Recognizing revenue under ASC 606 for a large population of customer contracts presents a challenge for businesses when combining multiple orders into a single contract, determining a standalone selling price, assigning the transaction price to the performance obligations, and recognizing revenue when the performance obligations are met. These situations present further challenges in using spreadsheets compared to data analysis software, which can increase efficiency and accuracy while saving time and costs.
Disadvantages of Spreadsheets
Using spreadsheets is much more manual than using data analytics and increases the effort to comply with ASC 606. In addition to the higher risk of errors, there are other areas where spreadsheets do not provide sufficient functionality to ensure ASC 606 compliance.
Clean and merge data. There is inherent complexity in running reports from multiple data sources and then preparing to accumulate the data in a single source file. More specifically, the customer contracts can be collected in a cloud hosted, sales/CRM platform, in an accounting/ERP platform or even in a proprietary platform/database. Extracting data from all these platforms is a major challenge. If the same contracts are recorded on more than one platform, there is no single truth system, resulting in additional efforts to eliminate data ambiguity and ensure that all contract data is unique, complete and accurate.
Configurable rules and templates. Spreadsheet functionality is unable to capture all complex use cases that accurately describe performance obligations. It is necessary to create complex formulas to recognize revenue for different permutations of terms in the customer contracts, for example contracts with prepayment versus monthly payment terms or standalone sales prices that change during the reporting period.
Flexible data models and implementation of complex calculations. Spreadsheet software lacks the ability to easily create formulas to calculate contract assets and contract liabilities for any contract, including short-term and long-term parts.
Ability to easily refresh data and add new datasets. Once the spreadsheet is created, making changes to the file is more difficult if there are additional contract terms.
Automate the simulation of audit processes. With a spreadsheet, it is challenging to check the data in the reports back to the data sources and verify the completeness and accuracy of the spreadsheets. It is expected that after the revenue recognition process is completed, random samples of data records will be reviewed and reviewed to ensure compliance with ASC 606.
Benefits of Using Data Analytics
Spreadsheets are generally excellent tools for storing and viewing a relatively small amount of data and provide basic functionality for manipulating and organizing data. However, using data analysis tools provides advanced capabilities for extracting, processing, and analyzing large amounts of data. Data analytics platforms reduce implementation time, offer a variety of data preparation methods, and generate much more flexible solutions than spreadsheets to comply with ASC 606. There are several other benefits of using data analytics.
Extract, transform, load capabilities. Advanced functionality to import and process data from different platforms and transform it to identify performance obligations.
Advanced data aggregation. Collect multiple purchase orders to be combined into one contract.
Flexible data assignments. Analyze contractual pricing to help evaluate and close stand-alone selling prices.
Automate allocation methods and assumptions. Allocate the transaction price to performance obligations and recognize returns using the appropriate measure of progress.
Dealing with complexities that ERP accounting software cannot handle. Accounting software such as Oracle NetSuite, Microsoft Dynamics 365, or Intuit QuickBooks offers built-in or third-party modules to address ASC 606 compliance. However, these modules are not capable of capturing complex performance obligations and ingesting data from other platforms, such as the CRM system.
Ability to forecast earnings. As an additional step in the ASC 606 process, it is very important to derive revenue forecasts with recognized and predicted values based on multiple revenue source data. Analysis tools provide different statistical methods for forecasting, unlike traditional spreadsheet software.
Best practices for data analysis software tools
When using data analysis software tools, different practices ensure that the full benefits of the solution are realized.
Combine skills with software. Blindly using low-code or no-code data analytics platforms to implement ASC 606 rules always leads to erroneous results. The best and most efficient approach always combines a team of data scientists and engineers with the right software tool. It is essential for ASC 606’s engineering team to thoroughly understand how analytics platforms work and have the software skills to develop custom solutions, as revenue recognition assignments are unique due to the complexity of the input data sets.
Pair experienced accountants with data analytics professionals. It is not enough just to have a great data team or a top accounting team to complete an ASC 606 compliance project. You also need collaboration between individuals who understand ASC 606 and individuals with a data engineering background.
Build audit simulation tools. The output files should be thoroughly tested for possible inaccuracies. It is essential for the data team to build statistical sampling software modules that simulate the audit process and confirm that the ASC 606 rules are implemented as expected.
Benefits of outsourcing data analysis
One of the main benefits of using a third-party vendor for the technical accounting aspects of ASC 606 and for the data analysis is knowing that they have significant expertise with ASC 606. They will also use best practices as much as possible during the process. Using a third-party specialist also helps finance departments by reducing the workload to meet financial reporting deadlines, increasing the likelihood of accurate revenue recognition under ASC 606 and reducing audit risk.
Companies with a large number of customer contracts may consider complying with ASC 606 internally as it can be considered more cost efficient. That may or may not be true, as audit costs may increase in addition to a possible increase in costs due to an increase in time, effort and pressure on internal resources.
Selecting the right provider is part of the puzzle to successfully use data analytics to comply with ASC 606. Businesses should consider the following when choosing a provider:
- Does the provider have significant ASC 606 technical accounting knowledge and data analytics capabilities?
- Does the provider have the current capacity to meet the deadlines?
- Will the project leader maintain a high level of commitment to the project to ensure quality and timely results?
When used correctly, data analytics can help ensure a company’s compliance with ASC 606, while saving money and reducing the headache associated with managing a large number of consumer contracts in simple spreadsheet software.
This article does not necessarily reflect the views of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their owners.
Brad Burch is general manager in the Accounting & Reporting Advisory practice at Stout. He advises both public and private clients in a wide range of sectors on complex technical accounting matters and financial reporting, including IPOs.
Fotis Konstantinidis is managing director at Stout and leads the Digital & Data Analytics practice. He began his career as a brain researcher and held leadership roles delivering AI-powered products and services at McKinsey & Co., Accenture, Visa and CO-OP Financial Services.
We’d love to hear your clever, original version: Write for us