Much of this was handled by complicated spreadsheets or custom coding to ERP systems.

So when the FASB issued ASC 606, Revenue from Contracts with Customers (Topic 606), on May 28, 2014, experienced leaders in the legal and business communities did not minimize its potential impact.1 After all, they had been through something like this before.

1 American Institute for CPAs, Financial Reporting Brief: Roadmap to Understanding the New Revenue Recognition Standards 1 https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/FRC_Brief_Revenue_Recognition.pdf (September 2016).

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In today’s economy, consumers buy goods and services in new ways, beyond a simple one-time transaction. They subscribe, buying products as an ongoing service and expecting to use self-service to modify their subscriptions. These consumers preferences have made their way into the workplace, forcing B2B enterprises to add new subscription and service options.

As a result, large enterprises selling to other businesses no longer simply sell “a product.” They also sell professional services, training classes, warranties, and enhanced support services. In addition, they sell subscriptions to services to monitor hardware or software that complements the original product on a per device, per user, or usage basis.

All of this means a more complex sales process, where bundling and pricing on-the-fly often occurs. These trends create a deeper, longer-lasting relationship between vendor and customer, where the collection of what has been purchased will transform over time.

ASC 606 AFFECTS EVERY COMPANY

ASC 606 prescribes the method to recognize revenue from these ongoing relationships with customers, including how to identify the obligations, determine the transaction price, and allocate the transaction value to the performance obligations. There’s no way around it - every company needs to follow the new rules.

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ASC 606 is a new standard for recognizing revenue designed to reflect the reality of modern business transactions. It requires that revenue for each obligation within a contract is attributed to that obligation, regardless how it is bundled in the sales process.

Before ASC 606 became effective for public companies on December 15, 2017 and for non-public organizations on December 15, 2018, the U.S. continued to follow current Generally Accepted Accounting Principles (GAAP) that differ significantly from worldwide guidelines under the International Financial Reporting Standards (IFRS).

To help reconcile these inconsistencies, the International Accounting Standards Board (IASB) issued IFRS 15 on May 28, 2014, and it came into effect on January 1, 2018. Both rules apply to “any entity that enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards.” This describes nearly every company, with exceptions only for lease and insurance contracts covered by different rules.

UNDERSTANDING ASC 606 / IFRS 15

ASC 606 and IFRS 15 are substantially the same and nearly every company must pay attention to the new rules.

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Before ASC 606, revenue recognition requirements in the U.S. were industry-specific resulting in different accounting for similar transactions. This matters because two similar companies could report different financial results based on how the accounting team and auditing team interpreted the existing GAAP guidelines. Outside the USA and FASB jurisdiction, the IFRS provided limited guidance on revenue recognition, so complex transactions were difficult to address.

In today’s data-driven economy, any minor accounting change that affects the impression of profitability or slows the perceived pace of growth could change the fortune of a company. For this reason, harmonizing these rules is critical in an era increasingly characterized by borderless business in the cloud and subscription structures where buyers pay for goods and services in advance of delivery. The new mandate directs entities to more precisely reflect the price and timing of any transfer of goods or services.

In the explicit case: The manufacturer may agree to directly provide maintenance service for free to an end customer that purchases the product from the distributor. But if the manufacturer outsources

REINVENTING REVENUE RECOGNITION

Establish clear expectations for all parties

Ensure control of resources

Optimize revenue and cost streams

Streamline business processes

performance of maintenance to the distributor and agrees to pay the distributor an agreed-upon amount for those services, then the manufacturer must allocate a portion of the transaction price to the explicit promise to provide those maintenance services.

In the implicit case: A manufacturer has historically provided maintenance services for free to an end customer that purchases through a distributor. Though there is no explicit promise in the contract between manufacturer and distributor, on the basis of customary business practice there may be an implicit promise to provide maintenance services. The manufacturer identifies the promise of maintenance services as a performance obligation to which it allocates a portion of the transaction price. This may mean the manufacturer needs to change revenue recognition practices under ASC 606.

In both cases, the obligations need to be identified and a portion of the transaction price needs to be allocated. ASC 606 puts two manufacturers with the same business obligations on a level playing field from a revenue reporting standpoint.

