Revenue Recognition for Subscriptions? The Answer Is Automation

Revenue accounting is complicated.

Revenue accounting is complicated. Understatement of the year? Maybe.

If you’re in accounting or finance, you understand. You know when a company reaches a certain growth point — whether due to increasing sales, acquisition, new lines of business or other means — revenue turns into a monster that needs to be tamed.

Too many companies today labor under the illusion that somehow, some way, manually-managed spreadsheets featuring VLOOKUPS, pivot tables and macros is the only way to account for revenue recognition. But these manual workarounds stand in the way of compliance with revenue guidance, accurate and timely reporting, and the ability to scale your business. There’s a better way.

Let’s dig into the main challenges we see companies face when it comes to revenue recognition — and see how automation can help.

#1. Aggregation and Grouping of Data

Common across all industries is the need to merge information from a variety of data sources into a single revenue contract in an easy and useful format for revenue reporting.

In today’s world, businesses often use more than one system to manage the business: ERP, CRM, CPQ, A/R, billing and other systems. There is no way to establish a grouping link or attribute to bring all necessary data together in a recognizable and useful revenue contract. Orders, invoices and projects may all come from different sources and many companies still use spreadsheets to attempt to link the data together and provide visibility for accountants into the revenue contracts needed for reporting purposes.

Often, revenue departments tasked with overseeing spreadsheets need to consolidate inputs from various systems, including manual inputs from remote offices without the benefit of any systems in place. This can involve running multiple reports, checking links between spreadsheets and systems, then re-running and re-checking the data line by line. Other examples include companies tracking revenue from various products into different systems which, in reality, are part of a single revenue contract and under the newest guidance need to be managed as such.

#2. Recalculating Revenue for Contract Changes

One of the benefits of the subscription business model is the flexibility afforded customers to upgrade, downgrade, pause, extend, cancel or, through a whole host of other ways, make changes to their subscriptions.

Such changes increase the complexity of revenue accounting. In the old days, accountants could choose to handle those changes as a separate order, or at least manage them manually in spreadsheets. That is not the case under the new ASC 606/IFRS 15 guidelines. With the requirement to analyze performance obligations and determine if they are distinct or not — and the need to perform prospective or retrospective re-allocations — revenue accounting and reporting for contract modifications is exponentially more cumbersome.

Most companies lack a robust process for handling contract modifications with the precision required by the new guidance. Imagine trying to use a spreadsheet to identify multiple types of contract modifications and calculate each one differently? That’s the challenge too many companies face when they lack automation.

#3. Event-based Revenue Recognition

Under the new guidance, recognition of deferred revenue revolves around revenue events — or “triggers” — that release revenue or allow it to be recognized by accountants.

Such triggers may include consumption, timing, acceptance, or activation of a license. These revenue triggers are difficult to track — and spreadsheets, emails, and even CRM or ERP systems struggle to keep up. Volume exacerbates the problem, as will the number of different triggers a company is likely to use.

Most companies have no systematic method to track these triggers, preventing a timely release of revenue with any sort of visibility. It is no longer sufficient to just recognize revenue upon billing. Rather, accounting policies need to specify events to define when a company can recognize revenue. Companies which track timing and events in spreadsheets and attempt to match that information with contracts to determine when and how much revenue should be released will only sink farther underwater without the use of automation.

#4. Standalone Selling Price Calculation and Allocation

The tedium of quarterly fair-value analysis of BESP and VSOE under the old guidance hasn’t gone away, but remains in the form of the standalone selling price.

These calculations require complicated reports and several hours of time just to uncover the data to be assessed — which is time better spent elsewhere. Revenue accountants can use a variety of methods to help arrive at the appropriate SSP, but applying it to a contract with multiple elements or multiple performance obligations is a whole different ball of wax. It is no longer enough to simply assign SSP or allocate it.

What happens when contracts are modified, making recalculations necessary? This is yet another time-intensive area where accountants spend hours every quarter gathering data from multiple sources, reporting errors with missing fields, and investing in laborious prep work just to analyze the data set. Without an automated system, this heaps additional layers of work onto an already overburdened accountant.

#5. Cost to Obtain Contracts

As every business knows, “It takes money to make money” and those contract-related costs need to be properly handled.

The classic example is a sales commission, which may be amortized over a fixed period or recognized upfront as a practical expedient. Doing all of this manually is challenging. You know there are limits on the number of cells in a spreadsheet, right? Consolidating all the information from multiple sources at month-end in order to generate adequate monthly reporting becomes very difficult. Most companies strive to solve this at the portfolio level.

One extreme example involved an accountant who struggled for five months to manually capture, amortize, and report on the cost incurred to obtain a contract. As with other areas, that’s just the data collection. The rest of the process involved spinning the data through multiple spreadsheets, over and over again, to arrive at a solution. This is when automation is needed to provide increased visibility and confidence in both revenue and expense numbers.

What Happens If You Don't Automate Rev Rec?

Companies that struggle with — and have no immediate plans to address — these significant challenges could face some heavy negative business impacts, including:

Audit and compliance risk. Too many error-prone manual processes and not enough visibility into a company’s numbers mean higher amounts of internal and external resources required to deal with complex revenue processes.
Earnings restatement. No one wants to hear those words, but it is a very viable option resulting from human error in critical revenue accounting processes. This can lead to lower stock prices and decreasing confidence from investors.
Lack of flexibility in revenue guidance changes. ASC 606/IFRS 15 is one recent example, but certainly not the last significant change, in how revenue accountants must report on revenue or prepare disclosures for financial reports.
Barriers to business growth. As companies grow internationally, change business models or acquire/divest business operations, the organizations also take on completely different revenue processes, These require integration and cannot be managed manually.
Delays in IPO or other exit strategies. Companies not using automated revenue solutions will struggle with the amount of analysis, reporting, forecasting and disclosures necessary to deal with bankers, investors and others interested in helping a company grow or plan exits.