The new regulatory standard, ASC 606, has had a large impact on finance teams that affects all industries. If you are a private company, there are certain reporting requirements that are necessary to remain compliant. Whether the goal is to remain private or your business is seeking an IPO, ASC 606 will affect revenue recognition processes. We delved into this a bit deeper in our previous ASC 606 article. But before your business completely overhauls the finance department and how it will handle revenue recognition, look into how NetSuite can simplify this process.
NetSuite Leverages the ASC 606 Five Step Approach
In the previous article, we went over a bit of ASC 606’s five-step approach to revenue recognition. Here’s how NetSuite tackles these five steps.
Step 1: Identify customer contracts.
NetSuite has a new transaction type called a “Revenue Arrangement.” A Revenue Arrangement is essentially the transaction connected with the customer contract. It’s typically sourced from a sales transaction, such as purchase orders or sales invoices, but NetSuite can also identify a transaction as a Revenue Arrangement from a project.
Step 2: Identify performance obligations.
In a typical transaction, there may different lines as part of it, such as in a sales order. NetSuite will assign each line as a Revenue Element within the Revenue Arrangement, which thus identifies each performance obligation. The individual Elements can then be assigned specific Revenue Rules within NetSuite.
Step 3: Determine the transaction price.
This will be the sales amount on the sales order. So if someone changes the amount, the Revenue Arrangement automatically updates.
Step 4: Allocate transaction price to performance obligations.
NetSuite has a Revenue Allocations feature built right into the Revenue Arrangement and the individual Elements. It takes into account the fair value prices, and then allocates the revenue across the Arrangement in proportion to the fair value amount. Therefore, if the sales department cuts a discount price for a customer, the Revenue Allocations feature ensures to allocate the fair value price.
Step 5: Recognize revenue when or as performance obligations are satisfied.
With Revenue Plans in NetSuite, a business can dictate when revenue is recognized, how much, and then will link a corresponding journal entry to them when it is time to post it to the GL. NetSuite also includes Forecasting Plans.
Other Ways NetSuite Simplifies the ASC 606 Process
With the transition period into 2019, NetSuite fortunately provides a seamless dual reporting tool as your business moves from the current GAAP to ASC 606. NetSuite will open two parallel books to cover both the current GAAP requirements and ASC 606 requirements throughout the transition period. When the official cutover happens in 2019, NetSuite will keep two parallel books once more. This time they are for the ASC 606 requirements and the old GAAP disclosures. This dual reporting system will smoothly slide your business all the way into cruise control for ASC 606.
NetSuite also merges Revenue Arrangements across these parallel books, even if the arrangements are complex with multiple Revenue Elements. It can take a sales order for a customer and a change sales order for that same transaction, each with their own Revenue Arrangements, Revenue Elements, and Revenue Plans, and merge them into one Revenue Arrangement with merged Elements and Plans.
Want to see it in action? Check out our full NetSuite demo below. Ready for a software consultation? Be sure to contact us today! Not sure if your business is ready for ASC 606? Check out the first half of the webinar.