How Can you Make Better Judgement Calls When it Comes to Revenue Recognition?

The effective date of the new revenue recognition guidance is, at long last, here. CFO Magazine’s recent article, How Risky Are New Revenue Recognition Rules?, says “at some point after that, we’ll begin to see whether the new standard’s principles-based methodology is working as intended.”

The article points out that there are some judgment calls that must be made when it comes to the new revenue recognition rules.

Elements of judgment reside in each step of the new standard’s five-step process, according to CFO, including:

Step 1: Identify the contract(s) with customers. The collectability of consideration in a transaction is a concept that requires judgment in both the current and new guidance. Under the new guidance, collectability will be addressed in the determination of whether a contract exists, rather than whether revenue can be recognized. While the concept of collectability is not new, the judgments used to assess it will now be necessary at the outset of the revenue recognition process.

Step 2: Identify the performance obligations within the contract(s). Identification of performance obligations will be less restrictive under the new guidance and, therefore, contracts may have fewer performance obligations to be accounted for separately. The determination of these performance obligations will also require increased application of judgment.

Step 3: Determine the transaction price. The transaction price under the contract(s) involves a number of judgments, including consideration of variable and non-cash factors. Under the new guidance, entities will determine variable consideration by estimating either the “expected” value or the most likely amount in a range of possible amounts. As variable consideration will be based on an estimate, the timing of revenue recognition may be accelerated upon implementation of the new standard as compared to the more formulaic recognition of multiple elements over time, as currently required.

Step 4: Allocate the transaction price to the performance obligations in the contract. To allocate an appropriate amount of consideration to each performance obligation, an entity will now determine the stand-alone price at the outset for the goods or services. As stand-alone selling prices can be calculated or estimated in numerous ways that may require significant judgment, revenue recognition may be accelerated under the new guidance, particularly when compared to the current allocation methods.

Step 5: Recognize revenue when (or as) a performance obligation is satisfied. Under the current guidance, the percentage-of-completion method is generally used when recognizing revenue for contracts. Under the new rules, revenue is recognized when, or as, control of the asset is transferred to the customer. The determination of when control is transferred is often a matter of judgment, and will require consideration of when obligations are satisfied.

How will you make judgment calls when it comes to these new rules?

U.S. filers are expected to adopt the new accounting standards their first reporting period after December 15, 2017. For most companies, financial statements released in 2018 will be the first in compliance with ASC 606. To ease the transition, the Boards allow filers to use practical expedients in their application of the new accounting standards and choose between two adoption methods (full- and modified-retrospective).

To learn more about the new standards, check out our ebook: Revenue Recognition Do’s and Don’ts.

Best regards,

Robbie Morrison
Chief Solution Strategist, SBS Group

About Robbie
Robbie Morrison has spent nearly 20 years helping customers build and deploy elegant technology and business solutions. From start-ups to enterprise-class organizations worldwide, his knowledge of the Microsoft Dynamics ecosystem and Robbie-2017products helps SBS Group customers maximize ROI on technology investments.

Today, Robbie serves SBS Group customers in his role as Chief Solution Strategist where he provides thought leadership and manages the development of B2B solutions. Robbie received his MBA from the University of Georgia, Terry College of Business.
https://www.linkedin.com/in/robbiemorrison

ASC 606 and IFRS 15: Are you Ready for New Revenue Recognition Rules?

We don’t want to add more to your to do list as things get busy around the holidays, but this is important! By now you’ve heard about the new rules governing revenue recognition for companies that will go into effect on January 1, 2018 for public companies, and January 1, 2019 for private firms. To recap, listen in to our podcast where I speak with Microsoft about the details.

ASC606 Overview

The Accounting Standard Codification 606, or ASC 606, made its debut in May 2014. It is an industry-neutral revenue recognition model designed to increase financial statement comparability among companies and industries. The objective is to decrease complexity involved with the current models for revenue recognition.

As a result, the new unit of account for revenue recognition is the obligation of a good or a service at the time it is delivered.

