New revenue recognition standards associated with ASC 606 and IFRS 15 have been published by FASB and IASB. Acumatica’s deferred revenue capabilities have been enhanced so Acumatica customers can support these standards and determine the impact of these changes through dual reporting capabilities.
In today’s Technical Tuesday, we’ll describe changes to revenue recognition and show examples of how these new accounting standards ASC 606 and IFRS 15 can be implemented in Acumatica.
Environment: 17.207.0029, with DeferredRevenue2017 customization
Data: SalesDemo data from partner portal
New revenue recognition standards have been published by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). These accounting standards fundamentally change the way businesses can recognize revenue from the delivery of goods and services over time.
Acumatica Financial Management software provides an efficient way to comply with these new standards and includes reports so customers can quickly determine the impact of the new requirements on their business.
In this post, we’ll describe the background of the new revenue recognition ASC 606 and IFRS 15 requirements and demonstrate how the Acumatica Customization manages two common business scenarios:
- Example 1: Line item sale of related items with disproportionate discount. In this example we sell a product for fair market value along with discounted maintenance services. Learn how to avoid over-stating revenue under new deferred revenue standards.
- Example 2: Bundle using fair market value as the transaction price. In this example, we implement the product and maintenance as a bundled product and get the same result using a multiple deliverable arrangements.
Business background: ASC 606 and IFRS 15
Prior to the publication of ASC 606 and IFRS 15, revenue recognition standards were not clearly defined. As a result, companies used different and inconsistent techniques to recognize revenue from contracts and services delivered over time. In US GAAP, the standards were broad and not clearly defined; in IFRS, there was limited guidance on how to apply the rules.
The FASB and the IASB collaborated to clarify revenue recognition standards and bring consistency to the US and international standards. In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), and the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers.
These accounting standards fundamentally change the way businesses can recognize revenue from the delivery of goods and/or services over time. The two standards have only minor differences such as impairment loss reversal, interim disclosure requirements, and applicability to non-public entities. A discussion of these differences is beyond the scope of this post.
ASC 606 timing and impact
The businesses most affected by these changes are those which offer multi-element contracts and long-term service contracts. Companies with tiered pricing, volume discounts, contract modifications, and other pricing considerations can be affected as well.
- ASC 606 was published in May 2014
- Public companies must comply by Dec 15, 2018
- Non-public companies must comply by Dec 15, 2019
Businesses with current contracts extending beyond the dates above will be required to meet the new reporting and audit requirements.
Under the new accounting standards, companies follow a five-step process to determine when revenue can be recognized.
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price
- Recognize revenue when a performance obligation is satisfied
This process is consistent with prior rules. The new standard, however, provides several examples that impact how the transaction price is calculated and allocated. In situations with bundled contracts, contracts with multiple items, and related contracts, the new regulations drive recognition to the specific obligations that are delivered. This includes determining the fair market value for these items when they are bundled as part of a contract.
Impact to financial systems
Several concepts in the new accounting standards impact the way deferred revenue is managed in a financial system such as Acumatica.
- Price Lists: The fair market value of performance obligations needs to be maintained separately from the sales price so the system can apply the fair market value instead of the sales price when selling bundles, applying discounts, or linking contracts.
- Bundles: Bundled items need to be indicated on the sales order or invoice to accurately apply discounts across line items.
- Group Discounts: Group discounts need to be accurately applied to the deferred revenue schedules based on the line items.
- Contract Changes: Changes to contracts (sales orders) need to change previously created deferred revenue schedules
- Credit Memos: Customer refunds need to change existing deferred revenue schedules.
- Contract Dependencies: Contracts that depend on other contracts (usually for a volume discount), must assign the appropriate discount across all deferred revenue schedules.
Acumatica advanced revenue recognition
Acumatica’s advanced revenue recognition capabilities allow you to implement contracts as well as items with multiple revenue components. When you link a deferral code to a stock or non-stock item, Acumatica automatically creates a deferred revenue schedule when inventory and services appear on invoice documents.
