NetSuite’s Role in ASC 606 Revenue Recognition Compliance

NetSuite’s Role in ASC 606 Revenue Recognition Compliance

The introduction of ASC 606, the new revenue recognition standard issued by the Financial Accounting Standards Board (FASB), has brought about significant changes in when and how companies recognize revenue. This new guidance, which went into effect for most public companies in 2018 and private companies in 2019, requires businesses to re-evaluate their accounting processes and systems to ensure compliance. As a leading cloud-based enterprise resource planning (ERP) system, NetSuite offers a suite of tools and features designed to help companies navigate the complexities of ASC 606 compliance. In this post, we’ll explore how NetSuite’s Advanced Revenue Management (ARM) module and other capabilities make it a top choice for businesses seeking to streamline their revenue recognition processes under ASC 606.

Why ASC 606 Compliance Matters

ASC 606 represents a major shift from the previous revenue recognition guidance. Under the new standard, companies must recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled. This is a departure from the old rules, which allowed companies to recognize revenue based on certain milestones or deliverables.

The goal of ASC 606 is to bring more transparency and consistency to revenue reporting across industries. By establishing a common framework for when and how revenue is recognized, the standard aims to make financial statements more comparable and help investors and other stakeholders better understand a company’s financial performance.

However, complying with ASC 606 is no simple task. The standard introduces new concepts and terminology, such as identifying performance obligations, determining standalone selling prices, and allocating transaction prices. It also requires significant judgment in areas like estimating variable consideration and determining whether a contract modification should be treated as a separate contract.

For many companies, particularly those with complex contracts or multiple revenue streams, implementing ASC 606 has required significant changes to accounting processes, systems, and controls. Non-compliance is not an option, as it can result in financial misstatements, restatements, and damage to a company’s credibility with investors and customers. In extreme cases, it could even lead to legal and regulatory consequences.

Given the high stakes of ASC 606 compliance, companies need robust systems and processes in place to ensure revenue is recognized accurately and consistently under the new rules. That’s where ASC 606 compliance software like NetSuite comes in. These systems are designed to automate and streamline the complex revenue recognition calculations and processes required under ASC 606, reducing the risk of errors and easing the compliance burden on finance teams.

How NetSuite Supports ASC 606 Compliance

NetSuite, as a leading cloud ERP system, provides a comprehensive set of tools to help companies manage their revenue recognition processes in compliance with ASC 606. At the heart of NetSuite’s ASC 606 capabilities is the Advanced Revenue Management (ARM) module. ARM offers configurable, rules-based revenue recognition that aligns with the principles of the new standard.

Let’s take a closer look at some of the key features of NetSuite ARM and how they support ASC 606 compliance:

Automatic Allocation of Transaction Prices

One of the core requirements of ASC 606 is to allocate the transaction price of a contract to the individual performance obligations based on their standalone selling prices. This can be complex, especially for contracts that include multiple goods or services, discounts, or variable consideration.

NetSuite ARM automates this allocation process through its Fair Value Pricing Engine. The engine uses configurable rules and templates to determine how to allocate arrangement consideration to each performance obligation. It supports various pricing methodologies allowed under ASC 606, such as the adjusted market assessment approach, expected cost plus a margin approach, and residual approach.

For example, let’s say a software company sells a bundle that includes a software license, installation services, and one year of post-contract support, all for a single price of $100,000. Using ARM, the company can set up fair value prices for each element based on their standalone selling prices – say, $75,000 for the license, $20,000 for the installation, and $15,000 for the support.

When a bundled order is placed, ARM will automatically allocate the $100,000 transaction price proportionately across the three obligations based on these fair value prices. This ensures that revenue is allocated in compliance with ASC 606, without the need for manual calculations.

Flexible Revenue Recognition Templates

Another key requirement of ASC 606 is to recognize revenue as performance obligations are satisfied over time. The timing of revenue recognition can vary widely depending on the nature of the good or service, the terms of the contract, and the company’s business model.

NetSuite ARM provides flexible revenue recognition templates that allow companies to define and automate their revenue recognition schedules in line with ASC 606. These templates can be set up to recognize revenue based on different factors, such as:

– Passage of time (e.g., ratably over the contract term)

– Usage (e.g., as the customer consumes or uses the product)

– Milestones (e.g., as specific performance targets are met)

Continuing with our software company example, they might set up ARM templates to recognize the license revenue upfront when control transfers to the customer, the installation revenue as the services are performed, and the support revenue ratably over the 12-month contract term.

