If You’re Not Early, You’re Late!Accounting 101
If You’re Not Early, You’re Late!
By Paul Johnson
CPA, CGMA, MBA
My dad used to “coach” up the stairs at us in the morning before school with cautionary advice and dad slogans like “jockey into position or get left behind,” and my favorite, “If you’re not early, you’re LATE!”
Well, I am passing on that particular pearl of parental wisdom to you right now because it applies to what we’re facing this year with the upcoming ASC 606 changes. As you might be thinking, “I still have more time,” let other forward-thinking subscription companies remind you otherwise.
We are seeing companies that have clients up for renewal, add-on products to their subscriptions, and companies with a lot of deferred revenue already building the changes into their contracts today. Many recognize that while they are signing on and renewing well before the changes are happening, the contracts they are signing today will be affected as they renew in the coming months or years.
These companies are doing things smart because come January, they won’t be scrambling. They already will have done their legwork, and by the time the regulations are enforced, the changes, to them, will be part of the routine.
Trickiness, for sure, but let’s clarify. If you’re a SaaS company with client subscriptions, you won’t just be doing a few tiny contract tweaks to stay compliant. You may also be looking at revisions to the way you do tracking, processes and internal controls.
Here are the 5 main areas where you need to focus for recognizing revenue:
- Contracts: More details needed for multiple agreements, modifications, and renewals
- Payment Terms: Special renewal terms and variable discounting
- Collectability: Minimum thresholds and reseller agreements
- Fees: This includes activations and added services
- Expenses: Sales commissions and royalties
And here is where you should focus for your revenue recognition to ensure compliance:
- Treating multiple contracts with one vendor as one.
- Establishing collectability thresholds and track collectible revenue until it meets those thresholds.
- Identifying and clarifying your promise to deliver goods or services to your clients. The ASC 606 is expecting that your promise – or performance obligations – are a benefit on their own or with other resources. The new guidelines also expect that the promise to deliver is distinctly separate and identifiable in the service contract.
- Itemizing details for transaction price breakdowns – things like refunds, credits, performance-based incentives, bundling discounts, and flexible financing.
- Allocating some of the transaction pricing to each performance obligation. Think standalone pricing.
We realize many changes hang in the balance, and these changes are far from simple. Still have questions? That’s okay! Luckily, we know compliance like jockeys know horses, and we would like to know you too, so we can help you get ready for the new ASC 606 guidelines.
Give us a call! We are here to help!