The Financial Accounting Standards Board (FASB), which administers Generally Accepted Accounting Principles in the U.S. (US-GAAP) has issued ASC 606, and the International Accounting Standards Board (IASB), which administers International Financial Reporting Standards (IFRS) used in most other countries, has issued IFRS 15. Both will enforce similar, fundamental changes to the revenue recognition process for any company that depends on complex contracts in their dealings with customers.

How do I know if my company will be impacted by ASC 606 and IFRS 15?

Businesses that have multiple components (e.g., product, services, warranties, etc.) in a single contract are the most impacted. If your firm permits changes to active contracts (e.g., adding a sports package to your cable TV contract), they are impacted. If the timing of when your firm pays commissions differs from when the products and services are delivered, then your firm is impacted. Cellular phone companies, software firms and many other kinds of companies will be impacted – some far more so than others.

 

 

Not Managed by Microsoft Dynamics out of the Box

Microsoft Dynamics does not manage these new standards out of the box. Companies running Dynamics GP, NAV, AX, or 365, must take all of their revenue outside ERP, process these complex calculations to figure out what they can recognize today versus what is deferred, and then bring those back in as manual journal entries. Before you start using Excel for this, consider using AXIO for Enterprise Firms, and Progressus for Small to Medium-sized Firms in addition to Microsoft Dynamics.

We wish you the best of luck with these new standards. Please let us know if you have any questions, and Happy Thanksgiving!

Best regards,

Robbie Morrison
Chief Solution Strategist, SBS Group

About Robbie
Robbie Morrison has spent nearly 20 years helping customers build and deploy elegant technology and business solutions.  From start-ups to enterprise-class organizations worldwide, his knowledge of the Microsoft Dynamics ecosystem and Robbie-2017products helps SBS Group customers maximize ROI on technology investments.

Today, Robbie serves SBS Group customers in his role as Chief Solution Strategist where he provides thought leadership and manages the development of B2B solutions.  Robbie received his MBA from the University of Georgia, Terry College of Business.
https://www.linkedin.com/in/robbiemorrison

 

Dynamics 365 For Operations Tip: Vendor Prepayments and Revenue Recognition for Fixed Price Projects

Hello, Good to be back here on the blog !!! Jumping straight into the topic here today about a new addition of a feature for vendor prepayments in relation with fixed price project revenue recognition !!

Issuing large amounts of prepayments to vendors is often a common business requirement for large scale, long-term fixed price projects, which involves a lot of sub-contracted work. Vendors often request prepayments for the subcontracting services they are contracted to deliver for these projects. These prepayments can sometimes be just a flat amount based on mutual decisions, or it can sometimes be a percentage of the total cost of the subcontracting service. There can be several months of gap between when the prepayments are issued and when the vendors actually deliver the services.

For such projects, customers usually recognize revenue on a percentage completion basis and need the ability to include these vendor prepayments in the project percentage completion calculation of the project for revenue recognition/revenue estimates calculations.

In this post, we will evaluate one of the new features of Dynamics 365 For Operations (Referred as D365 – Operations from here on), which allows us to consider these vendor prepayments automatically when running the monthly revenue recognition/estimates for fixed price projects for calculating the % completion of the project.

For this demonstration, I have setup a fixed price project and the associated contract already. This project is setup to recognize revenue on a % completion basis.

Contract Setup

Project Setup

The Project Manager has created and submitted the purchase requisition for approval so that the services can be procured from Rebar Supply Co. Ltd. See screenshot below.

PR Submitted

The purchase requisition gets approved by the designated manager and the Purchase order is automatically created. See screenshot below.

PR Approved

The Project procurement team/Project manager then sets up the prepayment details on the project purchase order that was automatically created upon approval of the requisition.

PrepaySetupOnPO

Finance and Accounting team now processes the prepayment invoice to initiate the prepayment to the vendor.