ARM then automates the posting of these revenue entries based on the defined schedules. This not only saves time and reduces the risk of errors compared to manual journal entries, but also provides a clear audit trail of how and when revenue was recognized for each contract.

Managing Contract Modifications

Contract modifications, such as adding or removing products or services, changing prices, or extending contract terms, are common in many industries. However, accounting for these changes under ASC 606 can be complex. Companies must determine whether a modification should be treated as a separate contract or as part of the existing contract, based on factors like whether the additional goods or services are distinct and whether the price change reflects their standalone selling prices.

NetSuite ARM helps companies manage contract modifications in compliance with ASC 606. If a modification is determined to be a separate contract, a new contract record can be created in NetSuite and linked to the original contract. If the modification is a continuation of the existing contract, the contract record can be updated and ARM will automatically true-up the revenue allocation and recognition schedules to reflect the changes.

For example, let’s say a customer adds additional licenses to their software contract halfway through the term. If the additional licenses are priced at their standalone selling price, this would likely be treated as a separate contract. The company could create a new contract record in NetSuite for the additional licenses, with its own revenue recognition schedule.

On the other hand, if the customer gets a discount for adding the licenses, this might be considered a modification of the existing contract. In this case, the company could update the existing contract record with the new total price and quantities. ARM would then automatically recalculate the allocation of revenue to the various performance obligations and adjust the recognition schedules going forward.

Performance Obligation Tracking and Reporting

ASC 606 requires detailed tracking and disclosure of performance obligations. Companies must disclose the revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods, the amount of the transaction price allocated to remaining performance obligations, and when they expect to recognize that amount as revenue.

NetSuite ARM provides robust tools for tracking and reporting on performance obligations. The Performance Obligation Allocation Record allows companies to see, for each obligation, the total amount allocated, the amount recognized to date, and the remaining balance to be recognized. This record is automatically updated as revenue is recognized over time.

ARM also generates detailed reports and dashboards that give visibility into the revenue recognition pipeline. Companies can see a schedule of expected future revenue recognition by month, quarter, or year, broken down by product line, customer, contract, or any other relevant dimension. This helps with financial forecasting and provides the data needed for ASC 606 disclosures.

Handling Variable Consideration

ASC 606 introduces the concept of variable consideration, which is any amount in a contract that can vary based on factors like discounts, rebates, incentives, performance bonuses, penalties, or usage-based fees. Under the standard, companies must estimate the amount of variable consideration to which they expect to be entitled and include that amount in the transaction price, to the extent it is probable that a significant reversal of revenue will not occur in the future.

NetSuite ARM provides tools to manage variable consideration in accordance with ASC 606. Companies can define different types of variable consideration in the system, such as sales-based royalties, usage-based fees, or performance bonuses. ARM will then automatically calculate the estimated amount of variable consideration based on the defined rules and the best available data.

As more information becomes known over the course of the contract (e.g., actual usage volumes or performance metric results), ARM will true-up the variable consideration estimates and adjust revenue accordingly. This helps ensure that revenue recognition remains accurate and compliant over the life of the contract.

Implementing NetSuite for ASC 606 Compliance

While NetSuite ARM provides a powerful toolset for managing ASC 606 compliance, implementing it does require some upfront planning and configuration. Companies will need to analyze their contracts and business models to determine how ASC 606 applies to them. This includes identifying performance obligations, determining standalone selling prices, and defining revenue recognition policies.

Once these decisions are made, they need to be configured in NetSuite ARM. This involves setting up items with the appropriate revenue recognition templates, defining fair value prices and allocation rules, and creating any necessary custom fields or workflows to capture additional contract data.

Another key part of the implementation process is migrating existing contracts and revenue data into NetSuite. This can be a significant effort, especially for companies with a large volume of contracts or complex revenue recognition histories. It’s critical to ensure that all historical data is accurately brought into the new system and that revenue recognition schedules are properly established for in-progress contracts.