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ASC 606 / IFRS 15 directs that the revenue recognition reflect the economics of what is really happening in a contract with multiple obligations. Revenues that are earned up front are recognized up front. Revenues earned over time are recognized over time. Revenue earned at milestones are recognized as milestones are reached. ASC 606 / IFRS 15 requires every entity to evaluate every sales agreement in detail in order to recognize revenue.

ASC 606 / IFRS 15 refines and codifies how GAAP is applied. Under the new guidance, merchants must consistently estimate performance obligations realized over time even though they may not record the revenue until earned. They also need to realize and record one-time fees or commissions over the length of the contract, instead of at the outset. Changes in the timing and proportionate shares of revenue (and their related costs of sales) applied to performance obligations may create a much different appearance of a company’s revenue performance. Likewise, the new structure for how revenue is reported on financial statements may trigger companies to change their sales compensation schemes, including how channel partners are remunerated for volume performance over time.

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Subscriptions began with enterprise software companies shifting from permanent, on-premises licenses to annual subscriptions. In the consumer world, subscription box services have brought fashion, food, razors, and countless other goods to the doorsteps of consumers. Large manufacturers of consumer goods sell information about consumer buying habits to distributors as a usage-based data service, which opens opportunities for other value-added services to accompany physical goods. The subscription economy is interconnected, complex, and booming.

The Internet of Things (IoT) is a great example of a large economic shift fueling the subscription economy. Gartner predicts that 7.5 billion non-consumer connected “things” will be in use by 20202 and IDC predicts that global IoT revenue will reach $7.065 by 2020, growing at 21% CAGR from 2015.3

With the advent of the Industrial IoT, sensors are being added to nearly all equipment. As a result, traditional

ADAPTING TO A SUBSCRIPTION ECONOMY

manufacturing companies are augmenting their revenue streams with subscription-based Control and Reporting Systems, proving valuable and convenient visibility and access to value-added resellers, service partners, and end users alike. Software as a Service (SaaS) empowers enterprises to change intellectual property licenses from a single right-to-use license, which forces customers to pay for explicit upgrades and maintenance agreements and give access to intellectual property (IP) through a Right-to-Access licenses. This opens augmentative recurring revenue streams and funds the costs of continuing improvement.

Enterprise businesses need the ability to offer their customers physical goods, digital goods, subscription services, and usage-based services plus professional services, training, warranties, and more. They must fulfill these orders, invoice them correctly, and recognize revenue at the appropriate time. Companies that are not selling with a subscription model yet must prepare to do so, and quickly.

2 Gartner Says 8.4 Billion Connected “Things” Will Be in Use in 2017, Up 31 Percent from 2016, Gartner Press Release (Feb. 7, 2017)3 IDC Market in a Minute: Internet of Things, http://www.idc.com/downloads/idc_market_in_a_minute_iot_infographic.pdf

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Companies should recognize revenue when the performance obligation is satisfied. If it is satisfied over time, then the entity should recognize the revenue by measuring the progress toward complete satisfaction of the performance obligation. Contracts with more than one performance obligation need to allocate the price proportionally to each one.

APPLYING THE NEW FIVE-STEP REVENUE RECOGNITION PROCESS

It’s critical to note that ASC 606 applies to all contracts with customers, except:

• Lease• Insurance contracts• Debt and equity securities, as well

as derivatives• Guarantees (other than product or

service warranties)• Non-monetary exchanges between

entities in the same line of business to facilitate sales to customers or potential customers

Different accounting guidance covers these special contract types.

To properly recognize revenue under ASC 606 / IFRS 15, a company must follow five steps:

1.

Identify the contract with the customer

2.

Identify the performance obligations in the contract

3.

Determine the transaction

price

4.

Allocate the transaction price to the

performance obligations in the contract

5.

Recognize revenue when

the entity satisfies a

performance obligation

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In addition, ASC 606 / IFRS 15 is likely to generally impact these area:

• Contract costs• The sale of non-financial assets• Income taxes• Warranties• Sale returns and allowance4

ASC 606 / IFRS 15 is likely to impact across industries and across job functions.

