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  • Writer's pictureJohn Hannan

Managing the ASC 606 Revenue Recognition Standard in ERP Systems

Implementing ASC 606 (and IFRS 15) Revenue Recognition standards in ERP systems is no easy task. For companies of any size, staying compliant with this financial accounting standard can be difficult and costly. The best way to stay compliant is to proactively ensure that the correct protocols and processes are in place.

How To Determine How Much and When Revenue Should Be Recognized

The Financial Accounting Standards Board (FASB) set out a comprehensive five-step approach to recognizing revenue. These steps are the most important aspects that an entity needs to consider when determining how much revenue should be recognized and when it should be recognized.

Step one: Identify the contract with a customer. This includes an analysis of all contractual obligations and their interpretation in the agreement between the entity and the customer.

Step two: Identify the performance obligations that are outlined in the contract. It involves looking into all services and goods included in the contract and all future cash payments that may arise as part of the agreement.

Step three: Determine the transaction price. Consider factors like discounts and payments, such as taxes or estimated returns.

Step four: Allocate the transaction price to the performance obligations in the contract.

Step five: Recognizing revenue when (or as) the entity satisfies a performance obligation. This step ensures entities adhere because it allows for accurate reporting of their revenues and a clear understanding of their profits or losses. 

The FASB’s five-step approach provides entities with a systematic approach to accurately and correctly determine and report their revenue. Following the five-step approach can provide an entity with an improved understanding of the amount and timing of revenue recognition, which can benefit any entity reporting its financial information.

How Companies Can Ensure They Are Adhering to ASC 606 in Their ERP Systems

Here are some ways companies can ensure that their EPR systems are compliant with the ASC 606 revenue recognition standards:

Recognize the Distinction Between Sales and Contract Recognition

It is essential to recognize the distinction between sales and contract recognition under ASC 606. It is possible to recognize revenue without entering into a contract and vice versa. ERP systems must be able to separate these processes to ensure proper financial management.

Understanding Contract Performance Obligations

Another key component of compliance with the standard is understanding contract performance obligations. This requires a deep understanding of how each specific obligation will affect revenue. With this knowledge, companies can track revenue for those obligations to ensure that revenue is properly accounted for.

Revenue Recognition

Revenue recognition in an ERP system must align with what has been prescribed in ASC 606. Many ERP systems are not programmed to adjust for varying revenue recognition rules and will need manual overrides or settings to stay compliant.

A critical aspect of implementing the standard in an ERP system is implementing the rules that govern timing. Recognizing revenue on different schedules is possible with certain products and services, depending on how long each component will take to provide to customers.

Customer Acceptance

Customer acceptance also plays a key role in revenue recognition under the ASC 606 standard. Many companies fail to factor in this element and can make costly mistakes. For revenue to be recognized, the customer must be fully satisfied that the product or service has met all its requirements.

Contract Changes

Contract changes are another factor that can complicate the compliance process. Contracts are frequently amended or adjusted to account for customer needs or circumstances changes. These contract amendments must be tracked and reflected in ERP systems to ensure accuracy and compliance.

Contract Terminations

Lastly, contract terminations should be monitored. ERP systems should be able to capture data around contract terminations to determine if there is still potential revenue to be recognized or if a contract needs to be canceled out of the system.

How ERP Systems Are Managing the ASC 606 Revenue Recognition Standard

Managing the ASC 606 in Microsoft Dynamics 365 (D365):

Microsoft Dynamics 365 is a comprehensive suite of business applications that enables organizations to optimize their operations, automate manual processes, and more. As part of its financial solutions, Microsoft Dynamics 365 supports the new ASC 606 revenue recognition standard and provides comprehensive analytics, advanced workflow, and robust management capabilities to manage the new standard.

Managing the ASC 606 in Oracle NetSuite:

NetSuite’s Advanced Revenue Management model has features for revenue allocations, forecasting, auditing, and reclassification. NetSuite customers can build a series of rules that drive system behavior when posting revenues related to milestone billings. These built-in revenue accounting functions ensure compliance with FASB and IFRS guidelines and were designed with protecting the accounting team in mind. Being that NetSuite is a software company themselves with Revenue Recognition considerations and they run NetSuite internally, you can be sure they will be on the forefront of keeping up with any updates to the standards.

Managing the ASC 606 in SAP:

SAP is a comprehensive ERP system with powerful solutions to manage the ASC 606 revenue recognition standard. SAP provides pre-built financial templates and wizards to streamline and automate the generation of financial statements compliant with the new standards. It also enables companies to understand how changes to contracts will affect their financial results, simplifying and reducing manual data entry for multiple entries and generating reports with greater accuracy.

Overall, ensuring proper ASC 606 Revenue Recognition compliance is important for companies to stay competitive and keep their accounting practices in order. Companies can proactively ensure that their ERP systems align with this financial accounting standard by closely monitoring the above factors. 

Managing the ASC 606 in Oracle ERP:

Oracle ERP provides comprehensive compliance solutions for managing the ASC 606 revenue recognition standard. This software helps businesses monitor the changing conditions that require timely revenue recognition. It also enables them to generate financial statements according to the standard automatically. Moreover, Oracle’s ERP system simplifies the data capture process for better financial accuracy, reduces manual processing for complex tasks, and allows organizations to integrate new services with existing ones.

Bottom Line

For organizations unsure of implementing ASC 606 into their ERP system, seeking advice from industry experts or consultants may be the best course.

Staying compliant with financial accounting standards is no small task, but it can help to ensure better accuracy and transparency for both customers and shareholders.

Comment with questions on the ASC 606 Revenue Recognition standard in ERP systems that you may have. And our team will do our best to answer them.


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