Article written by Neema Jyothiprakash, Product Marketing Manager, Bluewolf, an IBM Company
This blog is part of a 2-part series. Read part one here.
If you’re already familiar with ASC 606 or IFRS 15, read on to understand how Quote-to-Cash technologies align the front and back office to drive compliance and modernize revenue recognition practices on Salesforce. If not, check out this overview.
The new accounting rules, which standardize revenue recognition across industries, will impact finance, accounting, and legal teams. To effectively adopt the rules businesses need to have a clear view of their revenue recognition process. Where does it begin and end? What touchpoints in the customer lifecycle impact revenue recognition?
Salesforce views this as the Quote-to-Cash or Lead-to-Cash process, beginning with a lead or opportunity in Salesforce, and driving revenue downstream into an ERP system.
If you reverse engineer the revenue lifecycle from the moment a prospect interacts with a promotional email or a seller proposes a price, it's clear that marketing and sales activities like packaging offers, bundling products and services, quoting, pricing, and agreeing to contract terms are all top of the funnel activities that impact revenue amounts, schedules, and the recognition process.
Furthermore, these regulatory changes fundamentally alter what revenue is - for example, revenue is the amount a business receives based on contracts with customers, as opposed to transactions.
Today, businesses models involving subscriptions, pay-as-you-go fees, and services in addition to products, have complex and dynamic customer contracts. The revenue lifecycle is no longer siloed in finance, accounting, and legacy ERP systems, or defined purely by invoices and billing. Instead, the revenue lifecycle closely mirrors the customer lifecycle. To accurately report on and recognize revenue, and ensure customer success, the front and back office must work as one.
Quote-to-Cash (QTC) represents a way to align this “middle office,” bringing sales, operations, legal, and finance together with core technologies like Configure-Price-Quote (CPQ) and Contract Lifecycle Management (CLM). Below is a guide on business and technology requirements to demonstrate how QTC captures critical data points for ASC 606 compliance, based on the 5-step model outlined in the rules.
Sales typically initiates sales contracts and determines key terms like deal value, discounts, add-on services and their value, etc., and then transitions the contract to legal and finance, who help mitigate risk to the business.
Business Requirement for Step 1
Technology Requirement for Step 1 (CLM)
ASC 606 defines performance obligations as “a promise in a contract with a customer to transfer to the customer either:
Business Requirement for Step 2
Determine whether a good or service is distinct. Consider whether the customer benefits from that good or service on its own.
Technology Requirement for Step 2 (CPQ and CLM)
The transaction price is the amount a business expects to receive in exchange for the transfer of goods and services to a customer. This amount is important, because its what your business will recognize in revenue after fulfilling the performance obligation. You must determine it at the time of contract inception and reassess at each time of reporting.
Business Requirement for Step 3
Distinguish between fixed-price contracts, which have simple transaction prices, or contracts with variable considerations like volume discounts, rebates, refunds, concessions, incentives, credits, financing, or similar considerations, which require separate price calculations.
Technology Requirement for Step 3 (CPQ and CLM)
Since revenue must be recognized according to when performance obligations are fulfilled, once you’ve determined the transaction price, you must allocate it to each performance-obligation in the contract. The transaction price is allocated relative to the Standalone Selling Price (SSP). The SSP is the price a business would sell a good or service separately to a customer and will likely be more than the price goods are sold at because of discounts or bundles, for example:
Business Requirement for Step 4
Technology Requirement for Step 4 (CPQ, CLM, and Approvals)
Finally, CPQ and CLM won’t actually recognize revenue for you, but using these tools to automate, standardize, and manage everything that leads to revenue-recognition will make compliance easier. Beyond avoiding fines, a modernized middle office helps close more deals faster and improves customer experience by designing effortless employee experiences.
Curious where to start? .
*Disclaimer: Bluewolf is not sharing accounting, legal, or tax advice regarding ASC 606. If you require such advice, please contact a qualified financial advisor.
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