Prepay Invoice

Prepayment

Now that the finance team has processed the vendor prepayment for the subcontracting work, let us now go ahead and see what happens when they run the monthly revenue recognition process for this project.

Notice that system was able to consider the vendor prepayment cost for the project and was able to determine the percentage completion based on the total project budget/forecast defined. See screenshot below

PComp

When this revenue recognition entry is posted, the revenue amount (based on Percentage complete and the total contract value) will be posted to general ledger. We all know how it works from here 🙂

That’s it for today !!

Sandeep

Sandeep ChaudhurySandeep Chaudhury is a Dynamics 365 enthusiast with over 10 years of experience in functional consulting, Solutions architecture and systems integration, with expertise in the areas of Professional services automation(Project Management and accounting), Financials Management, Services Management, Sales and Marketing, Human resource management, Travel and Expenses Management and Procurement & Sourcing modules of Microsoft Dynamics 365 ERP. He has experience working with the Dynamics 365, AX 7, AX 2012 R3, AX 2012 R2, Dynamics 365 for Operations and more.

Who said Transitioning to a Recurring Revenue Model for Software Companies Would Be Easy?

While it may not be easy to transition from a license-based model to a recurring revenue model, the benefits are clear.  And, more importantly, it isn’t really an option for most software developers and resellers.  If you own or manage a software company and want to remain competitive in a subscription economy, it is imperative.

For that matter, it isn’t just software companies that are facing a fundamental change to the way revenue is captured and recognized.  From software and computing power to healthcare, specialty manufacturing and retail products like razors, we’re seeing a constant stream of new subscription-based offerings.  Most B2B professional services companies have added subscription options to the list, and many have moved to it entirely.  SBS Group has helped a wide range of Dynamics AX customers in the software sales and the reselling sector as well as other B2B firms like online survey companies and industrial equipment service providers.

Even the music industry has been entirely reinvented in the wake of the subscription frenzy.

Digital Experiences Are What the Fans Want

A report published by the Recording Industry Association of America (RIAA) said music streaming revenues for the first half of 2016 reached $1.6 billion—a year-on-year increase of 57%. According to the 2016 Mid-Year RIAA Shipment and Revenue Statistics report, revenues from subscription streaming services more than made up for a continued decline in physical product, with streaming accounting for 47% of all music industry revenue for the year to date.

Paid subscriptions to services such as Spotify, Apple Music and Google Play Music have cumulatively doubled in the last year, RIAA said.

Around 18.3 million people have signed up for a subscription-based plan from music streaming services—a year-on-year increase of 101%. Subscriptions were responsible for 30% of all music industry revenues in the first six months of the year, with revenues from a permanent digital download falling by 17%, the report said.

See “How Paid Subscriptions Are Saving the Music Labels”, an article written by David Bolton in September 2016.

Love that title: “Digital Experiences Are What the Fans Want”.  I couldn’t have said it better.  In our case, the “Fans” may be consumers or businesses looking to acquire access to software in a way that they’re most comfortable with.  And if software companies want to stay in business, they need to adapt their business model in a way that gives the fans what they want.

Of course, this isn’t entirely about giving the fans what they want.  While accessibility, cost and ease-of-use are some of the more commonly cited reasons for the subscription approach, there are many other benefits like:

  • Increasing the likelihood of a successful IPO or Acquisition
  • Lowering barriers to customer engagement (lower up-front costs)
  • Allowing customers to scale more easily
  • Adopting a more agile development and update cycle
  • Maximizing customer lifetime value (CLV) and brand loyalty
  • Driving a predictable, recurring revenue stream

Of all these things, it is the seller’s path to a predictable, recurring revenue stream which may be the most enticing reason to move forward under a subscription model.  The transition from traditional license and maintenance models to cloud subscription and consumption usage is not easy and requires adjustments to future revenue expectations, recreating sales compensation plans and more.

Either way, it is a trend that has been changing the face of revenue management for the last decade and will continue to do so.  Adapting systems, processes, and policies to help your organization thrive in a subscription world is often a challenge for most established technology companies.

