You no doubt have heard by now about ASC 606. Also known as Revenue from Contracts with Customers, this is the most significant new regulation the accounting world has seen in over a decade. It is intended to eliminate variations in the way businesses across industries recognize revenue from contracts. It also provides the perfect opportunity to transform key processes across your business.
The new rules require sweeping changes to the accounting treatment of revenues and related expenses. These changes will be most profoundly felt by companies that participate in the new services economy, specifically those companies with or transitioning to subscription models, since almost every service business revolves around contracts. Accounting for contracts is very different than a retail business, for example, that sells to consumers via over-the-counter, point-of-sale transactions.
Anything and everything is being sold as a service
The expanding services economy is phasing out traditional transaction models in favor of service- and subscription-based business models. Today, almost anything and everything is being sold as a service —from software to razor blades to gourmet meals. And for these businesses, calculating revenue and expenses according to the new ASC 606 guidelines can be very complicated, because their contracts and pricing models tend to change frequently.
What these companies need is a reliable solution to comply with the new revenue-recognition standards. They need a tool that can handle the more complex revenue-recognition accounting and reporting far better than manual, spreadsheet-based approaches. That’s why many companies are now migrating from spreadsheets to cloud-based revenue-management applications that can automatically execute the requirements of ASC 606.
The new rules have significant impacts on customer contracts — and those impacts are best dealt with by applications designed specifically to handle the requirements of ASC 606. Many applications now exist that address the revenue requirements of the new rules using automation, not spreadsheets, reducing complexity and the risk of error.
ASC 606 impacts the entire organization
These solutions enable companies to centralize revenue streams in a single location, automate calculations and reduce period-end close. They also allow finance teams to incorporate new and flexible billing models that are emerging in the services economy. These models typically involve complex revenue-recognition accounting and reporting that are difficult to scale for manual processes.
While the changes required by ASC 606 will be felt most acutely in the finance department, the new regulations will also impact the other parts of the organization that touch contracts, including sales, sales operations, marketing, legal, and even human resources. As a result, companies will need to integrate data across the entire organization as part of their ASC 606 transition.
For instance, contract data exists not just in your financial systems but in your CRM system, in your provisioning system and in documents spread across your company. It’s essential to capture contract details in a comprehensive fashion and apply ASC 606 in a consistent and scalable way across all your contracts.
A framework to transform your business
In this sense, ASC 606 is not just an accounting regulation – it can be used as a framework for companies to transform their business by eliminating manual processes and replacing them with automated systems that enable them to better compete in the digital economy. The new rules will compel companies to not only review and revamp their existing contracting policies and processes but to modify many other procedures and systems as well.
That’s a good thing. Although, like many transformations, it’s not easy. To accomplish it, many companies are reaching out to consultants, auditors and other organizations that have already completed their transition to the new ASC 606 standard. Most companies don’t have the time or people needed to run their business while simultaneously doing a top-to-bottom rewrite of their revenue and accounting process. So, bringing in outside help early is vital.
It is also critically important to select a solution that best fits your business and can get you to where you need to go in a timely manner. A single cloud solution can reduce friction and set your company up for a smooth transition.
Time to seize the opportunity
Meeting the new ASC 606 compliance standards takes time and careful planning but you should not dread the process. This is a net positive. You will find that the transition provides an opportunity for you not only to embrace the new services economy but also transform your business for the better.