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Do you know , there have been multiple acquisitions and announcements in the revenue recognition space as IT vendors ensure that they can support the ASC 606 standard including:

• Intacct’s May 2016 announcement as the first automated ASC 606 solution
• Zuora’s May 10th, 2017 acquisition of Leeyo
• CallidusCloud’s May 24th, 2017 acquisition of RevSym
• Aptitude Software (Microgen plc) , On August 31st, 2017 Acquires RevStream

One wonders how long revenue recognition vendors Softrax will remain available on the market!

Moreover , EBS customer can think for exexistance possibility with Oracle Revenue Management Cloud , which is a centralized, automated revenue management product that enables you to address the ASC 606 and IFRS 15 accounting standard for Revenue from Contracts with Customers.

ERP vendor like SAP and Netsuites also have seprate module to support ASC 606 and IFRS 15.

As we all know, on May 28, 2014, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) together issued a converged standard about recognition of revenue from contracts with customers.

Known as ASC 606, Revenue from Contracts with Customers, the standard will improve the financial reporting of revenue and improve comparability of the top line in financial statements globally, the Boards say.

Under the new revenue reporting regulations, which would establish a common revenue standard for U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), an entity will have to implement the following five steps for contract creation process .

1. Identify the contract(s) with a 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 (or as) the entity satisfies a performance obligation.

There is a misconception by some that ASC 606 only applies to SaaS companies. While recurring revenue companies are certainly impacted, any company with contractual obligations to their customers are impacted.

The new rules will affect companies that use even moderately complex contracts in their dealings with customers. They include, for example, contracts that are structured using tiered pricing or volume discounts or ones that routinely involve modifications, such as adding or dropping users, or that allow seasonal changes to services

More reading : ASC 606 Revenue Recognition

FASB’s new single, principle-based approach to accounting for revenue from contracts with customers is a turnaround from the existing rule-based system, and auditors and consultants are providing a lot of guidance regarding the new standard in regards to how it changes revenue accounting and related disclosures:

• KPMG: The New Revenue Recognition Standard, Planning and Implementing a Successful Transition
• Deloitte: Revenue Recognition, Is your company ready? Don’t run out of time.
• PWC: Revenue recognition: Effectively managing accounting changes

As we know , the entire accounting approach to revenue recognition is undergoing a wholesale re-write. Rather than relying on using a deferred revenue account, you will need to identify and account for performance obligations.

WHAT CHANGES ARE BEING INTRODUCED?

Revenue recognition is taking a more scenario and rules based approach to what can be recognised and more importantly when.

as we know ASC606 , there is introduction of the following 5 Steps to Recognising Revenue:

1. Identify the contracts with the customer
2. Identify the separate performance obligations
3. Determine the contract price
4. Allocate the transaction price
5. Recognise revenue when a performance obligation is satisf ed

Whatever ERP you run, whether it is Oracle or not, you need to consider the impact of this accounting regulation on your business.

IS THERE A SOLUTION/OPTIONS OUT THERE?

Oracle’s Revenue Management Cloud Service is the way forward.

This is a centralized, automated revenue management solution that enables you to address the ASC 606 and IFRS 15 accounting standard Revenue from Contracts with Customers.

Oracle’s Revenue Management Cloud service can be integrated with your existing ERP, whether it’s Oracle or not, to address the requirements of IFRS 15.

• Comply - Adhere to the IFRS 15 core principles
• Audit -Provide complete and accurate access to revenue
• Automate -Automate revenue calculations based on the new accounting standard
• Integrate -Integrate with your existing ERP and third party system

An application that enables you to manage customer contracts and performance obligations easily to help you address the mandates of the new accounting guidance.

Is part of Oracle Enterprise Resource Planning Cloud and has the capability to co-exist with any source application, say Oracle EBS.

Robust integration is available with third party applications, say Oracle EBS.

DISCLOSURE CONSIDERATIONS:

Once of the critical area in new Accounting standard is Disclosure Management .

You will need to either recalculate your fnancial statements for the last two years, or disclose in the year of go-live the impact of the new standard.
Oracle’s Revenue Management Cloud Service can help here too to Integrate with your BI or Hyprion .

Revenue Management Cloud Services Coexistence with Oracle E-Business Suite

Oracle Revenue Management Cloud is an automated and a centralized, revenue management product that addresses ASC 606 and IFRS 15.

Oracle Revenue Management Cloud Service lets you to apply the five steps of core principle of ASC 606 and IFRS 15 requirements:

The product provides a framework to automate the creation of customer contracts and performance obligations as per IFRS 15, their valuations and resulting accounting entries, and enables to recognize the revenue over time or at a point in time with these key Features.

• Contracts and Performance Obligations
  • Rules based Automation
  • Flexible Configurations
• Revenue Allocations
  • Simplified Revenue Accounting
  • Compliant Allocations as per Standards
• Satisfaction Schedules
  • Point in time and over time
  • Independent Billing
• Recognition
  • Liabilities Accrual and Assets recognition
  • Income Statement on transfer to customer on performance obligation met

Most of companies must comply with the new ASC 606 and IFRS 15 accounting standard for fiscal years that begin on or after January 1, 2018.

