4 Common Revenue Recognition System Challenges
Software revenue recognition has become increasingly complex for many companies. Accordingly, for many software companies, applying Standard ASC 606 may be challenging. We’ll discuss common system issues that revenue accountants often face when it comes to ASC 606.
Manual Calculation of SSP and Revenue Allocation Percentages
One challenge that revenue accountants can face with revenue recognition systems is determining SSP and the allocation of revenue. Under ASC 606, step four of the five-step process states that when a contract includes more than one performance obligation, the company must allocate consideration to each performance obligation based on its relative standalone selling price (RSSP or SSP). Revenue is then recognized as the entity satisfies each performance obligation by transferring control of the promised goods or services to the customer.
Establishing SSP is fairly straightforward and involves little to no estimation when the price of a good or service is observable and the company sells the good or service separately in similar circumstances to similar customers.
This exercise becomes more complex when standard prices do not exist for a good or service or if the pricing varies from one transaction to another. In both cases, companies may have to continuously update SSP on a pre-defined cadence (e.g. quarterly). A software that automatically recalculates or updates SSP is ideal for accountants, and can save time and reduce human errors resulting from manual calculations.
Lack of Controls and Change Management
Another challenge that revenue accountants face is the lack of controls and change management over the revenue recognition system. This problem is particularly challenging for companies that have opted to build an in-house revenue recognition solution.
When building an internal tool, the primary goal of the project is to develop a tool that meets the requirements of ASC 606, while other objectives such as controls and change management become secondary. However, developing and maintaining controls and change management over the revenue recognition tool is especially important to accounting teams because these controls allow accountants to obtain comfort over the source code within the system.
Without a change management process in place, engineers may have the flexibility to change code or update code to fix bugs without validation and approval from accounting teams. This may result in unintended results within the system. Alternatively, electing to purchase an off-the-shelf revenue recognition solution can alleviate some of these concerns. If your team is evaluating build vs. buy for revenue recognition software, take a look at our blog post for questions to consider.
A few things to consider when exploring off-the-shelf solutions:
- Is the tool ASC 606 compliant?
- Does the tool have proper reporting in place, not just for Accounting teams, but also consider the needs of other Finance teams that may rely on revenue recognition data (i.e. FP&A)?
- Does the tool have SOC 1 and SOC 2 Reports?
Lack of a Cash Matching Feature
A third issue that accounting teams face is related to the tracking of cash and revenue at the transaction level. Many accountants refer to this process as “Cash Matching”. Cash Matching allows accountants to follow the order to cash process at the individual transaction level. This is incredibly important for companies with a high volume, low dollar revenue model.
An automated Cash Matching system must be able to link cash from various financial systems at the transaction level and surface reconciling items. Accountants can then focus on the analysis and follow-up of reconciling items instead of spending most of their time manually performing Cash Matching. The lack of a Cash Matching system makes it difficult for accountants to identify differences between a company’s physical cash received versus customer billings, which ultimately drives revenue. Not being able to pinpoint and identify these differences can potentially lead to an over/understatement of revenue.
Inconsistent Data in Reporting
Revenue recognition systems must be able to generate various reports needed for financial reporting. In many cases, accounting teams are not the only users of revenue recognition systems. Other teams in finance (e.g. FP&A, Tax) will also generate reporting for forecasting, management reporting, and tax analysis. Ensuring that data is consistent throughout the system is crucial to guarantee that all teams are working with the same source data and all of the company’s financial records and underlying support can be reconciled across teams.
Further reading on revenue recognition:
- How to manage revenue recognition of gift card revenue
- An insight into other revenue recognition challenges
- Everything you need to know about cash accounting revenue recognition for subscription businesses
- Some more ASC 606 revenue recognition challenges
- Everything you need to know about revenue recognition for E-commerce companies