I can’t help you figure out how to replace revenue that used to come up front.  You’re on your own there (with the rest of us).  I can provide an option for optimizing the way you collect and recognizing your new recurring revenue stream.

 

AXIO for Professional Services - The New Microsoft Dynamics AX

Fig 1: Finance, Professional Services and Distribution for AX7

 

Adapting ERP to Subscription / Recurring Revenues for Software Firms

Dynamics AX is one of the most attractive enterprise ERP solutions that lends itself to a recurring revenue model, but not everything a software developer, publisher or reseller requires is provided in the solution right out of the box.  No worries, because we have already tackled this one for you.  SBS Group has created AXIO for Professional Services, an enhanced version of Dynamics AX that caters to the needs of enterprise professional services firms.

To my knowledge, AXIO is the only partner solution capable of managing the entire business process and handling the complexities of the latest revenue recognition standards and subscription billing on AX7.

Some 3rd party providers have created add-ons to AX 2012 but have yet to update or rewrite their solutions to work in the pure cloud environment of AX7.  To my knowledge, SBS Group is still leading the charge here with a fully functional solution that not only caters to project-oriented technology company using AX 7, but provides the ability to meet IFRS15 and ASC 606 accounting standards requirements for revenue recognition.

I have another post on IFRS 15 and ASC 606 if you would like to learn more on this topic.

 

Contract and Revenue Management Workspace with AXIO for Dynamics AX

Contract and Revenue Management Workspace

Tools in AXIO Professional Services for AX7 and Dynamics 365 can streamline you revenue management process

AXIO Professional Services for AX7 and Dynamics 365 not only handles the complexities of the license to subscription pricing evolution that software sellers will experience.  Our Revenue Management Module effectively manages a contract lifecycle within AX. This module tracks a contract from the time of negotiation to acceptance, works-in-process, and then retirement.

It helps them to address key issues like:

Contract Initiation

After contracts have been accepted and signed by the customer, it is imperative that your ERP system is capable of helping your team accurately manage revenue throughout the life of the relationships.  AXIO can automate one-time billing or recurring periodic billing by month, quarter or annually. Advanced payments, payments in arrears or even partial payments are easily managed.

Managing Renewals

Our renewals management features not only help to manage contract renewals after a contract term has ended, but helps to drive customer renewals as they near expiration.  Contract managers or sales team members can utilize consolidated dashboard views of the customer to view relevant history and ensure optimal renewal rates.

  • Easily update pricing and terms
  • Adjust effective dates for new agreements
  • Prorate payments as changes occur and even adjust the billing process
  • Notify sales and consulting team members with pricing changes to ensure optimal communication

Contract Realignments

In the software world, change is constant.  Customers often need to adjust multiple times thought the contract for reasons like adding users, modules or increasing user counts due to seasons or growth.  AXIO allows your team to change the terms of contracts mid-way (change the value and or contract periods) without missing a beat.

Billing, Billing Frequency, and Modify Billing Frequency

This module provides automated billing features with various types of billing frequencies and billing options like monthly quarterly, half-yearly, yearly and non-linear (custom billing dates). It also provides the ability to change billing frequency mid-way of the contract period.

Revenue Management

AXIO enables an automated revenue management process for both fixed price and variable price contracts that allows your firm to adapt as revenue recognition standards evolve.  No more unreliable spreadsheets or manual calculations.ASC 606 and IFRS 15 Steps

Workflow Integration

Because AXIO Professional Services for Dynamics AX is built on the Microsoft platform, the opportunity to integrate with customer relationship management solutions like Microsoft Dynamics CRM is relatively simple.  Kick off workflow processes that provide alerts to sales and consulting team members or nurture customers as contract changes approach.  Consistent, timely and communication around contracts keeps customers informed and drives a positive customer experience.

Used in conjunction with Microsoft Dynamics Core Financial capabilities, the Revenue Management module streamlines the contract management process and gives your financial staff the tools they need to ensure that contract terms and conditions are enforced.