In its last and greatest release of Oracle Revenue Management Cloud R12 includes a coexistence solution with Oracle EBS.

Oracle E-Business Suite (EBS) products use the coexistence solution for integration with Revenue Management to bring in source document revenue lines from upstream sales cycle systems. Beacuse of these co-existance model , Reference data, such as customers and inventory items, are synchronized between EBS and Revenue Management seemlessly .

 

The coexistence feature enables you to deploy a uniform, centralized and comprehensive view of contracts with customers, unifying the details tracked in a variety of order management, retail point of sales, and billing systems.

The Revenue Management Cloud Service (ORMCS) is a Software-as-a-Service (Saas)-based too, sold on a per user per month basis

As per Documentation , following 6 steps will ensure automated, efficient compliance with ASC 606 and IFRS 15 without impacting your existing sales processes in EBS:

1. Extract Data from EBS : Extract data related to the sales cycle.
   • For example, orders, contracts, receivable data, point of sale data, projects, shipping, traffic, and other fulfillment data.
2. Import Revenue Basis Data and Billing Data: Import revenue and billing data into Revenue Management using predefined File-Based Data Import (FBDI) templates for Revenue Basis and Billing data.
3. Validate and Correct Customer Contract Source Data: Integrated programs in RMCS validates the imported lines, transforms master data, and assigns the transaction period to the imported lines.
4. Ensure compliance with the new accounting standards ASC 606 and IFRS 15: Revenue Management analyzes the data in centralized repository that stores imported and processed sales cycle data, and provides user-configurable contract identification and performance identification rule engines for the system to automatically run the 5 steps of the core principle of ASC 606 and IFRS 15 requirements illustrated above.
5. Compare sales cycle data: Perform what-if iterative studies of how you might implement the new rules, such as the impact of different definitions of contracts and performance obligations, different pricing paradigms, different satisfaction criteria, and so forth.
   • Oracle recommends that you compare the results of your current accounting (ASC 605 and IAS 18) to each accounting iteration generated in Revenue Management (based on ASC 606 and IFRS 15) in an enterprise performance tool,
6. Create Accounting in EBS GL: The Subledger Accounting rules engine in RMCS provides out-of-the-box seeded accounting events to address the need for creating contract assets and contract liabilities at initial performance, as well as reflecting the appropriate accounting once a performance obligation is billed.

This is how best we can undersood Revenue Process with Oracle Revenue Management Cloud.

Untill , next post , bye.

Q :What are the effective dates for reporting using the new accounting standards

A : The expected effective dates are

• For public entities, the effective date starts with reporting periods beginning on or after December 15,2017.
  Fornonpublic entities, the effective date will be deferred for one year to annual reporting periods beginning after December 15, 2018 and interims beginning after December 15, 2019.

Early adoption is permitted one year prior to these dates.

The deadline for adoption of the new revenue recognition standards under ASC606 is fast approaching.

Public companies need to adopt for fiscal years beginning in 2018 while private companies have until 2019.

The changes in how to account for software and services can be significant, often requiring the break out of underlying performance elements that were bundled together under current reporting standards.

The guidance lays out two alternatives for disclosing the revenue recognition transition , both of which require dual accounting to support the disclosure requirements.

• Full retrospective
  • Under the full retrospective approach, the full prior two years of financials are restated to the new standards to provide an apples to apples comparison between the years under the new standards.
• Modified retrospective
  • The modified retrospective approach does not require restatement of prior years but requires disclosure of the year of adoption financials under the old standards to provide the apples to apples comparison under the old standard

Full retrospective

Under the full retrospective approach, the sooner that a multi-book solution can be implemented, the better.

A multi-book approach accounts for new contracts under both standards.

In a perfect world, implementing this type of dual accounting at the beginning of the retrospective period would be ideal, but most companies will need to perform recast calculations on some period of contracts.

The full retrospective also requires two points to calculate a cumulative adjustment.

First, a cumulative adjustment will need to be performed at the beginning of the retrospective period and then again at the date of adoption to adjust the company’s primary books to the new standards as per below diagram.

Modified retrospective

The modified retrospective is a bit simpler in that it only requires one cumulative adjustment of open contracts as of the date of adoption and only requires the cumulative impact calculation of open contracts vs the period by period recast required to support a full retrospective.

Usually it recommend establishing a multi-book strategy two purposes as below :

High Points and Low points in two Options

Let’s take a quick look for highpoints and low points for each approach, and offer a few reasons why a company might choose one over the other.

Therefore , regardless of the which method is choosen to disclose revenue recognition transition, there will be a significant effort which need to assess properly .These options include considerations for historical data restating requirements and overall data volume requirements. Discuss and engage your Implemenation partner to plan for this transition and deploy technologies to support these new requirements.

Question : Is there an approach to transition to the new accounting standard?

