Improper revenue recognition remains a pressing concern within the Securities and Exchange Commission (SEC). According to Cornerstone Research, in the fiscal year 2022, the SEC witnessed a staggering 55% surge in accounting and auditing enforcement activity, resulting in 68 enforcement actions.
Significantly, 25 of these actions focused on cases involving improper revenue recognition.
Moreover, when examining accounting restatements, 63% of the cases were linked to allegations surrounding revenue recognition and internal control over financial reporting.
These statistics underscore the gravity of the issue and highlight the SEC’s unwavering commitment to tackling this problem head-on. It serves as a stark reminder for businesses to cover all their bases before purchasing revenue recognition software to comply with regulatory standards, safeguard investor interests, and uphold the integrity of financial reporting.
What Features To Look-out-for in A Revenue Recognition Software That’s Future-Proof
GAAP Compliance (ASC 606/IFRS 15)
ASC 606, the US revenue recognition standard applicable to companies with contract-based revenue models, applies to public and private entities. IFRS 15 is the international counterpart to this standard, sharing the same fundamental principle, recognizing revenue when control of products or services (“performance obligations”) passes to the customer. Practically speaking, this often occurs at delivery.
For a SaaS company, ensuring your Revenue Recognition solution complies with GAAP is essential, but you also want to ensure it can scale with your business. Having a solution that can automatically handle renewals, upgrades, downgrades, cancellations, discounts, etc., is critical to meeting the needs of a hyper-growth subscription business.
Maintaining spreadsheets that serve as the source of truth for all sales transactions and journal entries opens the doors to errors and misstatements. To ensure a holistic view of all the transactions, you need a solution to serve as a revenue sub-ledger that can
- Automatically import and standardize transaction details from the billing system, order management, payment processors, and other internal systems.
- Understand the business logic, allocate revenue, and recognize it under GAAP.
- Share information seamlessly with the back-end ERP or accounting system.
- Creates an audit trail that can be validated for accuracy
- Provide reporting and analytics that helps management make better and more timely decisions.
Automated Standalone Selling Price (SSP)
Companies that offer multiple products and services as part of a subscription or SaaS business model must allocate the arrangement fee to each performance obligation based on a standalone selling price (SSP) methodology. Giving revenue based on SSP is a requirement under Step 4 of the revenue recognition model.
To arrive at an appropriate initial SSP, companies should consider sales data, competing products and pricing, product life cycle, and other internal analyses and estimates. Developing an SSP also requires continuous re-evaluation based on changes in product pricing and other factors. SSP can be based upon standalone sales, a contractually stated price, similar goods or services sale, or a list price. The SSP can be estimated using different methods, such as cost plus margin if it isn’t readily observable.
Data dependencies make determining standalone selling prices challenging for SaaS and subscription companies. Manually computing SSP on spreadsheets is inefficient and error-prone. Having revenue recognition software that automatically calculates revenue, allocates such revenue to performance obligations based on standalone selling price, and offers insights into the pricing trends of your products provides better accuracy and a scalable platform for growth.
Integrations With the Entire Tech Stack
The right revenue recognition tool recognizes revenue from various sources, including orders, contracts, invoices, and opportunities. It can connect to multiple source systems, summarize all contract data into a single source of truth and integrate with the back-end ERP or accounting system.
Reporting and Analytics
Revenue recognition software puts accurate revenue data at your fingertips. Look for a detailed dashboard that consolidates all key revenue metrics like bookings, revenue waterfall, deferred revenue, and expenses for the accounting period.
Usability and Configurability
However advanced, a good revenue recognition solution should be easy to configure for different revenue scenarios and use, backed by extensive documentation and tutorials. Consider the help and support available to drive fast implementation, adoption, and value maximization from the solution (e.g., reconciliation, segregation of duties, accounting period close).
Overcome SaaS Revenue Recognition Challenges with Chargebee RevRec
As a critical aspect of financial management, revenue recognition needs a massive upgrade from spreadsheets to software for handling complex SaaS revenue recognition scenarios. From improving your compliance posture and supporting pivotal business decisions to reducing operational costs and blazing through audits, a revenue recognition solution can empower your finance team and organization.
Chargebee RevRec ticks all the right boxes of what an advanced yet user-friendly and well-supported revenue recognition software should look like.
✅ Seamlessly Automate ASC 606 / IFRS-15 Compliance
Chargebee RevRec initiates a comprehensive, automated revenue recognition workflow that aligns with the five-step model outlined in ASC 606 and IFRS 15
- Identify Contracts
- Identify Performance Obligations
- Identify Transaction Price
- Allocate Transaction Price to Obligations
- Recognize Revenue
✅ Define And Customize Revenue Recognition Rules For Your Business
Chargebee RevRec simplifies the complexities of revenue recognition, allowing you to define and customize rules tailored to your business needs:
- Standalone Selling Price (SSP) Library: Revenue allocation to products and services by synchronizing with your price book and adhering to your defined accounting policy
- Revenue Recognition Rules: Identify specific performance obligations associated with each product & service sold and establish guidelines for deferring and recognizing revenue as these obligations are fulfilled.
- Contract Costs: Capture those contract costs that can be capitalized and amortized on either a contract or portfolio basis.
✅Establish A Revenue Subledger
Chargebee RevRec streamlines your accounting processes by replacing manual tasks with a robust accounting sub-ledger. From processing transactions and booking monthly entries to reporting and analytics, all revenue is seamlessly managed within a unified system. With an emphasis on audibility and alignment with your accounting cycle, this sub-ledger provides transparency, granularity, and reliable reconciliations. It serves as the single source of truth for revenue transactions.
✅Advanced Financial Reporting
With Chargebee RevRec, you gain reliable revenue reporting at various levels (e.g., sales order, customer) and across multiple dimensions (e.g., product line, geography, currency). It ensures financial precision by consistently validating and enhancing your reports for past, present, and future periods. Analyze trends, explain changes, and easily plan for strategic growth. Access all revenue perspectives, including bookings, billings, and revenue, in real-time, empowering you to build custom reports and dashboards effortlessly.
✅Multiple Integrations with entire Tech Stack
Chargebee RevRec integrates across enterprise resource planning (ERP), sales, finance, eCommerce, marketing, collaboration, reporting and analytics, and customer support and success systems. Some of the most notable integrations include:
- QuickBooks Online
- Sage Intacct
- Apple App Store
Drake Software, a Tax Preparation software that serves over 70,000 tax professionals, saved approximately $150K a year in operating costs with Chargebee RevRec.
According to Jennifer, CFO of Drake Software, Chargebee RevRec plays a crucial role in their tech stack by
- Automating the revenue recognition processes
- Accelerating their month-end closes
- Helping them stay GAAP compliant and audit-ready, and
- Being the single source of truth for revenue data
Check out how Chargebee RevRec can handle the revenue recognition woes and shift your focus to more strategic initiatives.