2018 is the year that the IASB (international Accounting Standards Board) intends to close the remaining revenue recognition loop-holes in GAAP for recurring revenue. This is through the issuing of IFRS 15 and in the US ASC 606, both dealing with tighter rules around recognising revenue. They apply more rigour to the tests than hitherto applied and must be understood by companies providing services over a period as opposed to transactionally.
As this is not an accountancy blog, we will not cover the full detail of the legislation, more the high level points and how they may impact your current accounting treatment of these term contracts.
Broadly, both cover the same five key points when deciding how to recognise term revenue:
- Identifying the contract; ensuring there is a formal contract in place which specifies the goods or services being delivered in exchange for payment
- Identifying performance obligations; within that contract, ensuring there is clarity over the performance of the supplier from a service and timing perspective
- Determining the transaction price; again, within the contract, identifying the pricing schedule
- Allocating the transaction price to performance obligations; combining the price with the performance obligation in a clear contractual sense
- Timing of the recognition of revenue; and lastly clarifying the timing of the performance obligation so that revenue is only recognised at the point that the payment obligation is evidenced as being delivered
All pretty dry stuff - why does it belong on a PSA blog?
Because this legislation spells the end of spreadsheet-based accounting where it is easy to edit the answer in response to management pressure to achieve a particular result. All the articles on the new legislation talk about the end of hand-crafted revenue models and the need for dependence on contract to revenue software to control behaviours with a clear audit trail.
Harmony not only documents the 5 key points in a continuous business flow model, it even automates revenue recognition in an IFRS 15 and ASC 606 compliant manner (i.e. recognising both revenue and cost directly tied to the delivery of performance obligations).
If you are deciding how to modify your processes to comply with these new standards, you may find Harmony’s approach a breath of fresh air.
About the Author: Harmony Business Systems Ltd (HBS) is the company behind HarmonyPSA, the most complete cloud PSA software on the market. Developed with functionality to cater for even the most complex needs of MSPs, VARs, ISVs and Professional Services organisations, HarmonyPSA truly is the next generation of PSA systems. HBS is an independent company based in the UK. Follow HarmonyPSA on Twitter, LinkedIn or Website