A: The standard states that the methods to transition to the new standards are as follows:

Entities are permitted to apply the new revenue standard either retrospectively subject to some practical expedients (that is, to restate prior periods for a consistent basis of accounting and presentation) or through an alternative transition method [full retrospective ].

The alternative transition method requires an entity to apply the proposed guidance only to contracts not completed at the date of initial application. Then, recognize the cumulative effect of adoption as an adjustment to the opening balance of retained earnings in the year of initial application. Under this approach, the financial statements before and after implementation will not be comparable.

Moreover , Retrospective transition requires applying the new guidance to all prior periods (subject to certain practical expedients).

From a timing standpoint, the critical issue is that an entity presenting three years of comprehensive income will likely need to run parallel systems for two years before the year of adoption

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

• ( ASC 606 ) Step1 : Identify the contract with a customer
• ( ASC 606 ) Step2 : Identify the performance obligations in the contract
• ( ASC 606 ) Step3 : Determine the transaction price
• ( ASC 606 ) Step4 : Allocation of Transaction Price

Lets take a quick look on Step 5 which is Recognize revenue as performance obligations are satisfied

RECOGNIZE REVENUE AS PERFORMANCE OBLIGATIONS ARE SATISFIED

Finally, the business can recognize revenue when they meet the performance obligations.

If that fulfillment happens at a distinct point in time, revenue can be recognized right then.

If the obligation is satisfied over time—for example, a technical support contract—the business needs to decide how to measure the progress and completion of that obligation.

More details herewith:

Performance Obligations Satisfied Over Time – An entity will recognize revenue over time if any of the following criteria are met:

The customer concurrently receives and consumes the benefits provided by the entity’s performance as the entity performs.

• The entity’s performance creates or enhances a customer-controlled asset.
• The entity’s performance does not create an asset with an alternative use and the entity has a right to payment for performance completed to date.

Regarding the last bullet, a right to payment exists if an entity is entitled to payment for performance completed to date if the customer terminates the contract for reasons other than the entity’s nonperformance.

Performance Obligations Satisfied at a Point in Time – An entity will recognize revenue at a point in time (when control transfers) for performance obligations that do not meet the criteria for recognition of revenue over time.

To determine when a customer obtains control, the entity should consider the following indicators (not all indicators have to be met in order to recognize revenue):

1. The entity has a present right to payment for the asset.
2. The entity transferred legal title to the asset.
3. The entity transferred physical possession of the asset.
4. The entity transferred the significant risk and rewards of ownership to the customer.
5. The customer accepted the asset.

Measuring Progress Toward Satisfying a Performance Obligations Satisfied Over Time

• Output Methods – Units produced or delivered, contract milestones, or surveys of work performed.
• Input Methods – Costs incurred, labor hours expended, time lapsed, or machine hours used.

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

• ( ASC 606 ) Step1 : Identify the contract with a customer
• ( ASC 606 ) Step2 : Identify the performance obligations in the contract
• ( ASC 606 ) Step3 : Determine the transaction price

Lets take a quick look on Step 4 which is Allocation of Transaction Price

ALLOCATE THE TRANSACTION PRICE

Step 4 allocates the transaction price to the distinct POBs in a contract. An entity typically allocates the transaction price to each POB based on the relative standalone selling prices of each distinct good or service promised in the contract.

If a contract has more than one performance obligation, the business needs to provide an accurate estimation as to that obligation’s standalone selling price versus the total agreed upon amount.

ASC 606 allows for includes three methods of figuring this amount—adjustment market assessment, expected cost plus margin, and residual.

To be continued

The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

Fig : 5 steps Framework

Last post we have seen step 1 and step 2

( ASC 606 ) Step1 : Identify the contract with a customer

( ASC 606 ) Step2 : Identify the performance obligations in the contract

Lets take a quick look on Step 3:

DETERMINE THE TRANSACTION PRICE

The next step is to determine the transaction price, the amount of consideration that the seller expects to be entitled to in exchange for transferring the control of goods or services promised in the contract.

The transaction price is the amount of consideration that an entity expects to be entitled to in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of a third party (i.e. sales taxes).

The transaction price is the amount the business expects to receive in return for transferring the goods or services outlined in Step 1. The amount can be fixed, variable, or a combination, but is allocated specifically to the performance obligations outlined in Step 2.

Therefore , once these performance obligations are fulfilled, the business can recognize this as revenue.

When a certain amount of cash is transferred to the business simultaneously with the promised goods or services, this is quite easy. But, more complex payment arrangements require additional thought.

Variable Consideration and the Constraint on Revenue Recognition:

• The transaction price may be variable or contingent upon future events, including discounts, refunds, rebates, credits, incentives, performance bonuses, etc.
• Variable consideration should be estimated based on either the expected value or the most likely amount, defined as follows:
  • Expected Value – Sum of the probability weighted amounts for various possible outcomes.
  • Most Likely Amount – The most likely amount in a range of possible amounts.

There is some suggestion that companies that implement ASC 606 rules early might be able to recognize more upfront revenue on sales, but that shouldn't be taken as a guarantee

To be continued.