IMPACT ACROSS INDUSTRIES

The revenue timing for contracts for chemicals and manufactured items that are recognized based on a percentage-of-completion, units-of-delivery, or attainment of milestones could be affected depending on when a customer receives its delivery. Even airlines will lose the incremental cost approach they use for miles earned through travel.

In the entertainment, media, and communications sector, the upfront installation or set-up fee that is

THE PRACTICAL IMPACT OF ASC 606 (AND IFRS 15)

currently recognized immediately conveys a material right. Therefore, revenue will be deferred and recognized over a period of time. Also, entities in these fields will not be able to recognize revenue net of discounts during promotional periods while avoiding it during free service periods. Instead, they will need to apply uniform treatment of discounts or free service periods that are considered integral to the performance obligations.

The new five-step process will provide greater transparency and comparability of company’s revenue across industries, transactions, and locations. It also brings the U.S. and other countries into alignment on revenue recognition principles.

4. Mike Walworth, Goodbye ASC 605, Hello 606! Five Non-Revenue Impacts, GAAP Dynamics (Jul 21, 2015) http://www.gaapdynamics.com/insights/blog/2015/07/21/goodbye-asc-605,-hello-606!-five-non-revenue-impacts/.

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In addition to specific changes in different verticals, the new protocols will encourage finance, legal, and sales leaders within affected organizations to adjust their respective approaches.

Finance professionals will need to manage the math behind the requirements and apply the proper valuation to obligations. More importantly, Finance will need to put systems in place that will automaticallymanage changes to the obligations, assets, and revenue recognition schedules as customers change the products and services they use throughout any given contract term. Plus, customers have the ability to manage multiple contracts as the business relationship grows.

Legal leaders are likely to focus on key contract terms and conditions earlier in the process, renegotiate existing agreements, and develop more effective approval practices. They will also need to be more aware of the financial impact of the post-proposal negotiations and communicate changes in a more transaction-oriented way, especially as the negotiations relate to implicit performance obligations.

Sales teams may see an overhaul of their compensation structures in order to better align incentive payments with revenue recognition.

IMPACT ACROSS JOB FUNCTIONS

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In 1987, when FASB adopted FAS 95, many companies dealt with the changes through manual processes, custom coding to ERP systems, and complex spreadsheets. There were no Quote-to-Cash platforms in 1987.

LEVERAGING QUOTE-TO-CASH TECHNOLOGY TO GAIN A COMPETITIVE ADVANTAGE

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• An entity can consider all components of the transaction, from the initial quote through post-sale events like rebates, promotions, performance bonuses, etc.

• Customers are presented with invoices as expected based on the accepted proposal and/or signed agreements, which avoids errors, increases customer satisfaction, and decreases delinquency.

• Revenue is automatically recognized in the proper form and order, viewable side-by-side based on current and new reporting standards for dual reporting.

• An entity can use company-wide approvals and workflows to ensure that implicit performance obligations (for warranties, etc.) are properly valued.

• The cost of acquisition is properly recorded and reflected according to the revenue from which it was created.

• Any subsequent changes to the contract or assets owned are captured and automatically handled to help ensure proper disclosure and compliance.

Now, with the challenges of compliance with ASC 606 / IFRS 15, companies can turn to Quote-to-Cash systems to strengthen their business practices. With a Quote-to-Cash platform:

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Today, Quote-to-Cash technology automatically processes certain functions and appropriately separates items to serve the same role for both public and private companies adjusting their practices to comply with ASC 606 / IFRS 15. Software can provide dual reporting under the rules by determining a stand-alone price, separating performance obligations, and processing an array of calculations simultaneously to identify the ideal approach to addressing the new mandate.

More importantly, any company subject to the changes will now have to identify every one of its performance obligations and tie each to an appropriate revenue recognition schedule. Furthermore, since the value of an obligation, such as a warranty, may be in a standard pricing table rather than in the contract itself,

ASC 606 / IFRS 15 COMPLIANCE IS IN THE DETAILS OF QUOTE-TO-CASH

companies will require an integrated configure price quote (CPQ) system. Companies will need robust obligation management as part of a complete contract lifecycle management (CLM) system that can model full parent-child hierarchies in contracts, handle identification of obligations in third-party contracts, and track obligations from quote, to contract, to delivery. The only way to achieve this is with an intelligent Quote-to-Cash platform.