When you release an invoice, you can open the deferred revenue schedule and make modifications if contract specific changes are required for any lines on the invoice. You can change both the recognition amounts and the dates as needed. Once created, amounts are automatically moved from the deferred revenue liability account to the invoice account at the appropriate time.
In the remainder of this document, we review how this standard functionality has been updated to support the new revenue recognition standards.
Acumatica implementation: Sale of related items with a disproportionate discount
The following example demonstrates how to configure Acumatica with the deferred revenue customization to automatically calculate two deferred revenue schedules for a common discount situation.
In this example, we are selling three items: a widget, a maintenance plan on the widget, and installation services. The fair market value as well as the actual sales price are listed in the table below.
|Item||Fair Market Value||Discount||Sales Price|
Due to competitive pressures (maybe the competition offered free maintenance for year one), the sales team discounted the maintenance services disproportionately to the product price.
The maintenance service and the product (widget 02) represent a single performance obligation that must be delivered. Without the widget, there could be no maintenance service. As a result, the discount must be applied to the fair market value of both the widget and the maintenance services.
Under the old advice, companies could recognize $2,000 + $50 = $2,050 immediately. With the new standards, the discount must be applied across the total fair market value. Thus, 81.25% of the discount is applied to the product/widget and 18.75% of the discount is applied to the maintenance. The resulting revenue that can be recognized immediately is $1,625 + $81.25 = $1,706.25.
Now we will review how the software can be configured to automatically calculate that for us.
Step 1: Verify that the Deferred Revenue customization is installed
Start with the SalesDemo data and install the customization. Verify by checking that the Dual Reporting and Revenue Recognition workspace appears.
Step 2: Setup Deferred Reporting and Revenue Recognition
Start by configuring the Alternate DR Preferences screen.
- Both numbering sequences can be defined on the Numbering Sequences (CS201010) screen.
- The Fair Market Value Price class ID can be easily created on the Customer Price Classes screen (AR208000). Once defined, we can use this to define the fair market prices on the Sales Prices screen.
- The Ledger ID is a reporting ledger that will store transactions related to the new revenue reporting standards. You define this on the Ledgers screen (GL201500).
Step 3: Setup the Alternate Deferral Codes
The alternate deferral codes can be assigned to inventory items as well as sales orders. These are the deferral schedules that relate to the new revenue reporting requirements, ASC 606 and IFRS 15.
The Alternate Deferral Codes screen (AC202000) is similar to the Deferral Codes (DR202000) screen, but the codes created here can be assigned in different places, linked to a different ledger, and linked to different prices.
By setting up these codes you enable the system to create a second (alternate) deferred revenue calculation based on the ASC 606 and IFRS 15 requirements.
Step 4: Setup Inventory Items
The alternate deferral codes can be assigned to inventory items as well as sales orders. These are the deferral schedules that relate to the new revenue reporting requirements.
In our example, we have a single item that requires a deferred revenue code: Maintenance. To configure this item, open the Non-Stock Items screen (IN202000), locate the inventory item, and enter the deferral code in the Alternate DR Settings tab.
The alternate DR settings tab has a field called the Fair Market Value Source where you define where to get the fair market value or the inventory item (or bundle in the case of a multiple delivery arrangement). In this example, select the Fair Value Price List. This is a new option that points to the fair market value price code set as a preference in step 2.
For this example, I set up Widget02 with an alternate deferral code as configured below.
Step 5: Set the Fair Market Prices
On the Sales Prices screen (AR202000), set the fair market prices for your inventory items.
In our current configuration, the system uses these values to calculate the deferred revenue schedules, regardless of the price or discount entered on the sales order.
Step 6: Enter and Process a Sales Order
Setup is complete. Now we can enter and process a sales order.
In the order above, I entered three lines:
- For the maintenance component, enter a 50% discount.
