ASC 606: Why Salesforce Makes Sense for Rev Rec
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By now you’ve probably heard of ASC 606.
It’s the new revenue recognition guidance with deadlines looming that affect virtually every company in the US. But how big of a deal is it?
It’s a big deal.
Noncompliance means not being able to produce GAAP compliant financial statements. Not doing that means bad things for private companies – trouble with bank loans, any kind of financing or eventually selling the company. It’s worse for public companies – it affects your ability to trade and comes with stiff SEC penalties.
You might think this is an accounting problem. You might think “Just let the accountants make whatever adjustments they need to and leave the rest of us alone.” It’s not that simple. The changes are so dramatic and sweeping, that it’s not a matter of making a tweak to current process; it means scrapping everything you do with revenue recognition and starting over from scratch. It means requiring information on sales and product data you may not have needed before. It can mean changing when you can report revenue, revamping your pricing strategy and – maybe – when and how you compensate your sales force.
Everyone in your company will be affected. It’s not an IT project. It’s a business project.
So once that reality sets in, you might think the first thing to do is call your GL vendor, ask about pricing for their new ASC 606 revenue solution and start putting a project plan together. That’s not a bad thought, but it’s definitely not your only option. If you’re using Salesforce, it’s worth taking a closer look at why that might be the best place to address the problem.
No matter what approach you take, you’re likely going to need to introduce new system integrations or update existing ones. The new standard requires that you compare everything you sell to a customer, evaluate which elements constitute a Performance Obligation, reallocate revenue based on each element’s standalone selling price and recognize as value is transferred to your customer. There’s a lot packed in that, but one of the implications is you have to get not only your sales information, but the delivery information – all in one place.
That means it’s not enough to send a sales order to your GL and recognize it on a schedule. You need to send your delivery data too – professional services, managed services, shipping of hardware. Depending on your business, it might include cost information. For most companies, that data isn’t already in one system, so plan on new system interfaces.
If you’re using Salesforce Sales Cloud, your source data is already there, and you probably already have interfaces to your other systems. Updating these interfaces to bring some data back is likely to be less effort to implement and support than a new system or a new API.
Think about who will use revenue data
Given the implications for many companies where the new revenue rules are affecting pricing, go-to-market strategy, sales commission plans and more, revenue is no longer relegated to the end of the quote-to-cash process. It is driving more upstream policies and processes. Given that, expect more internal stakeholders demanding visibility into revenue and more frequently.
If you’re expecting to email reports at month-end, that may work for a while, but it won’t be long before you need to show revenue by new dimensions, produce forecasts based on the new rules and enable self-service reports and dashboards. Your GL may not be the best place to enable this.
Enforcing new data upstream
Most companies will find that to enable rev rec downstream, they need data populated at the point a sale is closed. Having a way to automate or enforce that data entry will be critical to implementing any kind of scalable process. With Salesforce CPQ, you can enable business rules to enforce the auto-population or manual population of these new data elements you may not be tracking. This includes data like contract term dates, standalone selling price and revenue treatment.
The case for Salesforce and FinancialForce
The good news is FinancialForce has a robust solution for revenue recognition called FinancialForce Revenue Management. It’s 100% native to the Salesforce platform, has a great user experience, handles high data volumes and allows you to recognize revenue based on any type of Salesforce records in your system.
If you consider that most or all of your sales data is already in Salesforce, there’s a huge benefit in being able to connect your revenue transactions to that source data. And that connection will be in the system of record of your sales data. Auditing how and why revenue was recognized is a breeze with a clear audit trail drilling down into revenue contracts, performance obligations and the original source records.
Depending on which other systems you’re using, recognizing revenue within Salesforce probably requires fewer system integration changes than sending all your data to your GL or a standalone solution.
Most importantly, by initiating your revenue within Salesforce, you can make it easily consumable in real-time to your internal stakeholders. You can also forecast revenue using the same source data and revenue treatments as your actual revenue engine and compare forecast to actuals. Finally, you can generate revenue data throughout the month for real-time reporting and wait until period close to commit the transactions and sending them to your GL.
Don’t panic, but get started
The bottom line is if you haven’t started, start now. Look at all your options. Talk to others who have gone through the process. Spend time with your auditors. Put a plan together. And don’t overlook Salesforce as the best place to get started.