An advanced approvals system to streamline the approvals process will also be a requirement. If, for example, a customer asks for free delivery, the effective value of the product sold is lowered. Free delivery may not trigger an approval process, but a price discount would. Under the new rules, the two customer incentives should both be considered within the company’s approvals process.

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Quote-to-Cash is the vital business process that connects a customer’s interest in a purchase to the realization of revenue. It includes creating a quote, responding to RFXs, submitting a proposal, negotiating and managing a contract, fulfilling orders, recognizing revenue, ensuring compliance and tracking payments – all within visible and controlled workflow. Quote-to-Cash solutions include Configure-Price-Quote (CPQ), Contract Lifecycle Management (CLM), and Revenue Management applications.

Quote-to-Cash is the single link between top-line results, bottom-line results and customer satisfaction. No other process is as critical for maximizing the value of capturing revenue in a profitable way as well as meeting the needs of customer sales requests. This process relies on the collective intelligence of the enterprise. The impact of accurate quotes, proposals, contracts and orders make the flow of all data and processes within an enterprise work smoothly, thus creating value for enterprises and their customers.

ABOUT INTELLIGENT QUOTE-TO-CASH

INTELLIGENCE

BEHAVIOR

PROCESS

Max

X-Author

Promotions

Omni-Channel E-Commerce

Deal Management Order Management

BillingManagement

& RevenueRecognition

ConfigurePrice Quote

ContractManagement

Rebates

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Failure to leverage technology to automate compliance can limit overall corporate performance. It is critical that organizations apply the most efficient integrated and intelligent Quote-to-Cash solution to gain a competitive advantage in the ASC 606 / IFRS 15 era.

A Quote-to-Cash solution must have a contract management capability, including a secure contract repository. This gives Legal and Finance teams visibility and control of contracts, while enabling the sales organization to increase sales velocity without burdening the sales operations department.

A Quote-to-Cash system must have Configure Price Quote (CPQ) capability, which empowers sales to offer the best products and prices to their customers with accuracy and speed, even from complex product catalogs with specialized pricing.

LOOKING AHEAD

A Quote-to-Cash solution must have Revenue Management capabilities to easily manage entitlement-based orders, in-flight changes, or mid-cycle subscription changes. The system must accurately invoice customers and schedule revenue recognition as guided by the pricelist, transaction, and contract in place with the customer. Automatically propagating mid-cycle changes to the contract, such as assets-owned by the customer, and automatically reflecting those changes in the revenue recognition schedule, will give side-by-side visibility of the changes, save time, and prevent costly reporting errors.

Adopting Quote-to-Cash technology will align how the Finance, Legal, and Sales teams approach new contracts, standardize definitions and enterprise-wide guidance, seamlessly permit updates and renewals without any manual effort, and automate approvals to drive compliance.

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APTTUS INTELLIGENT QUOTE-TO-CASH SOLVES ASC 606 COMPLIANCE

5 STEPS TO RECOGNIZE ASU 2014-09 (ASC 606)

• Identify the contract(s) with a customer

• Identify the performance obligations in the contract

• Determine the transaction price• Allocate the transaction price to the

performance obligation

• Recognize revenue when the entity satisfies a performance obligation

ASC 606 SOLVED WITH APTTUS INTELLIGENT CLOUD

• Apttus CLM activated agreement(s) and Apttus CPQ accepted proposal(s) define the contract

• Products and services sold define performance obligations

• Contract terms, discounts, rebates, and promotions affect the expected consideration

• Revenue allocation rules proportion transaction prices by standalone selling price

• Revenue recognition rules applied to the products & services are the source for journal entries into your ERP of choice

Apttus solves compliance with ASC 606 /IFRS 15 by automating the revenue recognition process, especially as mid-cycle changes to contracts and assets-owned change the performance obligations over time. Apttus Quote-to-Cash is unique in that it represents contracts, assets owned, identified performance obligations, transaction prices, and revenue recognition schedules in a single data model. This reduces the time and cost of calculating, recording, and reporting on revenue and eliminates the use of manual processes and reliance on spreadsheets.

