Overcoming Revenue Recognition Challenges

Overcoming the Challenges of New Revenue
Recognition Standards

Confidential & Proprietary: Aria Systems © 2015
AGENDA
• Introductions
• Increasing complexity for the Back Office
• Market adoption of recurring revenue models (Dave)
• Review of the regulatory landscape (Tom)
• Important transition points and why it is important to take action now (Tom)
• The limitations of ERP platforms to manage the new rules (Dave)
• Q&A
2

INTRODUCTION
Meet the panelists
David DePiano, CPA
Sr. Solution Architect
3
Tom Zauli
Vice President Sales & Marketing

MARKET ADOPTION OF RECURRING REVENUE MODELS
Migration from “one and done” to recurring revenue
• Businesses in virtually all industries and verticals are migrating to recurring revenue
models
• Recurring revenue is often more predictable than traditional sales models
• Customer retention and satisfaction increase as a result of recurring revenue
• Wall Street rewards recurring revenue models
• Companies adopting recurring revenue models sell their goods and services in new
and innovated ways
• Recurring revenue is NOT just about sending a bill every month
4

Confidential & Proprietary: Aria Systems © 2015 5
RECURRING REVENUE CREATES AN EXPLOSION OF REVENUE MOMENTS
“Every revenue moment
is an opportunity” Text alert:
Reached 90% of plan
Exceed
consumption
limit
Customer inquiry (web):
Adjust service parameters
Approaching
renewal
date
Suspend Service due
to late payment
Pro-rate
for mid-cycle
upgrade
Credit card
expires
Dunning:
Stop service
Payment
not received
Customer
upgrades
mid-cycle
Payment
processed
Customer inquiry (phone):
Change Billing Address
Service rep
offers upgrade
Service
purchased
Invoice
generated
Welcome
email sent
Provisioning:
Begin service
Customer
charged
overage
Provisioning:
Service upgraded
mid-cycle
Customer Lifetime Value

NEW WAYS TO SELL PRODUCTS
Recurring revenue offers unparalleled flexibility and cash flows
6
Legacy Sales Model Recurring Revenue
• 10 Seats – Perpetual Software
License
• 20% PCS
• Add-on training
Option 1:
• 10 Seats Software License (billed monthly)
• Bundled Hardware
• Annual maintenance fee
• Add-on training
Option 2:
• Software License (billed monthly as used)
• Minimum charge for 5 licenses
• Monthly maintenance fee
• Add-on training
Option 3:
• Software License (billed monthly to a reseller)
• Track end-user and offer other services

Technology Implications of ASC 606/IFRS 15
© SOFTRAX Corporation – Proprietary and

For today
 Review the basic tenants of ASC606/IFRS 15 & timing
 Discuss delay factors for revenue recognition implementations in general
 Discuss tactical areas to think about when planning for a 606 implementation
 Hand it back to David to discuss solution options and pros and cons
SOFTRAX Corporation - Proprietary and
Confidential

The Basic Tenants of ASC606 / IFRS 15
 Identify the contract
 Identify the Performance Obligations
 Determine the transaction price
 Allocate the transaction price to the performance obligations
 Recognize revenue as the performance obligation is satisfied
Confidential
“Recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.”

Timeline for deploying
 Public companies – must report starting with periods after Dec 2017
 Private companies – must report starting with periods after Dec 2018
 Two methods of deploy
 Full retrospective – restate earnings according to new guidance for prior two
years
 Modified retrospective – no need to restate but describe impact to revenue
from new guidance for prior two years
Confidential

General Delay Factors for Implementations
Regardless of ASC 606 demands, plan and
prepare for:
 Resource limitations
 Data migration issues
 Business model / complexity
 Integration issues
 Testing issues
Confidential

Factors to consider in adoption
 Separation of Performance Obligations
 Variable consideration
 Stand Alone Selling Price
 Time Value of Money
 Dual Reporting
 Disclosures
 Managing changes and adjustments
Confidential

Why is ASC 606 Different?
Separation of Performance Obligations & Variable Consideration
 A few vendors provide the ability to
perform complex automated carves and
holds for standard scenarios
 Your team will have to review contracts
for non-standard scenarios and
potentially perform manual work here
Confidential

Stand Alone Selling Price (SSP)
 Not far different from existing
calculations of fair value
 Need to marry correct SSP’s in time
with transactions being processed.
 Requires capturing correct data sets in
time to determine the SSP that should
be in place at that time
 Complexity in selling models (ie. tiering)
will increase the effort here
Confidential

Time Value of Money
 Another scenario requiring contract
durations be synchronized with
changing monetary value
 Requires relationship between
inflationary numbers and contract value
 Particular issue for companies with
long-running contracts
Confidential

Dual Reporting & Disclosures
 This is the easy part if dealing with an
automated system, harder with
spreadsheets or custom solutions
 Once the data is in the system, applying
two sets of rules should be straight
forward
 Could require two sets of reconciliation
 Automated tools will enable a mapping
for automated disclosures
Confidential

IMPORTANT
 Do not forget about changes and
adjustments that occur
 In a ‘look back’ approach, these will
have to be exercised in the new
guidance as they were in the old at the
time they were
 This is often a missed activity in the
planning phase
Confidential

Timeline for Deploying ASC 606-Compliant Systems
Confidential
System in
place by
1/1/2016.
Deploy during the 2016-2017 time
frame, with “catch up” consideration
for all contracts after 1/1/2016.
Wait until 1/1/2018. Company
will also have simultaneous
burden of restating the previous
two interim periods.

WHAT OPTIONS DO YOU HAVE?
• Rip and replace
• Custom coding and new development
• Spreadsheets
• ERP augmentation and upgrades
• Implement purpose built revenue and billing
solutions
19

WHOLE SYSTEM REPLACEMENT RISKS
Will your replacement be successful?
• Estimated Timeframe: 1+ years
• Average implementation time: 17.8 months*
• 61% of implementations go over schedule; 60% received less than half the expected
benefits from new system*
• May not fully support ASC 606
• Too late for timely adoption of new standards
* Source: Panorama Consulting (2013)
20

SPREADSHEETS AND CUSTOM CODING RISKS
Measure the risk to your business
• Data-driven, not process-driven
• Version control and security become difficult
• Magnifies risk of human error
• Very difficult to manage two separate sets of books
• Could be a stop-gap, but likely to fail in the end
21

LIMITATIONS OF ERP TO MANAGE THE NEW REVENUE RULES
• Requires costly upgrades to the revenue management modules
• Significant implementation times likely to leave little time for testing before rules are
effective
• Significant changes to internal controls
• Limited automation capability
• Reduced future flexibility when rules or business processes change
22

SYSTEM ARCHITECTURE & RECURRING REVENUE
Rev rec implications throughout quote to cash process
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Order Entry
CRM, Quoting,
Customer Portal,
Shopping Cart
Billing & Collections General
Ledger &
Reporting
Provisioning
/Fulfillment
Revenue Recognition
(Unbundling, revenue allocation, unbilled to billed, revenue
scheduling, fair value calculations, etc.)
Revenue & Cost Items
Billed Items Signal on fulfillment
Journal Entries

Overcoming Revenue Recognition Challenges

Overcoming Revenue Recognition Challenges

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