Beyond the technical setup of NetSuite ARM, implementing ASC 606 often requires changes to upstream business processes. Sales teams may need to change how they structure and price contracts. Billing and collections processes may need to be adjusted to align with the new revenue recognition schedules. And there may be new data requirements for capturing information needed for ASC 606 calculations and disclosures.

Change management and training are also critical considerations. Finance teams will need to be trained on how to use NetSuite ARM and how to apply the company’s ASC 606 policies. But the impacts often extend beyond finance. Sales teams, for example, will need to understand how the new rules affect contracting and pricing. IT teams will need to be involved in integrating NetSuite with other systems and ensuring data flows smoothly.

Given the complexity of ASC 606 and the potential impact on multiple business functions, many companies choose to work with an experienced implementation partner for their NetSuite ARM deployment. A knowledgeable partner can help guide the decision-making process, ensure the system is configured optimally, and provide training and support to drive successful adoption.

The Benefits of NetSuite for ASC 606 Compliance

While implementing ASC 606 can be a significant undertaking, the benefits of using a robust revenue management system like NetSuite ARM are substantial. By automating complex revenue allocation and recognition processes, NetSuite can significantly reduce the time and effort required to comply with ASC 606 on an ongoing basis.

The system’s flexible configuration options allow it to adapt to a wide variety of business models and contract types. Whether a company has straightforward subscription contracts or complex, multi-element arrangements, NetSuite ARM can be tailored to automate revenue recognition in compliance with ASC 606.

NetSuite’s strong reporting and analytics capabilities are another key benefit. With real-time visibility into recognized and deferred revenue, projected revenue recognition, and remaining performance obligations, finance teams can more easily produce the disclosures required under ASC 606. And with the ability to drill down into revenue data by customer, contract, product line, or any other dimension, they can gain deeper insights to inform strategic decision-making.

Importantly, NetSuite’s native integration of ARM with the broader ERP system allows for a seamless, end-to-end revenue management process. From the initial sales order through billing, revenue recognition, and financial reporting, all data resides in a single, unified system. This reduces the risk of data inconsistencies and provides a complete, auditable trail of revenue transactions.

As a cloud-based system, NetSuite also offers the advantages of automatic updates, scalability, and accessibility from anywhere. As ASC 606 guidance evolves or as a company’s business needs change, NetSuite ARM can adapt quickly without the need for costly and time-consuming on-premise software upgrades.

Choosing the Right ASC 606 Solution

While NetSuite is a leading ASC 606 compliance solution, it’s not the only option on the market. Other ERP systems, as well as specialized revenue recognition software, also offer ASC 606 capabilities. Choosing the right solution requires careful consideration of a company’s specific needs and circumstances.

Factors to consider include:

– The complexity of the company’s contracts and revenue streams

– The volume of contracts and transactions

– The level of automation and configurability required

– The need for integration with other systems (e.g., CRM, billing)

– The level of reporting and analytics required

– The resources and expertise available for implementation and ongoing management

For many companies, particularly those in the mid-market and those already using or considering NetSuite for other business functions, NetSuite ARM offers a compelling combination of capabilities, flexibility, and ease of use. Its native integration with the broader NetSuite ecosystem, extensive configurability, and strong reporting features make it a top choice for streamlining ASC 606 compliance.

Conclusion

The shift to ASC 606 has been a significant challenge for many companies, requiring changes to processes, systems, and even business models. However, with the right tools and approach, it’s possible to not only achieve compliance but also to gain efficiencies and insights in the revenue recognition process.

NetSuite’s Advanced Revenue Management solution offers a comprehensive set of capabilities to automate and streamline ASC 606 compliance. From automatic allocation of transaction prices to flexible revenue recognition templates to detailed performance obligation tracking, ARM is designed to handle the complexities of the new standard.

While implementing any new system requires effort and planning, the benefits of a robust, automated revenue recognition solution are clear. By reducing manual effort, improving accuracy, and providing real-time visibility into revenue, NetSuite ARM can help companies navigate the ongoing challenges of ASC 606 compliance with confidence.

As your company continues its ASC 606 journey, consider how a platform like NetSuite could help you streamline your processes, strengthen your controls, and unlock new insights into your revenue streams. With the right systems and processes in place, you’ll be well-positioned to thrive in the new world of revenue recognition.