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Ultimately, the value of innovation comes down to how well a technological investment advances the interests of a business. Quote-to-Cash solutions deliver substantial business benefits to organizations, with the value of these solutions documented in surveys and validated by third party analysts and experts.

Average Percentage Improvements Reported by Apttus Customers Source: Apttus Quote-to-Cash (QTC) Impact Study conducted June 2017 by an independent third-party, Satmetrix on 200+ Apttus customer contacts randomly selected. Performance metrics are intended as a guideline based upon historical results from a sample set of customers. Results are dependent upon many different factors that are customer-specific. Therefore, actual results will vary. Response size per question varies.

THE QUOTE-TO-CASH IMPACT ON BUSINESS

+42% +42%

+35% +34%+30%

+38%

+27%+22%

FasterContract

Processing

ContractProcessing

Volume

FasterQTC

CycleFaster Deal

ClosureWin Rate

FasterTime toQuote

QuoteVolume

Deal Size

+7-25%SaleCOMPLIANCE

Reduced Rogue

DiscountingDeal Flow Visibility

FasterAudit

Reports

Faster Deal

ApprovalContract

Compliance

+44%

+51%+47%

+43%

+32%

QuoteQuality

ContractAccuracy

ReducedAmendments

After Signature

ContractsAuto-

renewed

+44%

+51%

+45% +43%

SALESEFFECTIVENESS

CUSTOMERSATISFACTION

• Visibility into all the components of the initial transaction and post-sales events affecting the transaction price.

• Control of revenue through approvals insuring obligations are properly valued.

• A solution to incent sales behaviors that align with corporate strategy.

• Intelligent approvals automation to drive compliance.

• The ability to easily manage subsequent changes to contracts or assets owned and reflect those changes in revenue schedules.

• Recognize revenue in the proper form and order, with easy and accurate reporting.

With Apttus Intelligent Quote-to-Cash, organizations gain:

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Apttus’ offerings are fueled by the Apttus Intelligent Cloud, which maximizes the entire revenue operation by streamlining and improving business processes, aligning and driving revenue winning behaviors, and recommending relevant, intelligent actions. No other enterprise software provider has ever used technology in this way. As a result, Apttus is uniquely positioned to deliver successful customer outcomes, improving the realization of revenue from the top-down, while solving common business problems within the sales cycle.

The Apttus Intelligent Cloud powers all of Apttus’ Quote-to-Cash solutions, including Configure Price Quote (CPQ), Contract Management, E-Commerce, and Revenue Management. Apttus combines these process-based applications with modern and innovative behavioral applications including promotions, sales compensation, and rebates to align and drive revenue winning behaviors across all your sales channels. All our applications can be further enhanced with machine learning to recommend relevant, intelligent actions making all your sales channels more effective and our conversational and intuitive user interfaces, make it easy to learn and use our applications.

WHY APTTUS?

Additionally, Apttus’ X-Author solution increases adoption of these tools across your organization by allowing Microsoft Word and Excel to function as user interfaces dramatically increasing the speed and efficiency of data input, manipulation and reporting and X-Author can be used to improve the adoption of CRM systems such as Salesforce and Microsoft Dynamics 365.

Only Apttus offers complete automation of revenue operations from beginning to end, successfully transforming the Quote-to-Cash process for some of the largest and most complex businesses around the globe. Apttus is your trusted business advisor for Quote-to-Cash business transformation.

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ABOUT APTTUS

Apttus, the category-defining Quote-to-Cash software company, drives the vital business process between the buyer’s interest in a

purchase and the realization of revenue. Utilizing a patented combination of SaaS-based applications, the Apttus Intelligent

Cloud maximizes the entire revenue operation by driving behavior and providing prescriptive data to company decision-makers.

Apttus offers enhanced Configure Price Quote (CPQ), E-Commerce, Contract Management, Renewals and Revenue Management solutions on the world’s most trusted cloud

platforms, including Salesforce and Microsoft Azure. Apttus is based in San Mateo, California, with additional offices located

across the globe.

FOR MORE INFORMATION VISIT:

apttus.com Quote-To-CashBlog Resources

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