You really must see it to appreciate it.

Please reach out to me directly or to anyone on the SBS Group team if your firm is struggling with revenue management.  It isn’t easy to change your business model, but your ERP solution shouldn’t make things more difficult.

Best regards,

Robbie Morrison
VP Enterprise Solutions and Services, SBS Group

About Robbie
Robbie Morrison has spent nearly 20 years helping customers build and deploy elegant technology and business solutions.  From start-ups to enterprise-class organizations worldwide, his knowledge of the Microsoft Dynamics ecosystem helps SBS Group customers maximize benefits from the ERP investments.  Robbie

Today, Robbie serves SBS Group customers in his role as Vice President, Enterprise Group where he provides thought leadership and manages the enterprise delivery team.  Robbie received his MBA from the University of Georgia, Terry College of Business.
https://www.linkedin.com/in/robbiemorrison


 


Want to learn more about AXIO for Professional Services and Dynamics 365? Watch our latest webcast recording!

Dynamics AX Tip: Percentage complete calculation for revenue recognition, based on WBS Work Percentage Complete for fixed price projects

Traditionally, the 2 primary methods of revenue recognition for a fixed price project were the “Completed Percentage” and the “Completed Contract” methods. I have explained how these work in Dynamics AX for revenue recognition of fixed price projects in my earlier posts.

With the AX 2012 R3 release (CU 10), the straight line method for revenue recognition was introduced, which I also elaborated in this earlier post.

When you work with the Completed percentage method of revenue recognition, there are multiple ways to determine the percentage completion of a project. Some of these options are,

  1. Manage percentage completion on a manual basis
  2. Use project budgets or forecasts to the system automatically keep track of % complete.
  3. The new method to calculate % completion on a project is based on the WBS percent complete. In this quick post, we will how this works.

The first step for this is to setup the Cost template and select the Completion based on as “Work percentage complete”. See screenshot below.

Cost Template Setup

Once you have that, associate it with the project group. See screenshot below.

Project Group

The next step is to setup the fixed price project and establish the project plan, which is basically the work breakdown structure. Once you have your WBS defined and the cost estimates established, Dynamics AX will automatically keep track of the “Percentage completion” for the project based on the WBS estimates vs the actual transactions. I have setup a very basic WBS for this walkthrough.

WBS

After I have progressed in the project and transactions (Timesheets, Expense reports, Purchase orders, journals etc.), Dynamics AX automatically starts tracking the % complete for the project at each task level of the project. See screenshot below.

Percent Complete

Let us say, at this point you are ready to run the revenue recognition for this project for the Month of August 2016.

Navigate to the Project revenue recognition screen and click Create. You will notice here that “Work progress percentage” is a new option under the “Cost to complete method” dropdown. But we will just leave it as default (From cost template).

Notice that after we have run the revenue recognition, system automatically shows the Percentage completion based on the WBS work percent complete.

Revenue Recognition Percentage

The process after this is pretty straight forward and as you would run the revenue recognition typically for the fixed price project.

NOTE: The intention of this blog post was not to explain the end to end process of revenue recognition for fixed price projects. I have explained these in detail in my earlier posts. This post was specifically a quick tip to highlight the new method of automatic work percent complete calculation.

Regards,

Sandeep

Sandeep ChaudhurySandeep Chaudhury is a Dynamics AX enthusiast with over 10 years of experience in functional consulting, Solutions architecture and systems integration, with expertise in the areas of Professional services automation(Project Management and accounting), Financials Management, Services Management, Sales and Marketing, Human resource management, Travel and Expenses Management and Procurement & Sourcing modules of Microsoft dynamics AX ERP. He has experience working with the new Dynamics AX (AX 7), AX 2012 R3, AX 2012 R2 and more.

 


Want to learn more about AXIO for Professional Services and Dynamics 365? Register for our webcast on September 13th at 2 PM EDT.

AXIO for professional services webcast

%d bloggers like this: