New Standards In Revenue Recognition

Financial metrics affect all stakeholders in a company – such as owners, employees, and shareholders. Meeting them or missing them impacts things like determining the difference between giving a bonus, selling and holding stock, or being out of a job. Along with cash flow, revenue metrics are used to gauge overall profitability. Accurately recognizing revenue then, is essential.

ASC 606 and IFRS 15 were introduced to combat the complications brought on by industry-specific norms and complex, fragmented practices across companies. They provide a common framework for businesses to recognize revenue consistently, proposing companies recognize revenue in the year that it is earned. Public companies were required to comply with these standards as of January 2018; private companies have until January 2019 to implement these changes.

For professional services organizations, complying with IFRS 15 likely means they will use the percentage completion method. Conceptually, it is fairly straightforward for the normal case: every project has the actual costs incurred. If those costs are divided by the total estimated cost, you have calculated what a percentage of completion the project has reached. For example: if a project that was estimated for $10,000 had a $2,000 burn, the project could be estimated as 20% complete. This number is then multiplied with the total contract value to get the total amount of revenue that can be recognized for that project. So, with a total revenue of $20,000, 20% completion would allow for $4,000 of revenue to be recognized. This method provides a much more accurate picture to investors and other parties interested in the financial standing of the organization.

While the normal case seems fairly intuitive, finance and accounting are all about the corner cases and accounting for their complexities properly. For example, how do you account for cost / time overruns?

Although these changes are necessary and will ultimately help businesses, in the short term they will cause pain as companies struggle to meet these new standards. These changes are complex and the challenges mount when businesses rely on existing software or manual solutions to meet these needs. According to a recent PwC survey, a whopping 76% of finance executives describe the documentation requirements under the new revenue recognition standards as either “somewhat” or “very” difficult. To truly understand the magnitude of the challenge that organizations are facing, consider that 31% of companies have over 5,000 contracts that must be made compliant, according to another PwC survey.

This is especially true for professional services organizations, where transactions are more complex than selling a single, stand-alone product. What’s more, current financial, accounting, or ERP systems are often too large and dated to make the necessary changes efficiently and effectively. Unfortunately, today revenue teams are settling on manual, multi-system, or ad hoc processes to meet these requirements. This exposes them to additional overhead, increased errors, and potential penalties due to non-compliance. Additionally, this slows the information flow about project statuses and financial metrics within an organization. They are no longer working in real time. This leads to even more errors and reworks necessary to manage the service delivery workflow.

The resulting economic consequences are significant. Administrators are forced to invest far too many hours ensuring compliance with the new standards and work with guesstimates for actual progress, invariably resulting in errors. Best-case scenario: They find the errors, and then have to re-do the whole process. Worst-case scenario: They don’t, and face penalties or take on unnecessary liabilities / reputational risk.

Replicon’s Time Intelligence® platform mitigates these challenges by providing a Professional Services Automation (PSA) solution with a built-in revenue recognition component. While many organizations attempt to shoehorn revenue recognition into their ERP or Accounting software, the revenue workflow is actually parallel to the service delivery and billing workflows. Thus it makes sense to place it within the core of a PSO’s ecosystem – the Professional Services Automation solution. This enables professional services firms to manage service delivery, billing, and revenue recognition from a single platform.

It’s easy to make incorrect conclusions about your organization’s profitability when it’s based on partial data assumed to be the whole picture. Failing to account for all time – and consequently all expenses – creates and perpetuates the Profitability Myth. By combining a complete view of resource time and availability with a configurable framework for an organization’s unique workflows, Replicon’s Time Intelligence® Platform busts the Profitability Myth once and for all.

Replicon’s Time Intelligence® platform provides a timefocused system of record for professional services organizations, which keeps them from having to adapt to a solution-dictated process. The Time Intelligence® platform tracks and details how all the time in an organization is used. All of an organization’s resources’ time – project or not, billable or not – is tracked and tied to the outcomes produced. This provides businesses a comprehensive picture of their current and future projects, profitability, resource utilization, and cash flow.