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Subscription Businesses Face Accounting Overhaul under ASC 606 (Part 1)

by | Dec 15, 2016

Subscription Businesses Face Accounting Overhaul

Accounting Overhaul

Subscription businesses face accounting overhaul in preparing to comply with the new revenue recognition standards issued by the Financial Accounting Standards Board (FASB). And at this point, if you are a publicly traded company, you have only one year to fall into compliance. Privately held companies must be in compliance in two years.

FASB developed ASC 606 in conjunction with the International Accounting Standards Board (IASC), which has issued its standards under the title IFRS 15, to better reflect the revenue of increasingly complex contracts of professional services companies’ revenue.

In this two-part blog series, we’ll look first at the implications of ASC 606 and the particular impact on subscription-based companies. In the second part, we’ll review the five steps FASB recommends companies take to recognize revenue based on contracts and services rendered.

A Speeding Locomotive

The first thing financial managers need to understand about ASC 606 is that the deadline for compliance is fast approaching. After initially issuing ASC 606 in 2014 with the idea of going live at the beginning of 2017, FASB later agreed that because of the complexity of the change, it would grant companies an extra year to fall into compliance. FASB did add a provision at that time to allow companies to begin early application of the standards in 2017 as a transition assistance.

The reason this change is so complex for accounting departments, unlike previous changes that making minor tweaks to the accounting system handled the change, is the required integration of contracts and deliverables into the revenue generation stream. Many accounting systems are not prepared to deal with this integration of information, and financial managers are left to reach across company lines to acquire this new information and build a system that can integrate the data.

Financial managers who hope to incorporate these changes with spreadsheets and custom scripts could be in grave danger if the numbers prove wrong. Whether a company is planning an acquisition, preparing to go public or merely seeking additional funding, misstated revenue as a result of mistakes in this integration will cost a CFO’s job.

The Challenge of Subscriptions

These challenges are multiplied for subscription-based services because of the complexity of the contracts.

Five factors that complicate compliance with ASC 606 for subscription business are:

  • Contracts: Many customers bundle multiple agreements with your company into their subscription, and under ASC 606 these may need to be considered together as one contract. Contracts also frequently are amended while in place and renewed at intervals based upon time frame as well as performances. The new requirements mentioned above can make revenue projections a moving target that the accounting department must keep in sharp focus.
  • Payment terms: Contracts also include discounts based upon meeting or not meeting performance standards that must be factored into revenue figures. Also, renewals can include special terms that will vary revenues.
  • Collectability: Your company also must meet minimal standards to ensure collectability in many service sectors, so accounting now must track how well services are delivered.
  • Fees: Fees of all variety, such as activation, user interfaces, etc., must be monitored continuously to ensure revenue figures remain accurate. Also, as customers add services, the revenue must accurately reflect when those charges take effect.
  • Expenses: One added feature of ASC 606 is that costs such as sales commissions and royalties must be applied against revenue at appropriate times through the life of the contract.

As your finance department considers how best to comply with these new ASC 606 revenue recognition standards, this might be the best time to switch your entire accounting system to one that already can factor all these changes. Intacct’s Contract and Revenue Management Solution is an out-of-the-box solution that integrates accounting with contracts and deliverables to meet the ASC 606 standards right now. Contact us to learn how Intacct can take away this headache from your financial management team and how we can serve as a partner to get your system up and running and in compliance in a matter of weeks, not months.