Overcoming Revenue Recognition Challenges
- 1. Overcoming the Challenges of New Revenue Recognition Standards
- 2. 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
- 3. Confidential & Proprietary: Aria Systems © 2015 INTRODUCTION Meet the panelists David DePiano, CPA Sr. Solution Architect 3 Tom Zauli Vice President Sales & Marketing
- 4. Confidential & Proprietary: Aria Systems © 2015 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
- 5. 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
- 6. Confidential & Proprietary: Aria Systems © 2015 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
- 7. Technology Implications of ASC 606/IFRS 15 © SOFTRAX Corporation – Proprietary and
- 8. 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
- 9. 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 SOFTRAX Corporation - Proprietary and 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.”
- 10. 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 SOFTRAX Corporation - Proprietary and Confidential
- 11. 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 SOFTRAX Corporation - Proprietary and Confidential
- 12. 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 SOFTRAX Corporation - Proprietary and Confidential
- 13. 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 SOFTRAX Corporation - Proprietary and Confidential
- 14. Why is ASC 606 Different? 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 SOFTRAX Corporation - Proprietary and Confidential
- 15. Why is ASC 606 Different? 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 SOFTRAX Corporation - Proprietary and Confidential
- 16. Why is ASC 606 Different? 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 SOFTRAX Corporation - Proprietary and Confidential
- 17. 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 SOFTRAX Corporation - Proprietary and Confidential
- 18. Timeline for Deploying ASC 606-Compliant Systems SOFTRAX Corporation - Proprietary and 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.
- 19. Confidential & Proprietary: Aria Systems © 2015 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
- 20. Confidential & Proprietary: Aria Systems © 2015 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
- 21. Confidential & Proprietary: Aria Systems © 2015 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
- 22. Confidential & Proprietary: Aria Systems © 2015 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
- 23. Confidential & Proprietary: Aria Systems © 2015 SYSTEM ARCHITECTURE & RECURRING REVENUE Rev rec implications throughout quote to cash process 23 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