overcoming revenue recognition challenges

Overcoming the Challenges of New Revenue Recognition Standards

Confidential & Proprietary: Aria Systems © 2015 2

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


INTRODUCTION

Meet the panelists

David DePiano, CPASr. Solution Architect

Tom ZauliVice President Sales & Marketing


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


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-ratefor mid-cycle

upgrade

Credit cardexpires

Dunning: Stop service

Payment not received

Customer upgrades mid-cycle

Paymentprocessed

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


NEW WAYS TO SELL PRODUCTS

Recurring revenue offers unparalleled flexibility and cash flows

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

Technology Implications of ASC 606/IFRS 15

© SOFTRAX Corporation – Proprietary and Confidential

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

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


“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.”

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


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


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


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


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


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


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


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


Timeline for Deploying ASC 606-Compliant Systems


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.


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


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)


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


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


SYSTEM ARCHITECTURE & RECURRING REVENUE

Rev rec implications throughout quote to cash process

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