- In the Bundle Number column, indicate that the first 2 items are bundled – that is, they are part of the same performance obligation. We can alleviate this step by creating a single item consisting of a multiple delivery arrangement (see example 2).
The alternate DRM code associated with the maintenance item on lines 1&2 appears automatically.
When you save the record, the Revenue Schedule ID is automatically created. You can click it to see the alternate deferred revenue schedule that was created.
The Contract Revenue column shows how the discount is spread across the line items according to the fair market value.
Step 7: Process the transaction
Complete the sale by preparing a shipment > confirming the shipment > prepare invoice > release invoice
The resulting invoice is illustrated below. There are two sets of deferral codes. The standard deferral codes and the alternate deferral codes linked to the new deferred revenue ledger and calculation.
In this example, we showed how we started the transaction from a sales order and the Bundle Number and the Revenue Schedule ID are carried over from the sales order. If there were no stock items, we could have started the process with an invoice. In Acumatica 2018 R1, we could start the process with an invoice even if there were stock items.
Step 8: Review results and reports
After releasing the sales order invoice, review the following: deferred revenue schedule, alternate deferred revenue schedule, comparison report.
Standard Deferred Revenue Schedule (DR201500)
This is the standard deferred schedule. As expected, the total deferred amount is $50 in each of the 12 periods.
Alternate Deferred Revenue Schedule (DF000003)
This schedule is ASC 606 and IFRS 15 compliant. As expected, the total deferred amount is $81.25 in each of the 12 periods.
Comparison Report (AC606100)
Run the report for the single transaction we created above. Items boxed in yellow are associated with the standard schedule, while items boxed in green are associated with the new recognition standards.
Alternate implementation using a multiple deliverable arrangement
The scenario above can also be implemented using a non-stock item with a multiple deliverable arrangement. This involves creating a new non-stock bundle where the alternative deferred revenue schedule is setup with two lines.
You can use this implementation in the case where you do not need to track the process of creating a physical shipment.
Step 1: Setup the deferred revenue customization
Follow steps 1-3 above to setup the deferred revenue customization.
Step 2: Create a non-stock item with MDA
Create a new non-stock item with the alternative DR settings pictured below.
Step 3: Create an AR invoice
Create an AR invoice with the new item. Apply a $600 discount in the discount amount.
Step 4: Process the AR invoice
Release the AR invoice to automatically create the deferred revenue schedules. Then click the View Alternate Schedule to open the Alternate Deferred Schedules screen (AC20150) associated with this transaction.
Notice that we get the same result. We immediately recognize $1625.00 + $81.25 over 12 periods.
Your business, Acumatica, and the new accounting standards ASC 606 and IFRS 15
With Acumatica, you have the support for the new revenue recognition standards associated with ASC 606 and IFRS 15 that your business needs. The initial support of these standards involves installing a customization that allows businesses to setup two deferred revenue schedules for each transaction. The first schedule is calculated based on existing rules while the second is based on the new revenue recognition standards. The Acumatica implementation allows businesses, such as yours, to determine how the new revenue recognition standards impact their financial statements using built-in reports.
We demonstrated how you can implement two common deferred revenue scenarios involving a discounted bundle. In example 1 we applied a disproportionate discount on a sales order. In example 2 we applied a discount to a bundle using a multiple delivery arrangement.
Acumatica will add support for the new revenue recognition standards to the core product in future releases and support additional automation for deferred revenue. As this happens, the implementation may change from what is outlined in this document.
We hope you found this discussion on how Acumatica supports the new revenue recognition standards ASC 606 and IFRS 15 both informative and helpful. Please contact us if you have any questions or comments about the accounting standards or about any business management concern you may have. Our team is always ready and waiting to help you.
And don’t forget to review our other Technical Tuesday posts, which have more information on how to use Acumatica’s complete and innovative cloud ERP solution to the fullest.