Contract revenue management: what it is and what you need to know
If you’ve never heard of contract revenue management and you manage any sort of contractual relationships with customers, it’s time to start paying attention. Contract revenue management, or the process of allocating contracted revenues based on Generally Accepted Accounting Principles (GAAP) revenue recognition standards, is undergoing massive change due to the recent GAAP mandates ASC 606 and IFRS 15.
The U.S. based Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have recently released ASC 606 and IFRS 15 as updates to GAAP accounting principles, to streamline and unify financial statements across the board. In the past, there was a wide variance in the way businesses recognized revenue, with no consistent format applied to contractual revenue.
The main impacts of these two regulations are for subscription-based businesses, and when they are permitted to recognize revenue. The ability to recognize revenue now depends upon the timing of “when (or as) the reporting organization satisfies a performance obligation.”
No longer is it ok to take the revenue associated with an annual contract and recognize it evenly across 12 months - unless the business is satisfying a performance obligation each month (which it might). That’s a big change in revenue recognition processes for businesses worldwide.
So how can businesses accurately perform contract revenue management?
Businesses wanting to comply with ASC 606 and IFRS 15 must go through the exercise of fully understanding customer contracts - and where performance obligations are being met. They can then plug this mission-critical information into contract revenue management tools that will help automate the process.
This starts with looking at all contracts and pulling out critical inputs. For many subscription-based businesses, these inputs are very similar - number of users, number of shipments, bandwidth allowed, or type of access. Then the business needs to understand what performance obligations are and when the business meets them. If customers have continual access to an online SaaS tool, the performance obligation could be uptime or logins. If the subscription is for a monthly delivery, the performance obligation may be just each delivery.
With these inputs and the price of the product or service in mind, businesses can allocate revenue based on each performance obligation during the contract. Contract revenue management tools allow users to enter these inputs and automatically reallocate revenue, or build templates that can do it for them - based on customer usage, for example. All of this is done using the new mandate, ASC 606, but users can also compare the new revenue recognition format to what it looked like previously, under ASC 605.
A handful of enterprise resource planning (ERP) platforms have released new contract revenue management tools to support their customers’ goals to comply with ASC 606 and IFRS 15. Look for more contract revenue management features from ERPs and other supporting platforms.
Are you an Invoiced customer looking to supplement your ERP’s contract revenue management processes? Take a look at our contract billing functions to see how it might further support your contract revenue management efforts.