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Software Companies Still Navigating the New ASC 606 Standards

Posted by Carrie Augustine, CPA, NetSuite Software Industry Principal

With the deadline passed, organizations are still using technology and automation to support ASC 606 compliance. 

ASC 606, the new revenue-recognition standard, is the most significant accounting change since the introduction of Sarbanes-Oxley. One of its primary goals is to harmonize US and international revenue recognition standards under a new principals-based model, simplifying revenue recognition.

What looks simple on paper is of course often complicated in practice. Many software companies have found that the transition to ASC 606 has complicated their revenue-recognition policies while raising questions about their ability to fully comply with the new standard.

While the deadline for implementation of ASC 606 has passed as of January 2019, that hardly means that every affected company has completed its transition: many private companies plan to take much of 2019 to adapt internal policies and operations, and to complete the transition shortly before end-of-year audits. Those companies should take special note of the challenges and opportunities presented by ASC 606.

Problems related to ASC 606 fall into three broad categories:

  • Understanding how ASC 606 impacts existing revenue policy
  • Recasting revenue for past fiscal periods
  • Operationalizing a new 606 revenue policy

Fully implementing ASC 606 and adapting current organizational practices is a particularly thorny process. Software companies tend to face three stumbling blocks on the path to full operationalization:

  • Revenue Allocation. Although revenue allocations were part of ASC 605, companies routinely white-papered their way out of the need to perform them. That’s not an option under ASC 606: revenue allocations must be reported, and at a level of detail that is new to many companies. This is easily the most significant shift in revenue management under the new standard.
  • Performance Obligations. ASC 606 changes the standard by which performance obligations are defined and recorded. Its predecessor used the satisfaction of contractual terms to identify performance obligations; under ASC 606, the transfer of control of goods or services defines a performance obligation.

    For example, under ASC 605, implementation of a software platform may have satisfied a contractual clause, and therefore fulfilled a performance obligation. Under ASC 606, the obligation is not fulfilled if the implementation requires further customization and integration with existing code. The service has not been truly delivered until the customer is able to use the new platform.
  • Contract Cost Deferral. ASC 606 matches contract costs, such as sales commissions, with contract revenue.

These changes can have effects beyond the accounting department; internal conversations about 606-compliant revenue policy should address the above points thoughtfully and thoroughly. Many customers go for long stretches believing that they will not be impacted by ASC 606, only to call in a panic after speaking with their auditors. Forward-thinking companies are prepared for these impacts along with purely internal ones.

Companies who are already considering how to take advantage of their new revenue policies have a partner in NetSuite ready to ease the transition, especially in the most troublesome areas:

  • Revenue Allocation. NetSuite’s robust allocation engine supports varying levels of complexity surrounding revenue allocations.
    For example, software companies commonly identify distinct groups or bands of customers (e.g. Enterprise, SMB, Partner), whom they sell to, and they price their products quite differently. This affects the Standalone Selling Price (SSP) for each group. NetSuite uses the appropriate SSP to properly allocate revenue. Further, additional purchases may be made under the umbrella of an existing contract. Revenue allocation for the subsequent purchase may require consideration of an existing revenue arrangement. NetSuite identifies and links additional purchases for revenue allocation.
  • Performance Obligations. NetSuite supports the ability to present a bundled offering to your customer and handles the revenue on the back-end in whatever way a given company’s policy dictates.
  • Contract Cost Deferral. NetSuite automatically matches contract costs with contract revenue.

Like many with a stake in the transition to ASC 606, I have been discussing the new standard for years with colleagues throughout the software industry. Along the way, we’ve discussed the systems we’re using to support the transition. It’s clear to me that NetSuite is the only enterprise resource planning (ERP) solution currently capable of fully supporting ASC 606 implementation. While other ERP solutions are scrambling to meet their customers’ 606-related needs, NetSuite customers are enjoying the benefits of its foresight and sustained devotion to helping companies fully operationalize 606-compliant policy.

Learn more about how NetSuite software supports ASC 606.