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The Aptitude Blog

Solving for common revenue recognition complexities

February 9, 2023
Posted by Sarah Werner

Revenue is one of the most important KPIs for an organization. A revenue multiple may be used to value a company for an interested buyer, strategic partner, or investor. Strong annual revenue growth underpins company value, drives investments and new business generation, and may entice new talent to join. Failure to accurately account for revenue could also result in serious issues that can damage a company’s brand and jeopardize the business.

Yet, most companies still manage revenue and revenue recognition compliance with Excel, a custom ERP solution, or a hybrid of the two. It’s often highly manual and requires large teams to complete monthly revenue close activities.

The revenue recognition standards, ASC 606 and IFRS 15, prompted many organizations to establish new policies and controls and helped drive the creation of data foundations rich with granular contract and revenue data. However, for many organizations, these new approaches and processes were shoehorned into legacy architectures or existing manual-heavy solutions without attention to improving the revenue outcome or building new revenue insight that would strengthen the business.

Below we’ve outlined some of the core complexities around revenue recognition.

Revenue Recognition Complexities

Responding to changes in accounting interpretation

The standard is specifically written to allow companies some flexibility regarding interpretation. As an organization changes and grows, it may choose to change the way they interpret the revenue recognition standard. A solution should allow this flexibility over the long term – with the ability to track changes in accounting judgments over time.

Companies who choose to do this in Excel or within ERP solutions that are not fit for purpose could struggle with modelling the impacts of the change in accounting judgments and automating the ability to apply the correct accounting rules in their system.

Accommodating new business models

Innovation is required to stay ahead of the competition and often this takes the form of new products and business models. Finance-controlled revenue recognition solutions remove the need for day-to-day IT involvement, empowering finance to self-configure rules and performance obligations and address issues in minutes.

For Red Hat, a shift to RevStream helped them roll out new products and offers quickly.  A challenge for Red Hat is constant change in both business models and product portfolios. AREV is highly configurable, and we are reassured knowing that we can easily adapt to changes and incorporate additional configurations to help with the transition and accommodate new business models,” stated Declan O’Donoghue, Senior Principal Analyst at Red Hat.  

Addressing disparate data

A more detailed, centralized data foundation is one of the benefits of revenue recognition compliance. If a solution is still relying on manual workarounds like Excel to centralize and standardize data from source systems, it’s a missed opportunity for automation and will hinder efforts to get maximum value from the data captured. For Amit Shah, CIO at Excelitas, RevStream gave him the ability to solve upstream data issues within the solution.

“Many of the solutions we looked at expected data going into the revenue recognition engine to be perfect. You were not able to fix anything within the model. In Aptitude RevStream there is the flexibility to fix data quality issues directly within the solution, which is something we really liked.”​ 

Managing Standalone Selling Price (SSP)

Standalone Selling Price, (SSP) is required under the new standard. Establishing fair value or product line SSP tends to be completed annually, or quarterly, in a traditional business. Taking a month to complete 33,000 lines in a matrix to find SSPs isn’t unusual in large companies.

For most companies, pricing is based on industry benchmarks or some other estimate that can be proven in audit but isn’t great for accurate forecasting. With a revenue management solution in place that delivers operational intelligence, SSPs come together across a global organization in one place. Accuracy is guaranteed because it is generated by monitoring what has gone through the system. The organization now has a centralized record of every discount applied by region, sales team, and so on and can analyze whether those discounts drove a positive or negative outcome. This is the kind of information that differentiates and empowers the finance team within an organization

Handling complex contract arrangements

Many organizations have complex arrangements with their customers that could result in varying accounting requirements by geography, customer type, sales channel, or even individual customer.

These specific terms can be captured in the language of the contract arrangement but not held within any of the upstream systems – like CRM or order management – that are used to support the revenue process. This means these terms typically need to be manually identified and input into the revenue recognition process. In addition, many contracts require modifications mid-term creating further accounting and revenue recognition complexities.

Correctly triggering revenue recognition

Material misstatements as a result of flawed revenue recognition practices can be a big concern for organizations. When there are system limitations on the ability to define specific and very detailed triggers for recognizing revenue, the risk of running afoul of the standard increases.

For example, ERP-based solutions may be very limited in what they can do around event-based recognition. Limited, predefined system events, events that require manual configurations, or an inability to string together a combination of events to trigger recognition can pose issues for an organization with complex contracts.

Automating revenue recognition

An automated revenue management solution can ease the manual requirements of revenue recognition and lead to more consistent company policy application and better transparency for auditors, investors, and business leaders.

RevStream has automated revenue management and compliance at some of the world’s most complex, high-volume enterprises. The solution is scalable to address volume fluctuations and can handle complex contracts, frequent modifications, and the need to report under both US and International GAAPs from a single source of trusted data.

Interested in more on this topic?

Blog: What CFOs need to get right when adopting subscription models

On-demand webinar: How revenue management can accelerate business growth

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This blog post was written by:

Sarah Werner
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