ASC 606 and IFRS 15: A Guide to Drive Compliance with Quote-to-Cash on Salesforce

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.

1) Identify contracts with customers

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

  • Map out all moments in the contract lifecycle and respective stakeholders at each stage
  • Standardize the entire contract lifecycle for all types of sales and service contracts

Technology Requirement for Step 1 (CLM)

  • Institute a central, secure, and searchable contract repository
  • This could require a migration from legacy systems to cloud-based platforms, like Salesforce
  • Automate the contract lifecycle in Salesforce

2) Identify performance obligations (the unit of account for 606 revenue recognition)

ASC 606 defines performance obligations as “a promise in a contract with a customer to transfer to the customer either:

  • A good or service, or a bundle of goods and services, that is distinct
  • A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

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)

  • CPQ organizes your product catalog, automates bundling, and creates a distinct data point for each performance obligation
  • Use CPQ to track each performance obligation during product selection, pricing, quoting, and contract assembly.

3) Determine transaction price

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)

  • CLM creates data points for all explicit and implicit terms of a deal including: future uplifts, SLA, limits on liability, etc., and variable considerations in a contract
  • CPQ is used to build ASC 606 into your pricing logic

4) Allocate transaction price

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

  • Define a process to determine SSP with full audit trails for future reporting
  • Since revenue cannot be recognized until goods and services are delivered, timelines for performance obligations and their respective transaction prices must be clearly broken out, especially for multi-year contracts, monthly recurring revenue, and subscriptions

Technology Requirement for Step 4 (CPQ, CLM, and Approvals)

  • Use CPQ to define mandatory fields for sales to fill out during pricing, quoting, and approvals to account for finance-oversight
  • Structure data in a way it can easily flow into revenue and accounting systems

5) Recognize revenue

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? Talk to a QTC expert today.

*Disclaimer: Bluewolf is not sharing accounting, legal, or tax advice regarding ASC 606. If you require such advice, please contact a qualified financial advisor.

Bluewolf, an IBM Company, is a global consulting agency and proven Salesforce strategic partner that builds digital solutions designed to create results. Now.