Like most other businesses, technology companies are charged with proper and accurate revenue recognition. While its basic premise is of recording revenue in the period in which it is earned, the real world application of recognizing revenue in the proper period is anything but straight forward. And, like most other businesses, technology companies regularly receive payment for a product or service in advance of its actual use or delivery. In the spirit of practicing proper revenue recognition, the Financial Accounting Standards Board (FASB) has implemented its new standard, which states that revenue is recognized when control of the goods or services transfers to the customer. And for many businesses, not much changes in the face of this new standard.
[Related: Deferred Revenue App Makes Rev Recognition Easy]
However, for a technology company with annual subscriptions and maintenance contracts, the process is significantly more intricate and complex. Let’s take a look at few scenarios:
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If Customer A signed up with ACME Software’s Tech Squad and paid in full, for a year-long software maintenance package, receipt of the actual maintenance service doesn’t occur in one instance. Instead, the maintenance package covers service and updates that take place over the course of the next 12 months. You’ve likely received payment well in advance of the contract starting. The question is, how do you recognize the proper amount in the proper period?
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Or, what if the service agreement allows for an upgrade or purchase of additional services within the first 90 days? How does that extra, unscheduled purchase get recorded?
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Here’s another one: What if, in an effort to motivate advance subscription renewals, you offered a 10% discount on subscription renewals if a customer renews early? When is that discount applied? Up front or spread across the following year? What is the net effect on revenue recognition?
For any of the above scenarios, you’ll eventually be able to sort through, make sense and properly record the corresponding revenue. Of course, you’ll likely have sacrificed a small part of your work day (that you didn’t have to spare), just to reconcile one contract. And if that happened once in a blue moon, it might not be a problem. After all, what’s 15 minutes here, 30 minutes there? But what do you do when you have a whole customer base purchasing subscription and maintenance packages, all with different start and end dates? The time required to sort through and properly report the receipt of revenue doesn’t double or triple. It multiplies exponentially, and you don’t have the time or the staff to devote to this tedious process. Who does?
So why all the fuss? You’re doing this and subjecting yourself to this reporting gauntlet, not just for the sake of a regulation, but because you want and need reliable financial statements. Reliable and accurate financial statements lead to better business decisions.
Gravity’s magic button: Revenue Recognition module
So, who’s got the magic button? That automatic process key that does all the dirty work for you? Why not look for an accounting solution that could streamline the process while remaining FASB compliant?
Gravity Software® (Gravity) released it's Revenue and Expense Recognition module that automates the whole process of making revenue recognition (and all its requirements) as simple as drafting a purchase order. Based on recognition templates, Gravity will create the deferral schedules automatically. All you have to do is post the monthly entries.
Gravity is written on the Microsoft Power Platform (aka Dynamics 365 CRM). A very open and robust platform allowing users to pick and choose which modules they want to include for their business. For example, a company can choose Financials from Gravity Software, Dynamics 365 CRM from Microsoft, and Grant Management from Grant Vantage.
Gravity’s business financials software can help your business grow by unlocking information and driving efficiency across the board. If your current entry level accounting software is creating more friction than growth, consider a better, viable option in Gravity. Learn more and schedule your online demo today.
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